YOUNG, SOMMER ...

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JEFFREY S. BAKER
DAVID C. BRENNAN
MICHAEL J. MOORE
J. MICHAEL NAUGHTON
KENNETH S. RITZENBERG
DEAN S. SOMMER
DOUGLAS H. WARD
KEVIN M. YOUNG
JOSEPH F. CASTIGLIONE
JAMES A. MUSCATO II
ROBERT A. PANASCI
ALLYSON M. PHILLIPS
KRISTIN LAVIOLETTE PRATT
OF COUNSEL
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MICHAEL E. CUSACK
COUNSELORS AT LAW SONYA K. DEL PERAL
ELIZABETH M. MORSS
EXECUTIVE WOODS, FIVE PALISADES DRIVE, ALBANY, NY 12205 KRISTIN CARTER ROWE
LAWRENCE R. SCHILLINGER
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Writer’s Telephone Extension: 227

jbaker@youngsommer.com

November 18, 2009

VIA FACSIMILE AND REGULAR MAIL

Thomas DiNapoli, Comptroller

Officer of the State Comptroller
110 State Street
Albany, New York 12236

Senator Bill Perkins

817 Legislative Office Building
Albany, New York 12247

Assemblyman Richard Brodsky

442 Legislative Office Building
Albany, New York 12248

Re: Bond Approvals for the Atlantic Yards Project

Dear Comptroller DiNapoli, Senator Perkins and Assemblyman Brodsky,

The Empire State Development Corporation’s Brooklyn Atlantic Yards project has undergone
substantial financial, revenue model, design and construction changes since it was first approved
by the Public Authorities Control Board (PACB) on December 20, 2006.

The relevant sections of the Urban Development Corporation Act require PACB resolution of
approval prior to entering into any project-related financing.

The PACB may approve applications only upon its determination that, with relation to any
proposed project, there are commitments of funds sufficient to finance the acquisition and
construction of such project.

Since the time of the 2006 approval, the ESDC has issued and approved a Modified General
Project Plan, the MTA and FCRC have struck a new deal for the sale of the MTA Vanderiblt
Yards to the developer and as per the above, the arena financing, along with the rest of the
project has been radically altered.
This mandates a new PACB review for Atlantic Yards as the changes since 2006 raise serious
questions about the availability of funds to finance the project. The tax-exempt arena bond,
which has yet to be issued—but is scheduled to be authorized on Tuesday, November 24 is of
specific and urgent concern. These bonds are technically non-recourse to the State, but it is
generally understood that should a default occur the State and its taxpayers will be on the hook.
The PACB was formed specifically to guard against reckless borrowing by ESDC that could
result in defaults and place the State in a moral obligation to support the bonds.

There is no way for the PACB to know if the current Atlantic Yards proposal is financially sound
and feasible.

Since December 2006 the following substantial changes have occurred:

• The Project was approved at $4 billion is now at least $4.9 billion.
• The arena price tag shot up from $637 million to $900 million.
• In 2006 it was uncertain what the amount of the arena bond would be, but it is now at least
$700 million.
• It is unknown if or when housing bonds will be available for the project’s proposed
affordable housing component.
• Financing agreements were signed more than one year after the 2006 PACB approval and
new financing agreements are reportedly still under negotiation. Both these old and new
agreements have never been vetted by the PACB (or the Comptroller).
• It is unknown what rating the arena bond may get, but it has been reported that FCRC is
having trouble getting a credible rating.

• Changes in the project revenue model:

a. The number of arena luxury boxes has been substantially reduced from 170 to 100
since the 2006 approval. It is unknown what the rental of these suites would be
since the economy has changed, but in 2006 FCRC projected a range of $58,000
to $580,000 and KPMG, in consultation, projected a range of $65,000 to
$450,000.
b. Whatever the suite rental projection is now, the total number of suites would be
reduced by 41%, and a reduction of suite revenue would be at least 41%.
c. The suites went on sale on May 5, 20081, since that time, over 21 months, only
20% have sold according to Nets President Brett Yormark2.
d. The new Yankees and Mets stadiums having major trouble filling expensive seats
and suites, and their bond issues have been devalued. The Nets are not nearly as
popular and beloved as the Yankees and Mets.
e. The terms of the Barclays naming rights deal are unknown. At the end of 2008
Barclays and FCRC reportedly renegotiated the sponsorship which had previously
been reported to be either $300 million or $400 million. This revenue stream is
not publicly available.

1
Crain’s. May 5, 2008. http://www.nolandgrab.org/archives/2008/05/nets_hold_court.html
2
Bloomberg News. March 13, 2009. http://www.bloomberg.com/apps/news?pid=20601079&sid=aQKlOiAxeHr8&refer=home
2
 f. There is an unknown timeline for construction of the project, the sale and cost of
condos, and the leasing and rents of rentals.
g. It is unknown if the commercial office building will ever be built, and whether the
income from it, will ever be realized.
h. Assumptions about the housing market, condo sale prices and rental prices were
made at the height of the real estate boom/bubble, assumptions that could only
make sense if there is another real estate boom/bubble throughout the life of the
project.

In 2006, the PACB had the benefit of a report from KPMG which attempted to review the
revenue and income assumptions supporting the project. KPMG found that the FCRC’s
projected internal rate of return (IRR) was overly optimistic and reduced the likely IRR, but
nevertheless found that the project was economically feasible, despite the fact that many of
FCRC’s income projections were on the optimistically high side.

There has not been any new analysis by KPMG or anyone else about the current feasibility of the
project given the enormous increase in construction costs, reduced revenues and extended project
timeline. Moreover, in 2006, the PACB only approved the issuance of approximately $100
million in bonds and did not authorize the approval of the approximately $700 million required
to finance the arena. The December 2006 PACB resolution, and a subsequent April 25, 2007
affidavit by Todd L. Scheuermann (at the time the Governor’s designated representative to the
PACB) made it clear that the PACB only approved the $100 million bonds associated with
infrastructure improvements and approved a revenue stream associated with ESDC acquiring
title to the real estate necessary for the project. The PACB has never approved the issuance by
an ESDC subsidiary of bonds for the arena construction.

These are just some of the changes impacting the questions of project finance and feasibility.
Clearly the financing structure, the figures and the overall economy are far different today than
they were in 2006.

The PACB needs to convene to vote on the project again if ESDC is to be permitted to approve a
new bond issue. Given the current dire financial circumstances facing the State, as Comptroller
and Committee chairs with oversight of the ESDC, we urgently ask for your concerted effort to
make this happen to force compliance with the law and to assure that ESDC does not issue moral
obligation bonds without doing the necessary due diligence.

Sincerely,

Jeffrey S. Baker
on behalf of Develop Don’t Destroy
Brooklyn, Inc.