It was like sinking a three-point shot from midcourt right before the buzzer. The $511 million in Pilot bonds issued by the Empire State Development Corp. on behalf of developer Bruce Ratner to help fund the centerpiece of his controversial Atlantic Yards project — a splashy new Brooklyn stadium for the New Jersey Nets basketball team — sold out in less then two hours on December 14. That was just two weeks before the big tax break available on the payment-in-lieu-of-taxes bonds was set to expire.
The deal was a sweet victory for Ratner, Chairman and CEO of Forest City Ratner Companies, a wholly owned subsidiary of the $12 billion Cleveland development company Forest City Enterprises and builder of high-visibility projects like Cleveland’s Tower City Center and The New York Times’ new headquarters. However, it was a stinging defeat for residents in the vicinity of the project, who are fiercely resisting it. Along with the 18,000-seat stadium, to be called the Barclays Center, the sprawling downtown Brooklyn complex will consist of offices, residences (6.4 million square feet worth) and a 180-room hotel. Several townhouses and businesses will have to be bulldozed for the project to proceed.
Despite the local opposition, institutional investors were highly receptive to the stadium’s Pilot bonds. “It’s a very, very interesting transaction,” says Goldman, Sachs & Co. managing director Gregory Carey, whose firm was both the adviser and the lead underwriter on the deal. Crucial to its success was the bonds’ obtaining an investment-grade rating.
The bond offering was given a huge boost when Russian billionaire Mikhail Prokhorov, a sports fan, agreed to take a majority stake in the Nets and a minority one in the Brooklyn Events Center, a special-purpose entity created to manage the construction and operations of the stadium.
The tax-free bonds, which mature between 2014 and 2047, yield between 4 and 8 percent. In a typically convoluted stadium-financing formula, bondholders will be paid by a trustee, which in turn will be paid by the Empire State Development Corp., which in turn will be paid by the Brooklyn Events Center, the recipient of the bond issue’s proceeds. If the center can’t make the payments, Prokhorov stands to lose control of the leasehold on the stadium (and possibly of the Nets as well).
The tax-free Pilot bonds have not surprisingly been popular in stadium financings. (In New York the Yankees and the Mets both used them.) But the Internal Revenue Service has now decreed that Pilot bonds can no longer be used to finance arenas. However, Ratner, who launched the Atlantic Yards project in 2004, won an exemption, provided he could issue Pilot bonds by year-end 2009. “This was a sunset deal,” notes Carey.
To get the issue done took a lot more teamwork than the lowly Nets normally display (the team had a 3–37 record through January 18). For a start, both New York State and New York City are involved in the stadium project, together putting up $231 million toward construction. And before the bond issue could go forward, Ratner had to sell the Nets to Prokhorov. The Russian, who built his estimated $19 billion fortune on gold and nickel, agreed to buy 45 percent of the Brooklyn Events Center’s parent company and 80 percent of the Nets (pending National Basketball Association approval). Prokhorov is paying $200 million up front and is also assuming certain other funding commitments. So if things go badly, he will be on the hook. And as Moody’s Investors Service analyst Richard Donner points out, defaulting on the bonds would leave the Nets without a home, so Prokhorov should have powerful incentive to keep up the payments.
The Pilot bonds and state and city contributions will cover only about three quarters of the stadium’s $1 billion-plus cost, so Ratner and company could be visiting the markets again very soon. As for the remainder of the $4.9 billion Atlantic Yards project, it has yet to formally raise a nickel of financing.
