United Citizens for a Better New Rochelle (UCBNR) received the National Development Council (NDC) report on the Echo Bay project. Below is our initial analysis of the report.
Before we get into the numbers, the public should be made aware that NDC is not a disinterested party in this deal. In July, NDC proposed to City Council that it be the general contractor for the City Yard move. NDC proposed a complicated financing structure whereby it would own the new City Yard and lease it back to the City, thereby taking the debt off the City’s books. With New Rochelle currently on a negative credit watch, any bond issuance could result in a rating downgrade and higher interest costs going forward. To avoid this, NDC proposed a non-transparent structure to hide our real debt load from the markets. You can see their proposal here.
NDC’s opinion is that the Land Disposition Agreement (LDA) provides the city “maximum consideration for the land and public improvements.” Let’s take a look at the assumptions they use to come to this conclusion.
On page three is a table labelled Uses & Sources of Funds. In the uses section, they attribute $8M to the acquisition of the land. That includes a $1.5M grant from the State for infrastructure improvement, $2.5M to defer 1.5 years of debt service for the City Yard relocation, and $3M towards the purchase of the Nelsted/Mancuso properties. Since these monies are not for the purchase of the underlying property, they should not be included in the purchase price of the land. What FC is really paying for this valuable waterfront property is $1M compared to the appraised value of $5.7M. (Without having the LDA, we cannot ascertain if the $3M for the Nelsted/Mancuso purchase is contingent on actually acquiring the property. Also, without seeing the appraisal we cannot determine if it was based on the current zoning or the new zoning needed for the proposed project.)
On page four, NDC lists the acquisition, public improvements, and public costs summary. Two things stand out in this summary.
First, there are two lines for remediation (Environmental Remediation & Public Improvements and, separately, Remediation) totalling over $10M. We would like to know why remediation has been itemized twice and also what improvements are actually included in “Public Improvements”.
Second, contingency, overhead costs, and profit are listed in the table even though they are not public improvements or public costs. Therefore, they should not be included in this calculation. They total $1.5M.
In their analysis, NDC assumes that FC will obtain a 30 year fully amortized loan (like the loans we get on our homes) but that is not the standard in the industry. The standard is a 10 year non-amortized (interest only) loan that typically gets refinanced after the 10th year. That would reduce their debt payments by $2 million below what NDC has in their analysis. That’s additional money that FC could contribute to the debt (or lease payments) the City will have to incur for the City Yard move. This statement from FC’s latest 10-K filing substantiates FC’s approach to debt financing (highlight ours):
We do not expect to repay a substantial amount of the principal of our outstanding debt prior to maturity or to have available funds from operations sufficient to repay this debt at maturity. As a result, it will be necessary for us to refinance our debt through new debt financings or through equity offerings.
The pro forma financial model on page five begs more questions that answers. On the one hand, they show a $40/sq ft retail rent assumption that is FC’s average across the country shown in their latest filings. Surely, retail in the tri-state market should command a premium. For the rental apartments however, they show a 47% premium over their nation wide average of $1,774 per unit.
Between the debt service and the revenue projections, NDC is totally understating the potential for FC to contribute more fairly to the City budget. This is underscored by the statement in Developer Returns section: “In this case, the stabilized cash-on-cash rate or return is less than 7%. Given the fact that most developers for comparable developments seek cash-on-cash returns greater than 10%, the projected reported returns are less than market for this development, even with the PILOT factored.”
Are we to believe that FC is willingly entering this project with a subpar return on their investment? If you believe that, we have some mud flats we can sell you.
Originally published at echobayfacts.com