Extell's Gary Barnett: Without a Billion Dollars of EXTRA profit, Riverside Center isn't "Economically Viable"

The Barnett/Extell/Carlyle strategy is now clear: assume you will get the variances you need to vastly exceed previously-agreed-to, legally binding limits; poor-mouth and threaten shut-down when any reductions, however minor, are suggested; and refuse to disclose the vast additional profits you stand to make by getting approval. The reason is simple. If people knew how much money Extell & co really stand to make from this project, they would first laugh, then get mad, and finally make Extell act like a responsible organization.

Assume

The starting point of this project is the Restrictive Declaration, which calls for 2.37 million square feet instead of Extell's demand for 3.1 million, etc. The courts and various officials have all affirmed that the terms of the Declaration remain in effect. When Extell bought the land, the limits to development were recorded with the deeds; no mysteries, no surprises. It's like walking into a restaurant and ordering a 12 ounce steak; when the kitchen delivers a 12 ounce steak, you've gotten exactly what you ordered and should have expected.

Suppose you look at the 12 ounce steak you ordered and send it back to the kitchen, demanding a 16 ounce steak instead! How do you think the restaurant would respond? Would you expect any sympathy from your fellow diners?

Now suppose that, against all logic, the restaurant actually agrees to take your demand seriously. The waiter proposes to give you, for the same price, a 15 ounce steak instead of the 12 ounce steak you ordered, a huge concession by any standard. If you're Gary Barnett, your response is outrage -- at the one ounce reduction in the steak you want to have! In fact, you're so annoyed at not having your demands fully met that you claim that 15 ounces is simply not "nutritionally viable." You only speak in terms of reductions from what you demand instead of the reality, which is just how huge the additions will be to what you purchased.

Linchpin #1 of the Extell/Barnett/Carlyle strategy: make your outrageous demands the standard by which any changes are measured; talk in terms of objectively tiny reductions instead of the reality, which is HUGE ADDITIONS to the development rights you purchased.

Poor-mouth

I could hardly believe my ears when I heard him say it, but fortunately others also attended the same meetings I did, and quoted Gary Barnett's poor-mouthing about the project.

In response to a suggestion like affordable housing that's actually substantial and permanent: "There's only so much we can give up."

In response to a suggestion that Extell actually build enough schools and provide playgrounds to accommodate the additional population: "Putting too much burden on the project will cause nothing to move forward."

In response to almost any demand for changes to the "16 ounce steak" that Barnett REALLY wants to have: this threatens the "economic viability" of the project and therefore can't be done.

Linchpin #2 of the Extell/Barnett/Carlyle strategy: complain vigorously and often about any demand, however small, to reduce your profits; imply that Riverside Center is practically a charity project you are conducting for the benefit of the community, and any further demands on you will push it into the red and force you to drop this virtuous undertaking.

Refuse to disclose financials

During his presentations, Gary Barnett met every objection and suggestion with the response that implementing it will kill the "economic viability" of the project. This is, of course, a relative concept. When I made a public request for the project's projected revenue and cost numbers, Paul Selver (Extell's lawyer) used a lot of words to say "no way."  Naturally, he refuses to disclose his numbers, but he depends on these undisclosed numbers to insist that the project is teetering at the edge of economic viability!

It's hard to believe that there's not good money to be made developing nearly 2.4 million square feet of space in a prime Manhattan location. What is the value of developing the additional 700,000 square feet of residential space and two or three floors of underground parking (at over 300,000 square feet per underground level)? In the absence of real information, all we can really do is guess, as I've already tried to do.

It appears that, even in a down market (and these units will come on-line in a couple years when the market is likely to have recovered), luxury condo sales are averaging over $1500 a square foot, while costs are down from $450 a square foot at the peak according to one developer. To make the math simple, I'll assume acquisition costs are covered by the 2.4 million square feet of permitted development. So we're looking at $1,000 a square foot of profit for the residential space. How much is the parking space worth? Probably less, but construction costs will also be way lower, so let's say "only" $800 per square foot for only two parking levels. Simple arithmetic yields a baseline for the profits on just the additional footage of $1,000 * 700,000 + $800 * 300,000 * 2 = $1,180,000,000. That is nearly $1.2 billion dollars. Of profit. Extra. No wonder they don't want to disclose financials. Suddenly the cost of submerging the West Side Highway seems like a manageable thing!

Linchpin #3 of the Extell/Barnett/Carlyle strategy: Do not disclose your costs, do not disclose your projected profits, do not disclose the true economic value of 1,800 parking spaces, do not disclose anything that would put your outrageous claims in the light of day and subject to examination. Respond with outrage at suggestions that might costs millions or tens of millions dollars, while you're looking at over a billion dollars of additional profit from the variances you are demanding.

Comments

[p]

While I don't want to disagree with your general conclusion, your calculation needs work. To get a luxury price, a developer must construct a luxury job, which according to the article you quote from, runs at least $600 per square foot for the cost of construction in Manhattan. You also neglect the cost of capital.

[David B. Black]

Your comment is valid -- since I'm not working with real numbers, I'm actually trying to err on the conservative side. That's why I put $1 billion in the title, even though the pro-forma calculation worked out to $1.2 billion, and why I rounded UP the cost I used to $500 per square foot. Using $600 instead lowers the profit to $900, yielding this calculation: $900 * 700,000 + $800 * 300,000 * 2 = $1,110,000,000. This is $70 million less than the calculation in the body, and still more than 10% over the figure in the title. Whatever the number, there is clearly loads of room for cost of capital and even submerging the West Side Highway.

[p]

Agreed.