This FAQ is drawn from our own sources as well as published material, primarily from the Atlantic Yards Report, the New York Times, Bloomberg, Reuters, Project Finance Magazine, etc.
What developments are we likely to see next…and how soon?
Expect the Empire State Development Corp., the state agency in charge of the arena, to move quickly on condemnation of the needed properties, almost certainly next week. The ESDC has had lawyers, appraisers and relocation consultants working on Atlantic Yards for weeks, if not months, waiting for the Court of Appeals decision. The number of affected individuals living within the entire Atlantic Yards footprint is no more than 62 and could be as few as 15, depending on whose numbers you believe. The ESDC's president described the number this week as "a relatively low number, in the dozens". Indeed, the number has always been inexact. The ESDC expects to have a "master closing" on the properties by December 15. Property owners can fight the price, but that's not going to slow the process. The law is quite clear that if there is a dispute it can be settled after the property is taken. If a person or company refuses to leave, they can be forcibly removed...although that is exceedingly rare.
On Tuesday, Goldman Sachs and Barclays, the two managers of the bond issue, will release an "offering memorandum" with all the details on the bonds—the amounts, the interest rates, insurance status, etc. It'll be the most critical document in the process, more critical than the Court of Appeals ruling.
Brett Yormark told WFAN Wednesday, "I think you'll hear some very positive news in the next couple of days from the rating agencies." Greg Carey, managing director of Goldman, told reporters Tuesday, "We've looked at the revenue streams and feel very, very comfortable, and numerous people will come out and show that they're comfortable with the structure."
Here's why the ratings are crucial to the project. Ratings agencies review revenue projections and other factors provided by the bond issuers. In some cases, agencies will require additional equity be put into a project in return for a lower interest rate. Think of bonds as the arena "mortgage" and the $282 million in equity the Nets have put down as the "down payment". Not everyone in the front office is as positive as Yormark about the ratings. The Nets needed to get an "investment grade" rating for the arena bonds, something BBB- or better, or they wouldn’t have qualified for tax-exempt bonds. Reportedly, they succeeded, but just barely. Beyond the tax exempt bonds, there are other, taxable bonds, to construct surrounding infrastructure. Rates on those bonds are going to be significantly higher. Originally, the Nets had hoped for rates as low as those sold to finance Yankee Stadium and CitiField. The Barclays Center bond rates will not be close to the 6.5% rate the two baseball stadiums received. Also, Cablevision, the Knicks’ parent company, will soon be marketing $500 million in bonds to finance a massive refurbishing of the Garden. Those bonds will be a better investment. It’s uncertain when they will be marketed or what effect they will have the Nets' efforts. Carey has said the most likely investors are funds who have previously invested in sports facility bonds.
In any event, Goldman’s Carey has said the bonds will go on sale December 7. He added that Goldman and Barclays expect to have them sold by "mid-December", or around the time of the ESDC's December 15 "master closing". Of course, they have to get all arena financing in place by December 31, the IRS deadline. If by that date it’s not in place, the arena bonds lose their tax exempt status. That would lead to a significant increase in bonding costs and perhaps kill the project. (There’s been some speculation by the arena critics that the deadline can be moved back. A Nets’ insider said the deadline is indeed "real".)
The Nets do not have to "break ground" by December 31. The financing has to be in place by that date. Ground breakings are ceremonial events.
How much are we talking about here?
The best estimate for the arena bonds is $600 million, for the additional infrastructure $150 million. The state agency that will actually issue the bonds for the Nets this week authorized as much as $825 million total, a bit higher amount.
"The $600 million and $150 million numbers are the best estimate right now of the actual issuance amount," said an agency spokesperson. "The resolution states a maximum of $825 million to give Officers the authority and flexibility to conclude the transaction including all costs within a realistic cap based on current market conditions."
In any event, Barclays may never been the "world's most famous arena", as the Garden is called. But it will be the "world's most expensive arena".
What about the two other December 31 deadlines?
With all the litigation delays, the Nets asked Barclays to extend its naming rights deal by a year til December 31 and Barclays agreed. The naming rights deal is a big part of the arena's revenue projections. The 20-year, $400 million agreement is the single biggest source of guaranteed revenue for the arena. (The Nets have another $100 million committed from its seven other founding partners.) Also, under terms of the Nets lease with the NJSEA, the team has to inform the authority every December 31 if it intends to renew its lease on the IZOD for another year…or move. Under the terms of the lease, the Nets have to pay a penalty to the authority if they decide to move anywhere other than Brooklyn (or Queens). The penalty declines each year, and this year, it’s set at $7.5 million.
Neither deadline is seen as an impediment. Both are negotiable.
Barclays is fully committed to the Nets, say insiders who note 1) Barclays is one of the investment managers for the arena bonds; 2) Barclays needs the deal more than it did in January 2007, when it first committed to the naming rights agreement…it now has a lot more retail banking business in New York; and 3) Barclays is very happy with its first major foray into New York sports, having sponsored the "The Barclays" PGA tour last summer.
As for the NJSEA lease, everything is up for negotiation, including deadlines, penalties, etc. as the NJSEA, the City of Newark, the Nets and the Devils try to find a way to let the Nets play temporarily at the Prudential Center. Newark Mayor Cory Booker told a local radio station last week that a deal was at "at the two-inch line". Expect a deal to happen this month as well. NBA and NHL schedules are set in the summer, so there would be plenty of time to work out dates. One potential stumbling block: Seton Hall plays all its men's basketball home games--and a select number of women's games--at "The Rock". Fitting Seton Hall, the Devils and Nets games onto arena’s winter schedule might be tough.
What about the other lawsuits?
The eminent domain ruling was the critical one. The others have been seen mostly as a way to slow the financing down, adding a degree of uncertainty to a process that is already fragile. Even the head of the Develop Don't Destroy Brooklyn's legal team, Candace Carponter, admits it's likely to be an uphill fight: "It is hard to imagine that a judge is going to require them to make new findings that would require them to start this whole project over again."
No one on the other side seems particularly concerned about the potential of these latest suits to stop the project. A spokesman for the ESDC said this week "none of those lawsuits would actually impede the beginning of development," since they don't challenge the condemnation of property needed for the arena or the larger Atlantic Yards project...nor can they. That issue was decided by the Court of Appeals. Next step is likely to be a consolidation of the new lawsuits. There are four now and another is expected next week.
What about a permanent move to Newark...if Brooklyn fails to go through?
So far, that hope is based on three reports, two from ESPN's Marc Stein, one from Dave D'Alessandro. Stein has quoted a "league source" as saying Prokhorov is so set on owning the Nets--"so geeked" in Stein's words--that he'd be willing to renegotiate his deal with Ratner and keep the team in New Jersey...if Brooklyn fails.
D'Alessandro, on the other hand, quoted a "Nets minority partner" as saying, Prokhorov "might be inclined to keep the team in New Jersey" if the price is right. The presumption is that the team would move to Newark, but none of the three reports mentioned the city or "The Rock" specifically. Of course, all that was before the Court of Appeals ruling.
Prokhorov has not commented on the reports. Nor have his US representatives. Nor are they likely to. Everyone is trying to get Barclays financing in place. Adding degrees of uncertainty won't help. But of course things can change. The one constant in Ratner's six year pursuit of the Brooklyn has been disappointment.
How long will it take for the Barclays Center to be built?
Good question. There were conflicting reports this week. Bruce Ratner and Yormark both claimed after the Court of Appeals ruling that the Nets will play at Barclays in the 2011-12 season, and reportedly the Nets would like to make the move across the two rivers during the February 2012 All-Star Break. That would mean a 24 to 26 month construction timetable from a presumed ground breaking in either December or January. There have been conflicting reports on that as well.
On the other hand, the New York Times reported that the construction will take 28 months from ground breaking and predicted an opening in June 2012, too late for the NBA season.
A couple of things should be noted: Conseco Field House in Indianapolis is the basic model for Barclays. They may not look the same from the outside but their dimensions are about the same and they have the same lead architect: Ellerbe Becket, and the same construction contractor, Hunt Construction. No architectural firm has as much experience managing the construction of NBA arenas as Ellerbe Becket does. On many of the jobs, they were paired with Hunt. That’s one reason the Nets dumped Frank Gehry for Ellerbe Becket: time. Conseco took 26 months to complete, from ground breaking to opening night. "The Rock" an admittedly simpler design, took 24 months. With so little construction underway in New York, there’s unlikely to be major delays in finding men and material to get the job underway. The new Giants-Jets Stadium at the Meadowlands came in four months early, something unheard of during the building boom.
Moreover, one advantage of having Ratner, a developer, in charge is that he and his team have vast experience in construction, particularly Brooklyn construction.
"For once, we have someone who actually builds for a living--that is, the developer of the project," says Goldman's Carey.
On the other hand, Barclays will have to be built on a platform above a railyard, a complicating factor. At least some supporting pylons have been built as part of the construction prep work as well as other infrastructure, including new water, sewer and electrical lines. The railyard has been moved.
Where’s Mikhail Prokhorov stand in all of this?
He’s a lot more than an casual observer. His $200 million investment represents a big chunk of the arena equity the Nets needed to impress the ratings agency. His agreement to have the Nets pay a substantial lease annually to the arena company helped with revenue projections. He has shown he is willing to do what needs to be done to get the arena moving. What else might he do? Not something we know about, That was Prokhorov’s choice. He wanted the arena deal completed before he committed to the team. Remember the Prokhorov deal has three parts: 80% of the team, New Jersey Basketball, LLC; 45% of the arena, Brooklyn Sports and Exhibition, LLC; and an option to buy up to 20% of Atlantic Yards Development, LLC. He has said the arena is the big moneymaker and expects the team to be a money maker as well by 2011-12. In the interim, he has reportedly committed to eat the costs of the Nets' losses in New Jersey, up to $60 million. That's about two years' worth. He will also take on 80% of the team's long-term debt, about $170 million.
If the deal does go through on December 15, it will be up to the NBA Board of Governors to decide on a transfer date. As ESPN's Chris Sheridan reported this week, it could be a few weeks or as long as three and a half months. It's more likely to be the former rather than the latter. The league wants Prokhorov as a partner...and wants the Nets to have a stable leadership. The league’s vetting of Prokhorov is expected to be completed not long after the "master closing" as well. It has been underway, in at least preliminary fashion, since October, Al Iannazzone has reported. So far, no "disqualifying" information has been unearthed, say insiders. Of the NBA's 30 owners, 23 must approve the application for transfer of ownership.
Will Prokhorov be in charge by the mid-February trade deadline and will it matter? Good question. Some have suggested that the 2010 free agency season may begin at the deadline, as teams with big free agents begin to wonder if their guy is going to bolt come July. If so, the smart thing to do is trade him and get something back in return. So this could be a very active deadline.
In the meantime, Ratner remains principal owner of the team, the ultimate decision-maker. Prokhorov and his people are very sensitive about him being called anything other than "prospsective owner". The Record’s Ian O’Connor wrote this week that Prokhorov reportedly told Rod Thorn at their one meeting last month not to spend any money in the interim (as if he was sitting on a lot of it!) Still, Prokhorov has hired a number of consultants, including basketball people, to report to him on the Nets’ situation. Some of those consultants no doubt are hoping to join the front office when he takes over. According to one source at the Nets’ offices in East Rutherford, his "people" are there all the time.
Meanwhile, Prokhorov’s wealth and influence grows, with estimates now north of $15 billion, making him the richest owner in pro sports by a wide margin. Paul Allen, owner of the Trailblazers and Seattle Seahawks, is worth about $10 billion. He is in France this weekend, part of Prime Minister Vladimir Putin’s official delegation. It’s his first visit to France since he was detained two years ago as part of an investigation into prostitution. It's highly symbolic and a stick in the eye to those French authorities who kept him holed up for four days.
How much will he spend? He’s not in this to pinch pennies…or kopecks. He’s in this to gain a reputation, legitimize himself, as one insider put it.
Who stays, who goes?
In short, who knows? Thorn, Kiki Vandeweghe, Lawrence Frank and all the assistant coaches are working on expiring contracts. Thorn and Frank in particular make a lot of money: Thorn $5.5 million, Frank $4 million. Vandeweghe makes less, about $1.25 million. None have covered themselves in glory this season, even acknowledging the restraints put on them by Ratner. Moreover, if Prokhorov wants to start anew, put his own stamp on the team, help fans forget this season--particularly those he will have to woo in New Jersey, it's hard to imagine all three will be back.
There's been a lot of speculation about Prokhorov's favorite coach, Ettore Messina, who has won four Euroleague championships, including two as coach of CSKA Moscow, Prokhorov's old team. But Messina, who's now coaching in Spain, has downplayed the idea of a European head coach stepping into an NBA job without spending time as an assistant. Of course, what he says makes sense.
On the other hand, Prokhorov tried to hire Maurizio Gherardini, the assistant general manager of the Raptors, to run CSKA. Gherardini was highly successful as GM of Benetton Treviso, a European powerhouse that plays just outside Venice. He is now in his third year with the Raptors. He's already served his NBA apprenticeship.
As for Yormark, it's been reported that under the sales agreement, all non-basketball personnel would be moved off the Nets payroll on to the arena payroll. That would mean Yormark and his $2 million salary would move, helping the team's chances at profitability. It should also be noted that Ratner's group will retain 20% of the Nets and 55% of the Barclays Center...and his parent company will get a 5% developer's fee to manage construction of the arena.
Could the Nets' current fortunes hurt the sale of arena bonds?
Absolutely, says an expert in sports finance. "After all," he notes, "this is all about revenue projections and if investors don't think the team will draw..."
How ironic would that be?