Wednesday, November 23, 2011

Who Owes The NY State Bond Debt Used To Build Roosevelt Island, Empire State Development Corporation (ESDC) or Roosevelt Island Operating Corporation (RIOC) - Not Us Says RIOC

Image of Bond Debt From Painependant

A previous guest post by former Roosevelt Island Residents Association President (RIRA) and current Planning Committee Chair Frank Farance raised an issue of the long term financial stability of the Roosevelt Island Operating Corp (RIOC): According to Mr. Farance's November 9 Post:
... there are some topics of real and long- term consequence that affect all residents. One topic is the long-term finances of the Island. Roosevelt Island was built in the 1970's with hundreds of millions in bonds. I've heard that as much as $400 million is due, of which RIOC's "profits" will pay it down....
Mr. Farance follows up on previous post with:

In the prior issue of the WIRE and on the Roosevelt Islander Blog, my letter suggested as much as a $400 million liability for RIOC. I was wrong. I've looked into the supporting paperwork and it appears that almost a BILLION dollars are due to UDC (Urban Development Corporation, now named Empire State Development Corporation - ESDC). According to the Revenue Allocation Agreement of August 3, 1988:
  • ... WHEREAS, in order to develop the Premises [Roosevelt Island] in according with such lease, UDC borrowed funds to finance construction of public facilities including without limitation, roads, sidewalks, sewer system, AVAC, water lines, schools, promenades, recreational facilities, a tram, parking garages, other parking facilities and other public facilities;
  • WHEREAS, in addition, other funds have been advanced to cover deficits arising from the operation and maintenance of the Premises;
  • WHEREAS, under chapter 899 of the New York Laws of 1984 (the "RIOC Act") UDC is required to assign the Master Lease to RIOC;
  • WHEREAS, the RIOC Act provides, in pertinent part, among other things, that all revenues derived from the contracts, leases, agreements or instruments assigned to or assumed by RIOC pursuant to Section 6 Subdivision 2 of the RIOC Act be applied first to the payment of obligations assigned to or assumed by RIOC, as more fully provided herein;
  • WHEREAS, the RIOC Act further provides the UDC and RIOC shall enter into such agreements and take such actions to permit UDC to recover the investment it has made in the Premises; ...
As of March 31, 1987 the Accrued Operating Deficit was $54,894,528 and the Public Facilities Debt was $117,462,448 (see PDF page 18 of the August 3, 1988 Revenue Allocation Agreement). In addition, another approximately $50 million operating deficit has accrued since the agreement. With an agreed upon interest rate of 5.74% per annum, the total due this fiscal year is $857 million. The annual interest is about $50 million (over $4 million a month), which dwarfs RIOC's $20 million in annual revenues. RIOC Board members frame this in wishful thinking (I Hope The State Doesn't Ask For Its Money), but this is a BILLION dollar Oops!, and it is off RIOC's balance sheet.

I'm sure we'd wish for ESDC to forgive the debt, but our billion dollar liability is their billion dollar asset and I'm not hopeful that ESDC (the State's flagship entity for economic development) is willing to take a couple black eyes when it might affect their ability to issue bonds (read: in ESDC vs. RIOC, I'm guessing RIOC loses).

As a former RIRA President, I complained loudly about the inadequacy of RIOC's 5-year budget and RIOC started providing 15-year projections, which had revealed significant risks and liabilities. Again, I ask RIOC Board members to disclose the true finances of RIOC and to explain their financial plans.

[Attached documents: #1 August 3, 1988 Revenue Allocation Agreement, which references the other three documents of July 21, 1988: #2 Assignment and Assumption Agreement, #3 Phase I Subleases and Revenue, #4 Other Agreements. Important Note: There are other records, I am awaiting a response from RIOC.]
In addition to being published in this Blog, Mr. Farance's statement was also published as a Letter to the Editor in the November 19 Main Street WIRE. Prior to publishing Mr. Farance's guest post, I asked RIOC:
Frank Farance has submitted the following article regarding the finances of Roosevelt Island Operating Corp. Mr. Farance asserts, based upon his review of certain documents described in his article, that almost a billion dollars are owed to the State of NY.

Is Mr. Farance correct? If not, can you clarify what is the current state of debt owed, if any, by RIOC to NY State or any of it's Agencies.

I understand this is a very important issue and am checking with you before publishing Mr. Farance's article. I plan to publish it on Friday. A comment from RIOC regarding the accuracy of Mr. Farance's article would be very helpful. If you do not wish to comment, please let me know that as well.
I received this reply from Howard Polivy, RIOC Board Member and Chair of RIOC's Audit Committee yesterday (Monday) afternoon:
There are some very basic misunderstandings in Mr. Farance’s recent letter to the Wire. Let’s start at the beginning. The New York State Urban Development Corporation (UDC) was conceived in 1968 primarily to build state-subsidized housing projects. UDC is now doing business as Empire State Development Corporation (ESDC).

The bond debt belongs with ESDC, not RIOC. By statute, RIOC cannot take on any debt. That’s why it’s quite properly not shown on our books. However, since the WIRE buildings were built with the UDC financing, it’s only reasonable and fair that any revenues derived from them would be split between RIOC and ESDC. Therefore, the RIOC Act requires a formal revenue allocation agreement exist that addresses how RIOC revenues should be split with ESDC. Part of that agreement requires that RIOC pass through PILOT payments (Payment in lieu of taxes) and gives ESDC a portion of the ground rent collected. RIOC has been doing that for the past 24+ years. Other income could/should theoretically be shared with ESDC but only after all other capital improvement payments have been deducted against operating incomes. When deducting all capital expenditures there are no expected excess funds to be shared through to 2068.

RIOC's annual budget and financial statements properly restrict themselves to its own direct receipts, expenses, assets, and liabilities.

So, bottom line, there’s no big groundswell of debt piling up ready to swallow up the Island. The board is not crossing its fingers and hoping the State won’t notice that RIOC owes them money. The board and RIOC staff is now, and has for the last 24+ years, been responsibly living up to its agreement with NY State.


YetAnotherRIer said...

Frank, your turn.

westviewgirl said...

Is Westview going to be a co op one day? I have heard my neighbor at Island House may be able to buy her apartment soon. Is this true at all? Any of it? I cannot afford to buy my place.

YetAnotherRIer said...

"Mr. Polivy states "The bond debt belongs with ESDC, not RIOC", which is true, but RIOC is still responsible for paying back UDC/ESDC for its investments in and operating deficit payments towards Roosevelt Island."

Doesn't that mean that the RIOC does not owe the debt but that it is chipping in and helps the ESDC to pay back the balance? The RIOC seems to be pretty much off the hook when it comes to this debt. They pay as much as they agreed upon and more only if they can but it seems that this will not happen anytime soon. I don't see a need to worry about this any longer.

theohiostate said...

Please don't invite Frank to take another turn. 

I have no idea why he's on a mission to prove that RIOC is going to go broke, just like I have no idea why he fights with his own colleagues about everything under the sun.

I hear he's making another run at RIRA President... good for him.  He should beat Katz easily.  The real question is why doesn't he run for the RIOC Board again? 

CheshireKitty said...

I doubt if anything is going to happen anytime soon.  The privatization has been dragging on for years, and likely nothing will happen for a while.  I imagine for those who do not, or cannot, buy their apartments, they will be permitted to stay on at a non-market rate rent.  

Frank Farance said...

It means: (1) UDC had the responsibility to pay the bonds directly (which, according to ESDC, none remain outstanding), but (2) RIOC has the responsibility to pay UDC/ESDC.

You say, "RIOC seems to be pretty much off the hook when it comes to this debt", which is not true, RIOC still has debts/liabilities to pay.

You say, "They pay as much as they agreed upon and more only if they can but it
seems that this will not happen anytime soon", but this isn't true either.

First, it is unclear whether RIOC is following their agreement because some of the revenues RIOC has received (and will receive) seem to be outside what RIOC is permitted to keep.

Second, the State can simply transfer money out of RIOC (as it has done with Battery Park City Authority) to address State budget needs.  So having a board that is unwilling to address the State's interests (and possibly a lack of compliance with the agreements) means they will have weaker negotiating power when that day comes (which might be soon with the State's budgetary problems).

Third, for people who own apartments this can depress the price of the apartment and for renters this can increase the rents, because if RIOC never pays the apartment owner/renter will have to pay at the 2068 Roosevelt Island lease termination (I believe this is true because the buildings are subleases to the Island's lease).  With back of the envelope calculations, $20 billion spread across 5,000 apartments is $4 million per apartment (and it might not be spread evenly).  Now the City-State lease of Roosevelt Island won't wait until 2068 to be renewed/resolved, it will probably be addressed in the next 15-25 years.  Still, a future liability can depress *current* prices of apartments.

Certainly, it is important to find out who will pay the debt/liability if the RIOC board chooses not to make payments.

Given the amount of financial calamity in the past several years, this condition of a debtor's inability to make payments, increasing debt, debt exceeding the value of the asset, etc. should sound familiar on a national level.  So the approach of "it seems that this will not happen anytime soon. I
don't see a need to worry about this any longer" doesn't seem like a
good financial strategy, right?

Frank Farance said...

So we should discourage understanding RIOC's true finances and their effects?  Whom would that benefit and Why?

CheshireKitty said...

Maybe the debt will be incorporated into the City's finances once control of the island reverts back to NYC.  Everything then will be paid for by the City - garbage collection, security, etc. - out of money we pay to the City in taxes.  If the debt must be refinanced at that point, doing so will be up to the City.  

Anonymous said...

I really don't understand the hoopla. It seems that the RIOC does not legally owe the debt. If they decided not to pay anything to the ESDC I assume they get sued because there is a certain obligation the RIOC does have. They cannot default, though. No real risks here.

Frank Farance said...

Is possible but unlikely that the City will just take over the debt: Given many other good things that a billion dollars would buy, I don't believe the legislators or the unions would allow such a bailout.

Ditto for the land under the buildings: I don't believe the City would give away the land free, so the buildings' owners (tenants) would have to pay something at lease termination.  I'm sure legislators, unions, and off-Island real estate interests would believe it is unfair to give the land away, right?

Not that you stated it, but here's the narrative of the plan you've suggested: The City leases the Island to the State, over the next four decades the State makes a bunch of bad real estate deals, there's a billion dollars debt, $6-8 million negative cash flow (i.e., now additional $6-8 million annual City budget), so the ground leases are terminated with the land given free to the building owners, and the City takes on a billion dollars in debt ... why is this a Win for the City?

Really, do you think Brooklyn, Queens, and the Bronx are going to support this idea when they each could use a billion dollars of relief or services?  And, unlike other public authorities, RIOC has a majority of board members as residents: we can't blame this on the State, this is our own fault.  The rest of the City is not going to be sympathetic to mistakes we've caused ourselves.

(By the way, I am not opposed to the City taking over the Island, it's an interesting idea, there's a simplicity to it, and it should be fully considered.  But just flipping a switch one day and folding RIOC and its debt/liability into the City is, I believe, a non-starter.  Ditto for transitioning the buildings into actual land ownership, it's very complex.)

YetAnotherRIer said...

Maybe we should start at the beginning. Do we agree that the RIOC is not the entity that owes the debt? It is the ESDC. The RIOC just chips in on a monthly basis. Now, you do raise an interesting question. What is going to happen if the RIOC cannot meet its payments to the ESDC? The ESDC will be the one on the hook and the one defaulting if it has to. They can in return sue the RIOC for breach of contract or some such but it actually really would be ESDC's sole mess especially if the RIOC can prove that they are insolvable and cannot pay the current monthly payment.

Frank Farance said...

RIOC owes the $857 million debt/liability to UDC/ESDC, please read the Revenue Allocation Agreement on PDF Page 3 (amount owed for Accrued Operating Deficit) and PDF page 6 (amount owed for Public Facilities Debt). It will be about $20 billion in 2068.  You have it backwards: ESDC will *not* be the one in default, it is RIOC that is unwilling/unable to make its payments to UDC/ESDC.  ESDC has a billion dollar asset: the debt/liability RIOC owes.  This isn't ESDC's mess, it's RIOC's mess.

CheshireKitty said...

This is what happens when   the State makes deals that are favorable to developers.  The only way to recoup the billion dollars is by charging the developers a rent that is truly in line with the value of the land, not the pittance that RIOC currently receives.

But this will greatly reduce the developers' profits and this the politicians in Albany will never do - since they are closely aligned with business interests.  

This is just one more example of the mess that has gripped the country and has caused the  growth of a left- and right-wing protest movement (Tea Party & OWS) sickened by the cozy relationship between big business and government that in the end leaves the ordinary citizen jobless, homeless, hungry, and no doubt eventually dead.   

YetAnotherRIer said...

I finally got some time to skim through the Revenue Allocation Agreement and I still fail to see what is so dooms-day about it. There are two pots of revenue that the RIOC collects. One of those pots (income generated by the investments the UDC did back then) is used to pay the ESDC. The other is used to pay all kinds of operating expenses and the remainder goes to the ESDC (which seems to be pretty much always zero). While the agreement says that everything has to be done to repay the debt it seems to hang on what exactly the RIOC can earn from the property. There is no fixed payment or some such. Somehow the statement Mr. Polivy made makes a lot more sense than what you try to say, Frank.

The UDC invested in Roosevelt Island and made the project possible. The state, through the RIOC, repays them but as it is with all investments there is no guarantee that it will pay off. I do not think so that the RIOC should be responsible to make it worth the investor's while to enrich them. The RIOC does what it can do and if it doesn't work out, that's just how it works. It's the investor's problem in the end. And since this is the government entity everything's muddle anyway.

Frank Farance said...

YetAnotherRIer: First, the debt/liability remains, it is not conditional upon whether or not RIOC has certain revenues. (Can you cite a provision that makes the debt/liability go away?)

Second, even if RIOC doesn't want to pay it, we (the residents) might still be responsible for it because we will want to continue our buildings past 2068, so RIOC can demand us to pay them the money as a condition to continuing our buildings (lease renewal, transfer to City, etc.) past 2068.  On top of that, the City can demand money, too.

Third, because of the size of the debt/liability ($20 billion in 2068, $4 million per apartment, possibly not spread evenly), and RIOC's unwillingness to give a clear picture, this can have a significant effect on apartment prices today.  Really, a buyer can easily say "Sure $1 million is a nice price for your apartment, but I'm taking $600,000 off the price because my grandchildren might get stuck with a $4-10 million bill. Only Roos Isl has this wacky ground lease and State agency combo (an agency that doesn't want to pay its debt). Elsewhere, things would be normal: I would own the apartment and the building would own the ground under it, but not Roos Isl.".  And banks can have a similar reluctance about mortgages.  That's why I say: it is really important for the RIOC Board to tell us the truth, to tell us their financial plans, and let us know who will be paying the debt/liability.

You say "It's the investor's problem in the end", but that is cavalier. Unlike other investors, the State can just start transferring money out of RIOC's accounts, regardless of what the agreement says and without RIOC's approval.  It's not prudent to be so dismissive of the State's interests.

YetAnotherRIer said...

"First, the debt/liability remains, it is not conditional upon whether or not RIOC has certain revenues."

That may be true but the agreement spells out in detail how these monies are supposed to be paid back. It doesn't seem to address the situation when all the dedicated revenue streams to pay back the debt dry up. I could only find that the RIOC must never default. I think if it comes to that we have to wait and see what happens then. Until then... I just don't get the urgency.

Frank Farance said...

Sounds like we agree on some important points.  You say "I just don't get the urgency".  My stress was on *importance*, not necessarily urgency: "This matters to all of us because we are all greatly affected by the
Island's finances. The issues above are part of the subtext that drives
these kinds of disagreements among residents on RIOC and in RIRA." (see my November 9 post at ""). 

I'm hoping that the posts and follow-up discussion inform the community on the big financial and real-estate picture of Roosevelt Island over the past several decades, and what's to come in the future.

USB 3G said...