At the March 22 meeting of the board of the Battery Park City Authority (BPCA), chairman Dennis Mehiel noted that, “our triple-A rating was reaffirmed. So our credit is better than the U.S. government. Not bad.”
He was not exaggerating. On March 17, Fitch Ratings (one of the “big three” credit rating agencies that review government and corporate debt — along with Moody’s and Standard & Poor’s) affirmed its highest rating on the BPCA’s slightly more than $1 billion in outstanding bond debt. This prized imprimatur is currently bestowed only on ten governments anywhere on Earth: Australia, Canada, Denmark, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden, and Switzerland. (Debt issued by the United States government was downgraded from “AAA,” to the slightly lower status of an “AA” rating, by Standard & Poor’s in 2011, and has yet to recover.)
The Fitch analysis of the BPCA’s creditworthiness contains some intriguing insights into the Authority’s operations. Chief among these is that people who live in Battery Park City (whether in rental apartments, or in condominium units they own) are contributing a proportionally larger share of the Authority’s revenue than ever before, while the financial burden carried by commercial landlords has eased. (Battery Park City contains approximately equal allotments of commercial and residential space, with each category totaling roughly 10 million square feet.)
As Fitch notes in its report, “the residential portion of the project has shown steady growth in Assessed Value and now makes up about 46 percent of pledged revenue, up from less than 40 percent ten years ago.”
This appears to mean that the burden of servicing the BPCA’s debt load is gradually shifting away from commercial property owners (such as Brookfield Properties and Goldman Sachs, who own the bulk of office space within the community), and onto the shoulders of residents, who now kick in a 15 percent greater share of the BPCA’s revenue than they did a decade ago. (For clarity, the six point difference between 40 percent and 46 percent comes to a 15 percent increase over the baseline value of 40 percent.)
As Fitch explains in its report, “the Authority obtains its revenues principally from the leasing of parcels in Battery Park City pursuant to long-term net ground leases that extend beyond the final maturity of the bonds,” and “the bonds are special obligations of the Authority, payable from pledged revenues that include primarily payments in lieu of real property taxes (PILOTs) from the leasing and subleasing of parcels in Battery Park City.”
These are a references to the exotic nature of property ownership in Battery Park City, where homeowners, landlords, and developers do not own outright the land they occupy, but instead lease the space (through the year 2069), in exchange for yearly payments of ground rent, as well as so-called “payments in lieu of taxes,” or PILOT. Concerns about this arrangement have grown acute in recent years, as more residents have come to realize that, under the current terms of the ground lease, their homes will disappear in the 52 years, as ownership of all the real estate in Battery Park City reverts to the Authority. For condominium owners, this will mean that their property is effectively confiscated, while renters will face the prospect of eviction. Both owners and tenants will be rendered homeless under this scenario. Or as Fitch notes in its report, “at the end of the lease terms, all improvements [meaning “buildings”] are scheduled to revert to the Authority.”
One reason for the increased burden borne by residents may that the aggregate worth of all the apartments in the community has increased faster than the total price of the commercial space. As Fitch notes, “residential values have increased at a faster rate than commercial values, and in fiscal 2017 residential and commercial assessed value were virtually equivalent.”
This represents a remarkable rebalancing of worth. In the 1990s, the commercial developments in Battery Park City were estimated to be significantly more valuable than the residential buildings. And as recently as 2009, bond prospectus issued by the BPCA estimated that, at the time, all of the commercial development in the community was worth a combined total of $715 million, while all of the residential buildings were worth an aggregate of $567 million. This formulation assigned to the office towers a 26 percent premium over apartment buildings. And at the time of a 2003 BPCA bond offering, Fitch reported, the Authority derived 62 percent of its revenue from office properties, but only 34 percent from residential buildings.
This tectonic shift in valuations may be an ominous sign for people who live in Battery Park City. Since both PILOT and ground rent payments are ultimately based on the worth of the underlying property, more aggressive increases in residential valuations may ultimately translate into higher monthly costs for both renters and condominium owners. Indeed, as Fitch noted in a 2013 report about the BPCA, “long-term projections show an increasing proportion of pledged revenue will come from residential properties over time, in part due to the expiration of abatements.”
This may be an ironic coda to decisions made about Battery Park City decades ago. As a 1991 book, “Downtown, Inc.: How America Rebuilds Cities” (by Bernard J. Frieden and Lynne B. Sagalyn, both members of the Urban Studies and Planning faculty at the Massachusetts Institute of Technology) notes, “one of the largest developments of the time was Battery Park City, 92 acres of office towers and apartment buildings sited on landfill in Lower Manhattan. An early plan called for subsidizing one-third of the 14,000 apartments for the poor and one-third for middle income families. A revised plan, based on new priorities in 1979, gave the subsidies to the office buildings instead (in the form of tax abatements) and changed the housing into 14,000 luxury apartments.”
In a more troubling sign for residents and community leaders who hope to keep Battery Park City affordable as a middle-class enclave, the BPCA’s 2009 bond prospectus predicts that, “by 2039, the residential PILOT revenue is projected to increase to $166.7 million from the 2009 total of $57.8 million.” This appears to mean that the BPCA has promised the bondholders from whom it has borrowed money that it intends nearly to triple the amount of money it collects from people who live here over the next 22 years.