Home MTA Economics MTA may offload real estate to close a budget gap

MTA may offload real estate to close a budget gap

by Benjamin Kabak

The MTA must close a $100 million budget gap before the end of the year, and CEO and Chairman Jay Walder has pledged to avoid fare hikes or service cuts. Thus, the agency is turning to its real estate holdings to see if it can eke enough money out of sales to help close that gap, The Wall Street Journal reported this morning.

Andrew Grossman has more:

Since the end of 2009, the MTA has slashed administrative staff by 18%. That has left it with thousands of empty desks throughout the city. Late last month, the authority issued a request for proposals seeking a real-estate firm to help it figure out how to wring more money out of its office space. The MTA owns or leases offices in every New York City borough and in White Plains. It spends nearly $89 million each year on rent, taxes and operating costs for that space, according to the request for proposals. Meanwhile, it’s trying to close the gap in its $13.4 billion budget by the end of the year without raising fares or cutting service…

The 277,000-square-foot MTA headquarters site [at 347 Madison Ave.] could be worth a lot…Properties in the area have fetched about $300 a square foot in recent months, according to real-estate website PropertyShark. The headquarters occupies three adjoining buildings that make up the entire west side of Madison Avenue between 44th and 45th streets. The buildings are connected to Grand Central Terminal by an underground passageway.

While the buildings themselves are cramped and outdated, they could fetch a high price because of an invisible advantage that comes with them: air rights from Grand Central. Because developers can’t build on top of the historic terminal, its air rights can be purchased by the owners of neighboring sites who want to build higher than regulations would otherwise allow. A large chunk of those rights went to now-defunct Bear Stearns when it built its headquarters on Madison between 46th and 47th streets in 1999.

The MTA’s real estate holdings have often come under scrutiny from politicians. The decrepit building at 370 Jay St. in Downtown Brooklyn has long incurred the wrath of local representatives, but the MTA has been hesitant to sell anything because it had needed the space. Now that staffing levels are down significantly, the MTA should be able to consolidate operations and begin to sell off some unnecessary assets.

Of course, the only problem with selling off real estate assets is that it’s a short-term fix for a long-term problem. The MTA can placate politicians by dumping its properties, and it can close its 2011 budget gap by doing so. But it’s not going to help the 2012 budget, and it won’t help restore sanity to the way the MTA is funded. By all means, the MTA should operate efficiently, but the politicians who grandstand on these issues must be willing to meet the agency halfway.

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R. Graham March 23, 2011 - 12:13 pm

There’s only one reasonable thing to say regarding this.

Politicians strike again! As they always say, anything to get you to and through the next election!

Christopher March 23, 2011 - 12:15 pm

Long term land leases?

If you’ve ever been to San Francisco — the San Francisco Centre shopping mall at the Powell Street BART station sits on property owned by the SFUSD. The schools get a hefty payment on that land every year. It’s a major piece of their funding stream. (Every now and then a new school boards suggests selling it outright and then they realize what a financial bind that would put them in).

SEAN March 23, 2011 - 12:47 pm

Two things 1. tipical one shot move for raising revenue & 2. if the MTA was really serious about doing this, they would have sold their real estate holdings at the top of the market in 2007. Oh what could have been.

Berk32 March 23, 2011 - 2:27 pm

can’t blame current MTA leadership for past leadership mistakes

al March 23, 2011 - 9:58 pm

That could have been sell high buy back low.

Peter Smith March 23, 2011 - 12:50 pm

property near transit lines is stupendously valuable — worth far more than conceivable in just a 20- or 50-year time frame — MTA needs to develop the property and collect rents from it for time immemorial — that will pay for transit for time immemorial.

Bolwerk March 23, 2011 - 11:27 pm

Agreed. And politicians should be adjusting land use policies to make that as lucrative as possible.

Al D March 23, 2011 - 1:00 pm

$300/sq ft is an absolutely ridiculous and sensationalist number for the type of space at MTAHQ and MNR. WSJ should try speaking to an actual real estate broker and doing their proper article research. Try more like $90 for the GCT area and that’s being generous. Jay St should be disposed of immediately to make room for a another high rise.

Christopher March 23, 2011 - 1:34 pm

Right, but why couldn’t that be structured as a long term lease? MTA owns the land, collects rent and new building gets built on top of it? I just don’t understand the need to sell valuable property when this could be a long-term funding stream.

Chris March 23, 2011 - 1:51 pm

Because doing that wouldn’t create money today to close the MTA’s funding gap. You could do as Alon mentioned below and borrow against future lease revenues/the value of the property, but that option commits the future cash flow anyway (so it’s still not available for transportation funding) and exposes the agency to the risk associated with the additional leverage, which may be good or bad depending how you expect the financial market situation to play out.

al March 23, 2011 - 9:59 pm

$300/sq ft is sale not lease price.

Scott E March 23, 2011 - 1:02 pm

Which space does the agency own, and what does it rent? (I think it rents 2 Broadway, but I’m not sure). It makes little sense to pay rent while owned assets sit vacant.

al March 23, 2011 - 10:01 pm

So consolidate. Sub lease the leased space and occupy the owned space.

R2 March 23, 2011 - 1:21 pm

You mean the EAST side of Madison Ave. and 370 Jay.

Yes, only one-shot deals so while nice to consolidate when appropriate to do, this ain’t be gonna be saving us from fare hikes.

And only in the instance of fortunate timing would an entity such as MTA ever sell at the top of a market. The approvals, processes, etc. just don’t lend themselves to quick action (or re-action). Remember, in 2007 RE transaction revenues were still strong and covering up bigger underlying funding issues.

Alon Levy March 23, 2011 - 1:28 pm

What Peter Smith said. Why is the MTA selling instead of signing leases and borrowing money backed by future rents?

Bolwerk March 23, 2011 - 11:29 pm

IMHO, they’d be better off just using such revenues to pay down existing debt or close operating income gaps.

John-2 March 23, 2011 - 2:18 pm

Selling off all their NYC properties and then working with Oxford Properties Group to consolidate all MTA offices in a new building at Hudson Yards, as part of an effort to jump-start the development of that property and increase the area’s valuations, would probably be the best long-term option. But it’s not going to give the MTA that one-time immediate financial windfall the agency needs for FY 2012.

MichaelB March 23, 2011 - 4:12 pm

I don’t understand why this is controversial. The MTA is a transit agency, not a property management company. It makes perfect sense to sell assets that are not useful to running transit. Try this thought experiment: Suppose the MTA never owned some of these properties, but had a somewhat smaller deficit. Would you support buying them? Of course not. The only real reason to hang on to them is that they’re already MTA owned. That’s not a good reason, especially when the MTA could really use the money.

Of course the MTA should maximize the money they get from them, and whether that’s by sale or leasing or whatever.

Alon Levy March 23, 2011 - 4:54 pm

Forget thought experiments. In the real world, well-run transit agencies make extra profits from real estate, in addition to making sure there’s plenty of development near their train stations to attract customers.

Chris March 23, 2011 - 5:16 pm

I think it’s actually a pretty good thought experiment and you’re being misled by comparison to entities whose greater success than the MTA is not at all attributable to their ownership of non-transit related property. Ownership of assets in unrelated industries is common throughout Japanese business and almost certainly to the widespread detriment of Japanese economic efficiency.

To your second point, ensuring adequate development is hardly an issue for any of the properties discussed in this article. (Indeed in the US it seems to be almost never an issue – zoning/political entanglement is usually the obstacle to denser development, not the desire of a commerical property owner to avoid it.)

Alon Levy March 23, 2011 - 6:13 pm

Japan isn’t really less economically efficient than the US – and neither is Hong Kong. Yes, Japan got pummeled in the 1990s, but it’s slowly recovering, and its per capita income has grown at the same rate as the US since 2010. Hong Kong is growing faster, but it’s still partly newly industrialized catchup.

But anyway, across all transit agencies I mentioned, the real estate business provides a disproportionate share of the profits. The transportation business is profitable by itself, but ancillary operations, including real estate and (for the MTR and JR East) licensing the transit smartcard for electronic money, have much higher margins.

As for development in the US, in some areas you’re right. But in others, judicious TOD would greatly improve things. Sometimes developers aren’t building very walkable things, independently of parking requirements and other zoning rules – not because they can’t but because they’re not used to. Other times, land that could make great TOD, e.g. Sunnyside Yards, sits fallow because the transit agency has no clue what to do with it. (Hint: built the train station there, not west of the ESA/Penn split.)

MichaelB March 24, 2011 - 10:40 am

If the MTA were a well run transit agency, that had proven itself an effective manager of its property portfolio that would be one thing. It isn’t and it hasn’t. Selling off 370 Jay Street for example is basically found money. As it stands it’s an empty building that needs expensive renovation to make useful. It’s not like we’re talking about selling the JR hotel group.

Moreover, well run transit agencies don’t just blindly own the property. They build a hotel or a mall or whatever else will be profitable… and if they find that they don’t have a use for a particular property they will sell it! I’m not suggesting a giant liquidation of all MTA real estate. I’m suggesting rather that the MTA adopt a good management practice of transit agencies, businesses and darn near everyone else in the world: sell assets you can’t put to good use -> especially when you need the money.

Alon Levy March 24, 2011 - 2:00 pm

Those well-run transit agencies are trying to grow the share of real estate. JR East wants it to be one third of its revenues, if I remember correctly. The reason is that managing property in a dense urban area with high rents is much easier than managing a railroad with perfect efficiency.

Whenever you invoke incompetence, ask yourself this: if the MTA can’t run real estate well, why would it be able to sell it and get a good deal?

al March 25, 2011 - 2:03 am

More broadly, the city should think of having linear medium to high density mixed use development, along subway lines with an emphasis on employment outside of Manhattan. This would increase off peak direction travel, short and medium distance trip percentage, and improve the NYCTA’s operating budget. Think about it. If the trains heading towards the terminals against peak direction were filled with passengers, NYCTA’s operating losses would be much smaller.

al March 25, 2011 - 1:08 am

The MTA should really ask for a zoning variance at 370 Jay St and build a high rise Class A office or other high return facility there.

Donald March 23, 2011 - 6:41 pm

“The MTA is a transit agency, not a property management company.”

Of course the MTA is a property management agency. Who do you think manages and leases space in Grand Central and Penn Station? The MTA is one of the biggest landlords in NYC.

al March 23, 2011 - 10:06 pm

And it operates over easements and ROW, and owns numerous rail and bus depots.

Anonymouse March 24, 2011 - 1:27 pm

And a cut of all real estate transfer taxes.

Walter March 23, 2011 - 4:27 pm

Too bad that 40 years ago the state of New York didn’t just take over the old Penn Central holdings in Midtown and use that land to fund transit. Instead, we’ve got an MTA that doesn’t even own it’s most famous asset, and all the valuable land that sits above the GCT train shed generates no money for transit.

I guess the same could go for other MTA train sheds/yards that have been built over, like, say, the recent Atlantic Yards debacle.

Anon March 23, 2011 - 6:05 pm

what’s good for the goose is good for the gander…. the Feds are doing the same thing.

Brian March 23, 2011 - 6:56 pm

Yes but you are all missing point- the MTA will keep having budget shortfalls until our grand old pals at Albany (both Republicans and Democrats) stop short funding the MTA and leave the supposed state aid intact. Oh, and they pass Congestion Pricing, leave the payroll tax alone or revive the commuter tax. Like Ben said in his post, “Of course, the only problem with selling off real estate assets is that it’s a short-term fix for a long-term problem…it won’t help restore sanity to the way the MTA is funded. By all means, the MTA should operate efficiently, but the politicians who grandstand on these issues must be willing to meet the agency halfway.”

Anon March 23, 2011 - 8:18 pm

“short-term fix for a long-term problem”
absolutely. hopefully things will get better…..

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Scott E March 24, 2011 - 9:28 am

Is property owned by the MTA taxed at the same rate as property owned privately? What if it’s MTA-owned but 100% leased for private use? I’m sure taxation may play a role somehow.

If these properties are a liability rather than an asset, meaning they cost the MTA money every year – more than they can, or do, pull in, then it’s worth considering getting rid of them. But not in this market, and not in these conditions. Property values are low, and when a seller throws up his hands and screams “I’m desperate!”, the price goes even lower.

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