A deal for Related but with terms attached

The MTA Board voted yesterday to approve yet another iteration of a contract with Related Companies for the rights to develop the Hudson Yards area. If all goes according to plan, this deal will eventually net $1 billion for the MTA, but as work continues apace along the 7 line extension, the money from Related is no sure thing. In fact, the contract contains terms and conditions that may eventually allow the real estate developer to back out entirely.

The details are complex. Related’s payments won’t kick in until the economy improves. You can wade through a lenghty PDF document if you want to explore the fine print, but The Observer’s Eliot Brown has it all in bullet-point form. While the contract will soon be signed, the deal won’t close until, says Brown:

• Midtown office space availability rates hit 11 percent, according to brokerage CB Richard Ellis. While the current rate is at 14.8 percent as of March, 11 percent is relatively achievable, as according to CBRE numbers, midtown averaged well below 11 percent between 2005 and 2007.
• Manhattan co-op and condo sales price achieve an average $1,200 a square foot for a sustained period (it’s slightly more nuanced than this). The fourth quarter of 2009 saw an average price of $1,051, according to Miller Samuel. The rate has cracked $1,200 a foot in three separate quarters in the last cycle, hitting a peak $1,322 a foot in the second quarter of 2008.
• The architectural billings index must pass 50 for the commercial sector. It’s currently at a bit below 45, and was last over 50 in early 2008.

On the one hand, these conditions appear to be reasonable demands for a deal of this magnitude. After all, Related shouldn’t just fork over $1 billion if it doesn’t feel as though it can fill the office space. The developers appear to want tenant guarantees before closing as well, and that’s no sure thing considering the costs, location and amount of time it will take to construct the support platform over the rail yards and the buildings in the complex.

On the other hand, this deal jeopardizes the MTA’s position. Related could back out without payments or the company could opt to wait years before sending the MTA any money. Meanwhile, the work on the 7 line will continue, and it seems quite likely that the one stop at 34th St. and 11th Ave. will open years before the majority of the Hudson Yards development is even under construction. The stop at 41st and 10th Ave. then should become more of a priority because it will make this project more worthwhile in the short term.

It makes development sense to build out to areas underserved by transit that are ripe for growth. But it makes even more sense to spend dollars that aren’t unlimited on improving transit options in heavily-congested areas of the city. The wisdom of this project continues to remain tenuous at best.