The Apple Store is courting controversy even before the plywood comes down.
The Apple Store in Grand Central is still a week or so away from its grand opening, but already, its mere presence and the lease Apple has signed is generating controversy. One State Senator may even take the extraordinarily bold step of holding a hearing to protest the lease.
Here’s the story, as first reported by The Post: Apparently, Apple negotiated a deal in which it pays $60 per square foot for the space and doesn’t have to pay the MTA, its landlord, a percentage of profits. It will be the only retailer in Grand Central with such a sweetheart deal, and the rent itself, while four times higher than what Metrazur was paying, pales in comparison with the $200 per square foot Shake Shack will soon be paying. Uh oh.
The MTA itself was a bit defensive of the deal. “We set out to maximize the rent we receive for this space, and we’re thrilled that we were able to more than quadruple what we had been receiving previously,” Authority spokesman Aaron Donovan said to The Post. No one else, the MTA has noted multiple times, even bit a bid in for the space when the authority issued a request for proposals earlier this year.
Still, those watching the proceedings and those dismayed at the state of the MTA’s finances were none too pleased. “I am surprised they didn’t get some kind of percentage,” Robin Abrams, an executive with Lansco, said. “You’d think if they were going to do, say, $50 million in sales, the MTA would at least get some percentage of anything over that.”
The MTA has repeatedly said that the Apple Store and the traffic it generates will make up for the lease terms favorable to the Cupertino computer giant. The authority anticipates that the Apple Store will “generate significant new traffic” for the other retail establishments, and as The Post reports, every one percent increase in non-Apple Grand Central sales results in an additional $500,000 for the MTA.
Throughout the city, reaction to this development has not been kind. Gizmodo slams both the MTA and Apple. The computer retailer is “screwing over one of its partners” and “might be hard-lining you right out of your ride to work.” That’s a bit of hyperbole as even a percentage-based lease wouldn’t generate the kind of dollars the MTA needs to close long-term spending gaps.
One State Senator though isn’t too impressed. “There needs to be an investigation of who negotiated this deal. The taxpayers of this state are being ripped off that Apple is getting this sweetheart deal,” Tony Avella said to WCBS.
So what to do? The MTA had no leverage in the negotiations, and Apple knew it. It’s getting more money than it used to get and could reap ancillary benefits in the form of increased traffic through Grand Central. On the other hand, Apple is paying a percentage at 59th and 5th that has amounted to around $15 million per year. That’s real money the MTA won’t see because they weren’t in a position to ask for and get it. It is another day in the life of this crazy city.
15 comments
Why did the MTA not have any leverage? Why couldn’t they have put it out to bid? Apple can’t be the only retailer in New York who’d like to have a spot like that.
They DID put it out to bid.
I was going to raise this in the earlier thread, but its a credit to this blog that I thought that Ben would notice this and get around to posting something on this.
Ben is too polite to ask the obvious question of how a northern California based county was able to get a deal like this with a New York state agency. How did they know who to bribe?
There’s always the possibility you’ve got an Apple fan boy(s) in the MTA’s real estate department who green-lighted this deal simply because they truly believe the store will turn the building into Geek Central Station, and that there really will be thousands of people coming for the computer products who’ll be using the other stores and restaurants in the building (and to be fair, the “added value to the surrounding area” argument isn’t all that different from how the city justified new baseball stadiums for the Yamkees and Mets, so it’s not a new tactic, and 60 years ago New York Central was big about CBS having studios in the building as a way to gemerate buzz for the train station).
Who did they bribe to be a single bidder, you mean? I don’t think so. This was a pure commercial negotiation, plain and simple. MTA needed Apple more than Apple needed MTA, so Apple had the leverage. Additionally, Apple negotiators are probably far more adept at negotiations than MTA.
Please also see my post below. NY State and MTA cannot have it both ways. MTA cannot be a business when it is convenient and then a state run bureaucracy the next. As a business, it can negotiate any terms it wants. But as a bureaucracy, it is beholden to the State dysfunction. So, someone, somewhere needs to decide.
I’m not sure you have to resort to accusations of bribery to explain how the MTA could screw up a real estate deal.
I’m not sure it’s a good comparison – it’s a huge space but, to my memory, it would be pretty hard to use. I also agree that Apple Stores become destinations and will draw traffic to linger in GCT as opposed to just pass through. I’m not in real estate, I have no idea if they got a steal or not, but with a space as unusual as this and circumstances as unique as this, I can be fairly sure that none of the people in your article know either.
But, well, attacking the MTA is always in season in NY.
I would recommend that Mr. Avella first investigate his own governing body (NY State government) first to determine how to restore monies to MTA that were promised and not delivered by the state. Furthermore, Mr. Avella should investigate ways to establish a permament, dependable, and size-appropriate funding package that the state can commit to each and evey year. This funding should be further contingent upon reasonable reforms to be undertaken by the MTA to provide, promote and grow mass transit in the area and to improve upon the existing infrastructure. And the MTA must reform itself to be a more functional agency. It cannot purport to operate like a business and function like a bureaucracy. Additional funding levels can be provided with additional levels of innovation
Oh, please. If Joe Lhota caught a cold on his personal time, and sneezed into a tissue bought by the MTA, the NY Post would run an exposé on the personal use of MTA property and the State Senate would conduct an investigation.
This is fair-market real estate, plain and simple. And a flat-rate rent is the way to go in this situation. What if someone bought an iPhone at the store and signed up for a 2-year service contract with AT&T? Would the “percentage of profits” continue to be paid for the next two years? What if the subscriber cancelled or changed his service plan? What about purchases from one store that are returned at another? None of these scenarios are possible at Shake Shack. I haven’t come close to figuring out who at the MTA would review the sales records. Logistically, a percentage-of-profits deal doesn’t make sense here.
Some facts about commercial real estate.
In general, stores seen as “anchors” that draw traffic pay lower rents than other stores that benefit from that traffic. That is true of supermarkets in neighborhood shopping centers, and department stores in regional shopping centers. So it isn’t the case that something is necessarily wrong if Apple pays less than other retailers in rent.
The question is, would Apple be an anchor, or is the MTA in fact the anchor? Will Apple just benefit from all the people passing through the station, or will additional people travel to the station to go to Apple instead of going to 59th Street or Soho?
And will those who travel to GCT to go to Apple also shop at other stores?
Hard to say. One wonders what Apple’s plans are. Do they want to sell only at their own stores, just as they only license their software to their own manufactured products? Will they be as common as Starbucks? Or is GCT an eventual, better located replacement for 59th Street?
I was just shocked that Apple got the space ready so fast. In contrast to the MTA’s contarctor taking 2 years (at least) to build a GCT exit on 47th Street.
Apple products must be pretty damn profitable, on account of having short lives and costing several times more than competing products with the same or better features. Perhaps the revenue sharing thing isn’t such a loss. I’m sure it’s not going anywhere, but this is a risky time for Apple – it’s not entirely out of the question that, with Steve Jobs gone, Apple’s days as hot shit are numbered.
I doubt that apple’s days for hot shit are numbered at all. Just look at the sales for the Iphone 4s & realize that the Iphone 5 comes out next year. The madness fore the next version will happen again.
Keep in mind a few years a go what happen to Starbucks. Wall Street furms were questioning there viability since Dunkin Donuts & McDonald’s were making inroads on the coffee market. Thanks to the return of founder George shultz, Starbucks has regained what market share they lost in the past few years & then some. That being the case, why couldn’t Apple do the same if need be.
Now for the store it self – it functions similar to a department store in a mall drawing customers to it as well as the other stores around it. In this case, the mall just happens to be Grand Central Terminal a landmark that has no trouble atracting visitors from all over the world not to mention 200,000 train riders every day.
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