The Grand Central Apple Store has sparked a dispute between the MTA and New York State Comptroller Thomas DiNapoli. (Photo by flickr user redswept)
In one corner, Comptroller Thomas DiNapoli and his deputies. They allege that Apple, Metrazur and the MTA engaged in some backroom dealings that lead to a biased RFP process and a favorable lease for Apple in Grand Central Terminal.
In the other corner, Jeffrey Rosen, the MTA’s director of real estate. He says the process was transparent and resulted in major fiscal gains for the MTA. Only Apple or a similarly wealthy retail company could have bought out the Metrazur lease while upping the rent payments. It’s a fight for the ages and one indicative of the problems the MTA faces as a quasi-governmental agency with significant and sought-after real estate holdings.
This tale of government bureaucracy and a mostly insignificant much-ado-about-nothing got its start in December when The Post starting drumming up controversy over the Apple lease. For reasons unknown, Alexander Hamilton’s former newspaper continued to harp on the fact that Apple was paying a relatively low $60 per square-foot and did not have to share a percentage of profits with the MTA.
The Authority, noting that Apple is paying four times more than what Metrazur would have paid for another seven years, called the deal a good one for an anchor tenant. Apple’s rising tide could lift all real estate boats with increased traffic, and the early returns, in fact, bear that out. Even amidst a sluggish retail economy, business at Grand Central has been booming since the Apple Store opened up.
So seemingly at the behest of The Post, New York State Comptroller Thomas DiNapoli had his people do some digging, and yesterday, they released their report [pdf]. How you interpret it depends upon your experience with the way commercial real estate works. On the one hand, the Comptroller’s Office was none too pleased. “While Apple may turn out to be a good tenant, the MTA set a troubling precedent when it played favorites and gave Apple a competitive edge over others for the Grand Central space,” DiNapoli said in a statement. “Apple was directly involved in setting the terms of the lease and given exclusive access to information more than a year before any other vendor knew the Grand Central location was available. The company even signed a $2 million agreement with the current tenant to vacate its space five days before the MTA issued the RFP.”
Essentially, as the Comptroller’s Office notes, the timeline is more than a little bit favorable to Apple. Apple and the MTA started talking about the Grand Central space in November of 2008, and the MTA later approached Metrazur concerning a buy out. In July of 2009, Metrazur and Apple began negotiations, and the two sides settled on a $5 million payout. As DiNapoli’s office notes, this amount eventually became a key requirement for the MTA and provided a significant barrier to entry for tenants not in Apple’s shoes. Whether or not this is a controversy depends upon we interpret that payment.
Meanwhile, once Metrazur and Apple had their price, on May 18, Apple agreed, in a non-binding document, to advance $2 million to Metrazur to vacate early. This money was contingent upon Apple’s winning the RFP. So with many of the financials worked out, the MTA opened the RFP on May 23 and closed it on June 27, receiving just one bid from Apple. Here’s how the Comptroller summarized things:
Although the RFP was competitive in the sense that other bidders were able to submit proposals, the circumstances of the MTA’s lengthy and substantial dealings with Apple support the conclusion that the playing field was not level amongst all potential bidders. At a minimum, Apple had both an informational and time advantage spanning many months, whereas other vendors were afforded approximately one month to determine if the space was practical and the price feasible for them. Moreover, Apple was directly involved in negotiating the amount of the buy-out of Metrazur which ultimately became a key requirement of the RFP.
As a result, the competitive process followed by MTA RED in this instance was at a minimum severely slanted toward Apple. While this procurement may not be unlawful, it surely evidences non-compliance with the intent of our prior audit recommendation requiring RED staff to ensure all rental units are marketed through one of the competitive processes required by the MTA. Moreover, we are concerned about the existence of such behind the scenes close dealings between a vendor and MTA officials prior to issuance of an RFP.
DiNapoli’s report also highlighted one bidder who claimed potential lessees should have been free to negotiate a buy-out with Metrazur and that the $5 million was simply too high. That seems like an oversimplification of a complex real estate transaction.
The MTA issued a vehement response to DiNapoli’s audit. “This audit is not fact-based, and accordingly, their opinion is worthless. The MTA’s lease process with Apple was open, transparent and followed both the spirit and letter of the law,” MTA Chairman Joe Lhota said in a statement. “The overt bias against the MTA and Apple in this audit is breathtaking. Trust, honesty, humility, transparency and accountability are the building blocks of a positive reputation. It’s a shame the Comptroller’s staff who prepared this audit showed none of these fine qualities.”
Offering up less bombast and more nuance, Rosen went into detail on the MTA’s process and outlined how the buyout of Metrazur would not have been possible without negotiations. The MTA, he noted, has increased their revenue from the space, if not maximizing it based upon the size and identity of the tenant. If no one else bid on the space, that’s because no one else could meet the steep financial demands that Metrazur, a tenant with a binding lease, could ask for and receive.
So where does this leave us? In the real world where Comptrollers aren’t free to poke around in every real estate transaction, what the MTA, Apple and Metrazur did was to make a deal. A landlord had a tenant in a below-market rent with a potential tenant interested enough in the space to pay a few million dollars to the restaurant. The landlord facilitated the deal and realized significant increased revenue because of that deal. It’s highly doubtful the landlord would have enjoyed such a bump in income without the deal, and no one else seemed interested enough in the space anyway. Because the MTA is subject to government oversight though, it’s a controversy.
As with many of DiNapoli’s audits, I believe there are bigger fish to fry. Of all the wasteful MTA real estate holdings, the East Balcony at Grand Central with Apple as a tenant ranks pretty low on that list, and the desire to grab political points seems to outweigh a truly egregious violation of decorum of the law here.
11 comments
So wait, what are these political points that have been grabbed?
[Not that I disagree with you, I’m just curious who they’re trying to please with this…]
The MTA seems to be adopting the idea that bringing a ‘hot’ brand into the terminal is smart from a marketing standpoint, because it will attract people who might not normally go into or stop while they’re in Grand Central. Apple above the concourse and now Shake Shack on the lower level are both businesses that have a buzz above what was/is in those locations, and what else is inside GCT.
It’s not a new phenomenon to try and bring something ‘hot’ into the terminal — New York Central did that 65 years ago when the made a deal with CBS to put their first television broadcast center inside the station (CBS wasn’t specifically selling anything, but the concept of television in the late 1940s/early 1950s would being people out just to look on and see how the sausage was made). The concern, long-term, would be you don’ want to turn GCT’s retail into nothing but cutting-edge brand name storesor it becomes something resembling The Grove in Los Angeles, only with a more functional set of trains running in it.
The main thing in the Apple case was that — like two rich people buying and selling an upper floor condo on the Upper East Side — Apple made the $5 million deal with Metrazur because they had the cash to do it, while others may not have been able to match the price. The situation downstairs with Shake Shack and Zocalo seems a little less clear cut at the moment as far as someone being bought out and someone being forced out, though it’s not as if there have never been contract negotiations conducted through the media before, and like Metrazur, Zocalo may be holding out for the best deal possible in order to give up its lease.
For the NY Post, nothing is worth reporting unless they can gin up some sort of false controversy about the story.
The Post is less a newspaper than fishwrap with words printed on it.
We shouldn’t be surprised.
The MTA should audit the 2000 retroactive pension deal DiNapoli voted for. (No, I don’t have to look at the vote count, because the vote count on all these deals is 212 to 0).
The claim, made by DiNapoli’s predecessor Carl McCall and endorsed by DiNapoli by voting for it is that an inflation adjustment could be added to the pension, with immeditate huge increases for those already retired, and the employee contribution could be cut to zero for those with ten year’s seniority, and it would cost nothing.
The claim was also made that NYC and NY State pension funds would return 8.0% per year from the peak of the stock market bubble in 2000, and not just 7.0%.
I wonder how much they were off? I wonder if they care?
I forgot to mention basing the pension on the last year’s salary, including overtime, and not the last three, re-creating pension spiking as a scam. That supposedly cost nothing too, per DiNapoli.
Of course it did not cost nothing to sweeten the pensions. It was is a huge raise that some union members benefited far more then others. It is GROSSLY UNFAIR TO THE RIding PUBLIC. . One of the reason the entire pension system needs to be junked in favor of a 401k type defined benefit is because it is too easy to rig the pension system in the favor of a special interest group in exchange for a bribe. Such a 401k type system managed by the same financial people but more transparent to the public would not reduce pensions but reduce the gimmicks that spike some employees pensions
The average person does not have the financial know how to figure out how much this change that supposed to cost nothing actually cost the taxpayers. Each an every MTA employee is a Millionaire if you count the amount they will get in pension and health care payments over an expected lifetime.
The amount of money per employee(per hour per position) in dollars should be spelled out to the riding public each time a contract comes up. Assuming no overtime the mta needs to place $700,000 earning 7% annual return in an account to pay the bus drivers $49,000 a year pension (70% pension) . A driver retiring 25 year from today would need well over a million to be contributed into his retirement account(and interest earned) to pay his future pension. How many average New Yorkers who ride the bus and trains have $700k plus in their retirement accounts? Of course this calculation did not include health care costs
A fair way is for the mta to disclose to the public the actual amount (cash paid per hour and estimated pension and health costs) when the twu is negotiating. An 11% raise over 3 years added a huge jump in pension costs
Also the current pension system harms many workers who just want to retire or move onto another job. They must stay the entire minimum term or face a huge early penalty. 1 year could be as much as 20% reduction in some city and state plans
One question is that when the other prospective bidders raised their concerns about the $5mm up front payment, did they do so in writing? And if so, did the MTA stop and re-evaluate their RFP requirements to ensure that they were sufficient enough to foster the needed competition?
Alternatively…were the requirements generally fair in the market place AND was the uniqueness of the space such that only a large company, such as Apple, or maybe ONLY Apple would have been able to fulfill the requirement? For example, MicroSoft has lots of $$ too and is expanding their retail presence. Should they have been given the opportunity to compete? Outside of the technology area, perhaps a Banana Republic with a space in GCT and thus presumably on the GCT ‘preferred’ list, could have moved and put another flagship store in the space?
I don’t know the answers. These are the questions.
none of the above would have brought in the high end foot traffic that benefits all other. Plus only apple has the revenue per square for and the attraction to attract a person up to the second level. The space was only valuable to apple and it was an excellent move by the mta. The crook DiNapoli and the rest of the criminals up in Albany just blow smoke when it does not benefit them.
FYI go google twu100 news and prepare to gag on the propaganda . FYI my union spews the same lies. According tot he twu the mta broke only because the banks.
I would love to refinance my house at the new lower rates offered today. If you add in the 2% mta mortgage recording tax, it is not worth it at all. An I am a union member in this city. The leadership are all Marxist crooks
Sounds like someone wants to make noise to distract attention from their job performance. Landing Apple is a great deal for GCT; the spillover effects from bringing them in would be worth giving Apple a sharp discount. I don’t own a single APPL product but it’s clear they’re an attractive brand.
As Joe on the street who Apple is replacing at GCT. They don’t know, and don’t care. Now ask them who is Apple, would they consider it an upscale product, and would they stop by a store for any reason including just browsing (that’s retail traffic for other GCT stores).
They do a cr@p job of running the subway, in part because that’s what we vote for, but this is one of MTA’s smart, beneficial moves.
I’ve been thinking for a while that the subway system could be massively profitable if the focus on profit margins were based on real estate holdings.
Think about the land that the MTA owns on the East Side right ontop of the new subway line. A mega condo with shops connected to the subway internally would have ridiculous appeal. Even in the outer boroughs this could work very well for the MTA financially. It would also give them massive financial leverage to borrow for new lines (how do you think Trump gets the money to build so many expansive buildings in such short time?).
I honestly think the MTA is hamstrung by being a quasi governmental agency rather than full-blown privatization. I get the pitfalls that have existed in the past in privatizing mass transit, but is bureaucracy that much better? The system is still not being properly maintained and not given the proper support. Also, the biggest reason for the fail of the privatized subway system was Rockefeller/Roosevelt and the subway companies solely competing on price.
Subsidized transit rates would still exist to encourage subway riders to visit underground shops (there’s a really depressing lack of shopping on the subways that should really exist).
My 2 cents, anyway. I just don’t think government agencies looking to run a profit really work. They either should be the responsibility of the city, or the corporation to find a way to assume profits.
PATH is funded entirely from the revenue generated by PANYNJ. Perhaps that is a good reference point from which to begin.