Hudson Yards

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.

With the city and the MTA at an impasse over the fate of the 7 line station at 41st St. and 10th Ave., real estate lobbyists and politicians are making a last-ditch effort to secure a federal grant for the badly-needed station. As Michael Howard Saul of The Wall Street Journal detailed today, officials from the Real Estate Board of New York and City Council Speaker Christine Quinn are going to meet with Vice President Joe Biden in the hopes of convincing the rail-friendly veep to find some of the $500 million the city needs to build this station.

“I don’t expect we will be leaving the White House with a check in our hands,” Steve Spinola, president of REBNY, said. “But it would be nice if we can identify a structure to move forward that will, in effect, make sure this station actually gets built.”

As we know quite well, the city is ponying up the $2 billion it costs to send the 7 line from its current terminus along 41st St. between 7th and 8th Aves. to 34th St. and 11th Ave. Original plans called for a station at 41st St. and 10th Ave. that would service the crowded Hell’s Kitchen area, but when costs spiked, the city scraped plans for even a shell station. It took REBNY nearly two years to grow interested in this project, but now the real estate board — which announced its support for this second station in February — calls the no-build plan a “terrible, terrible mistake.”

Meanwhile, the city and REBNY are at odds over the project’s timing. Saul has more:

Mr. Spinola said a report commissioned by the board suggests supporters have roughly a year to secure funding before it’s too late. But the city believes the time frame is closer to two weeks.

The administration plans to move forward with the next set of contracts on the project, and turning back to build a second station after these contracts are issued, would result in tens of millions of wasted dollars, an official said. “We’re open to talking about what happens if someone finds additional funding, but we’re certainly not going to hold up the project hoping that happens,” said Andrew Brent, a spokesman for the mayor. “A 10th Avenue station would be nice, but the MTA and state budget problems are well-known, and the city is in no position to step in to pay for that, too.”

If federal funds can be secured, Mr. Spinola said, officials in the Bloomberg administration told him there’s a “strong desire to find another $250 million” in city funds.

Somehow, someway, the $250 million should materialize. In the grand scheme of development in New York City, that’s not a significant amount of money, and both the MTA and the city are making an expensive and nearly uncorrectable mistake by not building this station at 41st St. and 10th Ave. Hopefully, smarter heads will prevail.

I also want to note that REBNY has dropped the ball on this one. The city killed the station in August of 2008, and the powerful real estate board sat on its hands for nearly 18 months. Now, time is of the essence, and it’s unclear if the money will come through. Had the lobbying begun when the station was shelved, the funding would have been easier to secure and could have been in place already.

A Related deal — but no payment — nears

Meanwhile, as REBNY races against the clock, Related and the MTA seem ready to announce a deal for the Hudson Yards development rights. The new deal seems to have a catch though. Michael Grynbaum reports:

Under a deal unveiled Monday, Related would commit to the project with a $21.7 million down payment. But the company would not have to close on the project — and therefore start paying the 99-year lease — until after the city’s real estate market improves…

Under the plan, Related would commit to a 99-year lease on the 26-acre railyards for $1 billion, the original price. But three specific measures of the real estate market, including average prices for Manhattan co-op and condo sales, must be met before the company would be forced to close on its contract; in the earlier plan, Related would have had to close within 150 days of signing…

After signing the contract, Related will still have to post another $21.7 million in the following 12 months. But the new plan allows the developer to post a promissory note in lieu of cash.

The MTA praised the restructured deal because it maintains the price tag negotiated during better times. Yet, I still fear that Related isn’t actually going to build much for a while. The area will benefit from the station at 34th St. and 11th Ave. eventually, and the city should be encouraged to build out transit to underserved areas. But for now, this is still a very expensive project at a time when funds are tight, and the fate of the station that could have an immediate impact on the surrounding area is very much in doubt. Still, misguided subway expansion is better than none at all, and one day, the MTA will get its $1 billion.

The Hudson Yards area, it seems, is doomed, and the MTA may suffer a financial hit because of this curse.

Last May, after months of public and private wrangling, the MTA saw its first $1-billion bidder pull out of the Hudson Yards project. Shortly after that Tishman Speyer deal for the rail yards died a painful death, Related Companies swooped in and signed a similar deal. The Related deal, it seems, may join the Tishman plan in the great Hudson Yards in the sky.

Erik Engquist of Crain’s first reported on this development earlier this week. He writes:

If the Metropolitan Transportation Authority and the Related Cos. cannot reach a deal on Hudson Yards in 10 days, the $15 billion project could end up being postponed indefinitely or never being built.

The authority and the developer have until Jan. 31 to sign a contract, which would trigger a schedule of payments that could ultimately bring close to $1 billion into MTA coffers. But the sinking economy and a paucity of financing are pressuring both sides.

Given the uncertain market, Related would like to avoid commitments of scope and schedule that threaten the profitability of the project. At the same time, the developer wants to move forward and not forsake the $11 million deposit it put down last May.

Both sides in the Crain’s article are saying the right things. “Hudson Yards continues to move forward,” Joanna Rose, a Related vice president, said to Engquist. “We remain focused on the various governmental and required reviews that continue to progress and are working closely with the MTA, the Department of City Planning and the community.”

But with MTA CEO and Executive Director Elliot Sander calling the negotiations “very sensitive,” it’s easy to see a collapse in the near future. With this deal on the rocks — and the Atlantic Yards deal treading water for another year — the MTA’s capital budget may suffer. These mega-projects were to bring in over $1 billion, and if they both fall through, the MTA will have to scramble to replace the funds.

Meanwhile, as the Related deal teeters on the brink, the city’s commitment to the 7 line extension remains in place. No matter what happens, the city will fund the construction of the 7 line from its current Times Square terminus to 34th and 11th Ave. While there may be no development on the Hudson Yards area for a decade, at least the subway will serve the area. With more pressing projects on tap, that hardly seems like a good use of funds to me. This could turn into quite the boondoggle.