Surprised? MTA Restructures the Hudson Yards Deal; Developer Cherry Picks More Benefit While Public Keeps the Risk

In light of the New York Times report today about delays and proposed developer-favorable modifications with respect to the West Side’s 26-acre Hudson Yards Project we would like to note how it confirms and hearkens back to concerns we raised a long time ago. (Railyards Deal May Still Be Weeks Away, by Michael M. Grynbaum, April 26, 2010.) Are we really that much smarter than the MTA’s board? Or are we just more attentive to protecting the public interest?

In an extended overview piece in early 2009, we wrote about Hudson Yards (and a number of other projects) while reflecting how Bloomberg’s attraction to privatizing public development with his accompanying propensity for huge mono-developer projects doesn’t serve the public. (See: Monday, February 23, 2009, Un-funny Valentines Arriving Late: Your Community Interests at Heart.)

The Benefit of Hudson Yards That Could Be Accruing Now

The pith of our concerns with respect to the Hudson Yards project as they are now very much materializing in the most recently reported events was republished by Norman Oder in an Atlantic Yards Report story. (See: Wednesday, February 25, 2009, Noticing New York's critique of major projects, and the path not taken of site preparation (at Hudson Yards and AY).)

We said then that delay at Hudson Yards was being occasioned precisely because the project was proceeding as one massive project with a single developer and that if instead the MTA site was prepared by the “government (as opposed to a private developer) . . . it would not be necessary to postpone the site’s preparation at this time. Site preparation during the current economic downturn might even be cheaper.” If MTA development of the site were proceeding immediately it could be a be providing a counter-cyclical benefit to fight the economic downturn and we noted that:

As it would be a public work, it would arguably be in the running for funding through federal stimulus, an important part of that being that the prepared parcels would later be bid out. But stimulus money cannot be given to a private developer already signed onto the deal because it would totally change the equation based upon which the developer bid to pay the public a low amount for the site. Used that way, the money would eliminate the risk developer assumed and constitute an award of enormous private benefit to the developer without bid.

Atlantic Yards Report reiterated the obvious parallels to the Atlantic Yards megadevelopement.

A Golden Sacking?

Instead of the above envisioned benefits being available for the public, the Times is reporting how (much the same way that happened with Atlantic Yards) the MTA is being asked to forgo these benefits and reformulate the mega-deal so as to make it more beneficial to the developer, Related, whose financial partner is Goldman Sachs.

Per the Times:

Under a deal unveiled Monday, Related would commit to the project with a $21.7 million down payment.

Later on it explains:

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.

Putting this in context (which the Times doesn’t): In the original deal with Tishman Speyer that was abandoned with substitution of second-choice Related as the developer, a total of $43.5 million was supposed to have been paid in two installments with the second being paid “in 2009 or 2010.” In May of 2008 Related agreed “to the same tentative $1.054 billion deal that Tishman had signed in March” with the payments aggregating to the same $43.5 million on essentially the same schedule. In other words the amount the developer must now pay is lower, delayed and reduced to being only 50% of what previously had to be paid entirely in cash.

The Times goes on today saying:

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.

The arrangement addresses a sticking point in a negotiation that began in 2008, when the economy was still going strong. The deal had been delayed by protracted negotiations and the strains of the economic downturn, as financing for major real estate endeavors has dried up.

Remembering When the Economy Collapsed

The truth is, 2008 is not when the economy was "strong" but when it was collapsing. When the deal with Related was struck in May of 2008 the economy was already in a dramatic collapse. Here is what the Times said back then in an article about why the Tishman Speyer deal for Hudson Yards didn’t consummate:

Developers who a year ago would have gleefully bid any price for a building or a project are now delaying or abandoning projects in New York and elsewhere as the economy has slowed and many lenders have balked at financing real estate projects in the wake of the credit crisis.

(See: Deal to Build at Railyards on West Side Collapses, by Charles V. Bagli, May 9, 2008.)

So the MTA is structuring a new plan. As is typical with so-called public-private partnerships where what is public and what is private is confused and up for grabs, the public is taking all the risk and the private developer (now getting a lower price and having less obligation) is cherry-picking to get all the benefit. (Remember, as we pointed out back in 2009 and at at the outset of this piece: If there were not a privatized development scheme for the 26-acres as a mega-deal, the public would, in fact, be getting a lot of benefit now without waiting. It would be get the boost it needs in a bad economy.)

Here is the description of the new plan that appears in the Times today:

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.

Presumably, if the original bid had made it clear that the buyer had the option of proceeding only when the market was good, the competing bidders would have been willing to bid far higher amounts at the outset.

The Benefit of Forethought vs. A Rush Without Review and Reasoned Consideration

Just like the recasting of the Atlantic Yards deal with the MTA (which was also phenomenally bad for the public and also no doubt a long time in the making) the Hudson Yards deal was rushed to the MTA board with no time for reasoned consideration. (Regarding the Atlantic Yards rejiggering see: Wednesday, June 24, 2009, Noticing New York Discloses What MTA Chairman H. Dale Hemmerdinger Has in His Closet, Tuesday, June 23, 2009, Thoughts on the MTA’s Finance Committee Meeting Wherein Atlantic Yards Was Considered as an “Information Item” and Friday, December 18, 2009, Big Picture Questions: Does MTA Chairman Jay Walder Comprehend Atlantic Yards Link to MTA Cutbacks?)

Here again is the Times. The Times points out that the MTA’s Finance Committee was bypassed (again similar to what happened with Atlantic Yards):

Members of the authority’s board, who received details of the deal on Sunday, expressed frustration that they had no time to review the plan before being asked to approve it. “I really feel that in these big developer deals we get the bum’s rush,” said Doreen Frasca, a board member. The finance committee issued no recommendation on the plan.

Here is some advice for "frustrated" MTA board members: You wouldn’t be getting in these kinds of binds if they abandoned the ill-advised practice of doing these single developer mega-deals and you wouldn’t be surprised with so little time to think about things if you were reading some of the Noticing New York articles where we consider these critical issue ahead of time.