Tuesday, May 27, 2008

At West Side hearing, Brodsky questions subsidies, muses about eminent domain for MSG

Presumably, the Metropolitan Transportation Authority’s (MTA) confirmation Thursday of a second developer, the Related Companies, for the Hudson Yards project, after original bidder Tishman Speyer pulled out, somewhat undermined the rationale for the Assembly Corporations, Authorities and Commissions Committee, chaired by Westchester Assemblyman Richard Brodsky, to assess the status of various projects on Manhattan’s West Side.

So it’s understandable that the hearing held Friday attracted modest press coverage. To Reuters, the story was Brodsky’s provocative but somewhat theoretical suggestion that the city consider using eminent domain to condemn Madison Square Garden to effectuate a version of the Moynihan Station project. To the New York Observer, the story was MTA chief Lee Sander’s suggestion that the agency might add bus rapid transit or light rail to the West Side district, on top of the 7 line subway extension. WNYC radio reported a related story about how the Moynihan project, if it adds capacity for Amtrak, could draw additional federal funds.

For those concerned with Atlantic Yards, however, the story was Brodsky’s ongoing and unresolved effort to assess the proper level of public investment and subsidies in such projects, and the incomplete responses from government officials.

“We want to create the incentives to get the private sector do things they wouldn’t otherwise do,” explained Deputy Mayor for Economic Development Robert Lieber. “We want to use the resources of the public sector sparingly to create incentives for the private sector.” It was, he said, a question of risk and value.

That question deserves a close look in the context of Atlantic Yards. When calculating the value of direct and indirect government support, to what extent, for example, did city and state officials assess the value of naming rights for the arena (and other buildings) in the Atlantic Yards project? The value of luxury boxes? While not traditional subsidies, the opportunity for such special revenue sources was made possible only by the government’s backing of Forest City Ratner’s plan.

An AY hearing?

While Brodsky (right) mentioned Atlantic Yards in passing more than once, and suggested that the state’s willingness to pursue eminent domain for AY means it shouldn’t be philosophically opposed to using it for Moynihan Station, he wouldn’t commit to holding a hearing on Atlantic Yards.

“We’re going to proceed with a whole host of inquiries on these kinds of projects,” he said, in an interview after the hearing, indicating that, at the least, written questions would be sent. “Atlantic Yards is in that mix. Whether or not I hold a hearing is secondary as to whether I get the information.”

Brooklyn Assemblyman Hakeem Jeffries, whose district includes Atlantic Yards, is pushing for such a hearing and there are numerous questions--some noted below--that are pending. Indeed, the advantage of a hearing, as shown on Friday, is that in-person exchanges enliven and clarify contentious topics. (Assembyman Jim Brennan and Assemblywoman Joan Millman, whose districts border that of Jeffries, also support a hearing, according to Jeffries.)

Brodsky, who has served since 1982 and has a history of investigating authorities, made an abortive run for Attorney General in 2006 and has been rumored to be interested in succeeding Sheldon Silver as Assembly Speaker.

(Photo from NY Observer.)

Calculating incentives

Notwithstanding the news from Thursday, Brodsky opened the 3.5-hour hearing, held at 250 Broadway near City Hall, by saying that the West Side projects are at best delayed and to a certain extent more costly and more uncertain than ever. He expressed what he called his own bias, that the “single most important economic development and social investment is mass transit.” (Those who challenged Brodsky’s campaign against congestion pricing might allege some cognitive dissonance.)

He blamed a governance structure that scants the role of elected officials. “Bad governance has yielded unsatisfactory results,” he said. Also, as he’s expressed before, he said subsidies distort any view of such projects, since we can no longer tell what the market can produce. “Public investment should be made when it’s essential and necessary, not when it is merely a way to enrich developers,” he said, adding that he wasn’t casting aspersions on any specific project.

The city’s Lieber described “three broad buckets” in which the city could provide support and incentives to developers: direct subsidies, changes in zoning or land use, and financing and tax incentives. He described how the Hudson Yards UTEP (Uniform Tax Exemption Policy) has been amended to offer developers incentives to build office space in the western segment of the Hudson Yards zone; the discounts are 40% on payments in lieu of taxes (PILOTs) for the first 5 million square feet of development.

“It provides greater incentive to build farther from the core,” Lieber said, which sounds plausible. Then again, critics have suggested that the extension of the subway is an incentive in itself. “It seems particularly hard to justify committing to a policy of property tax cuts several years in advance of market conditions, and inconsistent with committing billions of dollars of public infrastructure investment,” testified James Parrott of the Fiscal Policy Institute in 2006 at a hearing before the New York City Industrial Development Agency.

“The development of Hudson Yards is going to take place over a series of economic cycles,” Lieber said, noting that it would take “decades to complete” 24 million square feet.

Atlantic Yards would be an arena encompassing 850,000 square feet and 6.5-7 million square feet of mostly housing, plus office and retail space. While the project, as approved by the Empire State Development Corporation (ESDC) in December 2006, was “anticipated” to take a decade, a State Funding Agreement signed in September 2007 gives the developer up to six years after the close of litigation and the exercise of eminent domain to build the arena, and 12 years to build the four or five towers of Phase 1, with no timetable to build the rest of the project.

No government official has been challenged to justify that timetable, though presumably the issue would be aired in a hearing.

Assessing the incentives

“How do we know if the public investment is insufficient, adequate, or excessive?” Brodsky asked.

“We’re trying to create incentives to encourage development” on the western part of the site, Lieber responded.

“I’m asking for a general rule,” Brodsky continued.

Lieber suggested it was a determination elected officials like Brodsky could make.

“Why is [the discount] zero to 40%?” Brodsky asked. “Why not 40 to 80%?”

Lieber acknowledged that the number could be debated.

Brodsky pressed for the method to determine the discount.

Lieber said the challenge was to determine the “appropriate level” of risk and return to the private sector. He said the city engaged the real estate firm Cushman & Wakefield to assess the viability of the project.

How can you defend the 40% figure, Brodsky asked.

Lieber acknowledged that he wasn’t part of that decision-making four years ago, but would search for the analysis and provide it to Brodsky. While he couldn’t immediately explain the total value of the discount, later--after receiving communication via BlackBerry--he estimated the discount at $200 million.

Excess discount?

There are other places for subsidies to emerge. For example, the Hudson Yards Infrastructure Corporation, which finances development to be carried out by Hudson Yards Development Corporation and other public entities, has bought development rights from the MTA and will sell them to developers.

“At market rates?” asked Brodsky.

“Yes,” replied Lieber.

“No way,” uttered Anna Hayes Levin, a lawyer and member of Manhattan Community Board 4, in the audience.

She was similarly skeptical about the state’s plans to sell 5.4 million square feet of development rights for the Moynihan Station project, telling Reuters that the ESDC had priced the rights at half the market value.

Adding infrastructure to the list

Brodsky tried to drill down to the public costs and subsidies. Was it just sales tax exemptions and real estate PILOTs, he asked Lieber.

An aide whispered in Lieber’s ear. “Just to be clear, there are additional costs,” the deputy mayor told Brodsky, citing sewer, water, and utility upgrades. “We have $225 million in the city capital budget for infrastructure.”

That raises questions about the appropriate spending for infrastructure. For Atlantic Yards, a project less than one-third the size of Hudson Yards--and with an overall price tag of one-fifth or less--the city has committed $105 million for infrastructure and the state has committed $100 million. (The city has committed another $100 million for property acquisition.)

Then again, an arena may require more infrastructure, but it would be worth hearing some explanations from governmental officials.

Lieber later added that, on the West Side, there would be subsidies for affordable housing that “would inure to all residential projects.”

He allowed they were “subject to volume cap,” the limit on total bonds issues that has already affected numerous projects, including Atlantic Yards, and has caused Brooklyn developer John Catsimatidis to revise a Myrtle Avenue development from mixed-income to all-luxury units, the Brooklyn Paper reported this week.

Hidden costs

Though it didn’t come up, there may be additional, unmentioned costs in the Hudson Yards project. Former MTA Chairman Richard Ravitch, recently appointed by Gov. David Paterson to head a commission on the MTA’s five-year capital plan and operating budget, has expressed skepticism about such costs.

Similarly, there are indications that the public contribution for Atlantic Yards could go up. Both the city and state, according to the Atlantic Yards Memorandum of Understanding signed in 2005, agreed to “consider making additional contributions for extraordinary infrastructure costs relating to the mixed-use development on the Project Site (excluding the Arena Building Site)."

Given that Forest City Ratner once claimed it was paying $163 million in "extraordinary infrastructure costs incurred by the developer to build on the MTA parcels," including a new platform and public open space, but no longer makes that claim, it’s reasonable to conclude that the developer will seek reimbursement.

Who’s in charge?

Gary Dellaverson, the MTA’s chief financial officer, said that, under the agreement between the MTA and Related for the Hudson Yards project, if the 7 line subway extension isn’t available by 2014, there’d be a 50% rent holiday, some $32.5 million a year.

Brodsky: How did the HYIC get the legal right to control PILOTs?

Lieber said the decisionmaking involved both the city and city agencies.

Brodsky: “What is the mayor’s legal authority to assign revenues in a PILOT?”

“He’s the mayor,” Lieber replied, serving Brodsky a fat pitch.

“Here we come to the heart of the problem,” Brodsky responded, with indignation. “If I wasn’t under control I’d make a reference to dictators.”

“I’m certain he doesn’t do this without legal authority,” Lieber replied, not without some exasperation.

It was another opportunity, however, for Brodsky to suggest that properly balanced oversight was missing.

Looking at Moynihan

When it came to the Moynihan Station project, which could involve a new rail station in the Farley Post Office, the relocation of Madison Square Garden, and new office towers and retail over the current Penn Station/MSG site, Brodsky had the same basic questions. “How do I know how the public investment should be made versus private--what’s the rule?” he asked.

You make what’s “necessary to maintain the infrastructure, to maintain the stature of the city” replied Avi Schick, acting president of the ESDC. “This is not a subsidy for economic development. It is maintaining and enhancing transportation.”

Brodsky asked the “value of 5.4 million in FAR.” (He was referring to Floor Area Ratio but meant, simply, development rights.)

It’s not a simple answer, Schick said, saying that the working number is $125/square foot--the figure Levin later disputed.

Brodsky again asked about the appropriate relationship between public and private investment.

“We take into account the nature of the project,” Schick replied gnomically.

Brodsky acknowledged he was facing a formidable rhetorical foe. “I’m going to get you, Mr. Schick, but it’s going to take a bit longer,” he said playfully.

(At the close of the hearing, he offered public thanks to Schick for service to the state, suggesting that this might have been Schick’s last public hearing. Schick is leaving in September, so that suggests that, at the least, Brodsky’s not planning to hold an Atlantic Yards hearing by September.)

Who’s paying?

Brodsky brought up the apparent effort by Madison Square Garden to get government to advance the cost of building an arena.

“To my understanding, it’s not for the Garden, it’s for the [Moynihan Station] project,” Schick said.

Has the Garden asked for such support, Brodsky asked.

No, replied Schick.

Brodsky amended his question: Has the joint venture--involving Related Companies and Vornado Realty Trust--asked for such funding.

Yes, replied Schick.

Lieber added the entire financing plan was under discussion.

Eminent domain for MSG?

Then, as if out of left field, Brodsky brought up the eminent domain issue. “What are the arguments for condemning Madison Square Garden” to hasten the project, he asked. (At this point, the Dolan family’s Cablevision, which owns MSG, is planning to finance an arena upgrade in place, rather than move to the post office.)

It would be “a full-employment act for lawyers,” Schick replied skeptically.

“You’re doing it for Atlantic Yards,” Brodsky countered. “You have no philosophical opposition to eminent domain.”

“Within a 22-acre [AY] site, there is a limited use,” Schick said.

“Why pick on a homeowner, when you can pick on the Dolans?” Brodsky asked, to general laughter from the audience, who know the Dolans have been criticized for their stewardship of the hapless Knicks basketball team and their effort to continue a real estate tax exemption for the Garden. “What are the virtues of considering the use of eminent domain to break the logjam on this project?”

“I think if one is talking about breaking the logjam, and bringing certainty and clarity and speed to the project,” Schick responded, “there are very few virtues.”

Brodsky: Has ESDC considered use of eminent domain.

Schick: No.

Lieber backed Schick up, saying that there’s been no discussion of the issue, to his knowledge.

Brodsky again asked if eminent domain could achieve the project more quickly and effectively.

Lieber said he didn’t know the answer to the question.

It’s an opinion, Brodsky said.

“My own view, philosophically," Lieber mused, "is that the role--what would you do, if you condemned the Garden, the Dolans out of the Garden, for what purpose--?”

“The same purpose you’re doing in Brooklyn,” Brodsky interrupted, with a touch of exasperation.

“Where would they go?” Lieber continued.

“Same thing in Brooklyn,” Brodsky cut in.

“We would be looking at wanting to maintain their presence in New York City,” Lieber said.

“I want their presence in New York City too,” Brodsky said. “I think they’ve been great corporate citizens. I think they deserve a fair shake. I don’t think it’s necessarily a thing we ought to do. But I certainly think it ought to be considered. Would you gentlemen get back to us with your considered views on the wisdom of using eminent domain to advance this project?”

“As a legal analysis?” Schick asked.

‘No,” Brodsky replied. “The wisdom to whether it would advance the public interest.”

“With all respect,” Schick said, “the touchstone, the starting point for any condemnation--while I’ve never practiced law in this area, I believe, is the neighborhood condition study, is there blight? There are a number of preconditions. So I’m not sure that, in a vacuum, what Avi Schick or Robert Lieber on a random Tuesday think... is the right way to go with it. It’s a much more detailed and focal process, which is, what are the preconditions, as a legal matter, what would the analysis be, and what could be done?”

[Lawyer M. Robert Goldstein, who represents condemnees, writes, “While property may only be condemned for a 'public use' or 'public purpose,' the terms being synonymous, the definition of those terms, has become so broad that almost anything a condemnor wishes to do for the health safety and welfare of the public fits under this umbrella.”]

Brodsky shook off Schick's lawyerly analysis: “You won’t get to doing the studies until you decide you want to do the studies. My question is: Is it an attractive enough tool to go through the exercise of deciding whether it should be used in this project?... Will you get back to us with your policy conclusions?”

“My current thinking is that, given what the process needs is certainty and clarity, and what it suffers form is delay,” Schick said, “eminent domain would certainly inject a lack of clarity and... significant and substantial delay. So my current position is that, since it would just further some of the issues that came with the project and it would not solve any of those, it would not seem at first blush to make sense. But if the thinking changes I will certainly get in touch.”

“Mr. Lieber?” Brodsky said.

“I would say, as a policy matter, sitting here in front of you today, we’ve not considered it,” Lieber said. “It’s the first time it’s been asked.”

Speed and clarity?

“In terms of speed and clarity, I disagree with Mr. Schick,” Brodsky said. “You get control the day you write the check. You litigate the price. You can move forward. That’s a difference of opinion, but I understand your answer.”

Given that the Atlantic Yards eminent domain case, filed in October 2006, remains unresolved, and that the deep-pocketed Dolans spent nearly $19 million on lobbyists to fight the West Side Stadium, Brodsky was perhaps a tad optimistic.

Did Schick’s statement constitute an acknowledgement that the need to use eminent domain injected "a lack of clarity and significant and substantial delay” into the Atlantic Yards project? That's a question worth asking at a hearing concerning Atlantic Yards.

Afterward, I asked Brodsky if using eminent domain for MSG was a new idea or if had it come up before.

"It came up today," he responded.

"The rationale would be blight?" I asked.

"Don't get to be a lawyer on me," he responded. "The issue there is, whether or not, rather than concede to a"--he paused and shifted gears, apparently unwilling to put Cablevision on the spot--"this is a theoretical answer to your question. Eminent domain exists when an individual, by stubbornness or greed, is trying to hold up a project that is in the overwhelming public interest. I believe in eminent domain, and I asked today, without making a recommendation, whether that analysis should be applied to the Garden.”

Calculating the price tag

In closing, Brodsky attempted to tally the price tags for all the projects on the West Side, including Moynihan Station, Hudson Yards, and expansion of the Javits Convention Center. “We haven’t talked about downtown [projects],” he said. “We haven’t talked about Atlantic Yards.”

Does the public sector have the money to do all this? Brodsky asked. “If I had to choose, which ones should be done first?”

“You have to carefully assess costs and benefits,” Lieber said.

Brodsky pressed on. “What should I do first, with $10 billion?” he asked.

“I think you use it to seed multiple projects like we’re doing,” Lieber said.

Brodsky asked about the first $2 billion. Lieber said that’s where the city was with Hudson Yards.

Lieber further pointed out that, to some extent, Brodsky’s question of priorities is moot. “In many of [the projects], the city’s contribution and funding has already been made.”

That’s the case with Atlantic Yards--except that there might be additional contributions for “extraordinary infrastructure” costs as well as support for affordable housing. After all, CEO Chuck Ratner of parent Forest City Enterprises told investment analysts in April that "We still need more" subsidies.

Priming the pump

Earlier, Brodsky had asked about the general rationale for subsidies.

“From an economic development perspective, we think the city is going to benefit in the tens of billions,” Lieber said. “We think we can spend a couple of hundred million to do that.”

Brodsky said that, because he lumped the cost of the $3.5 billion #7 line extension into the costs for West Side development, he calculated some $4 billion in public support.

Lieber said that there’d be “significantly in excess of $20 billion” in private investment on the West Side.

The numbers for Atlantic Yards are more modest. It would be a $4 billion-plus project, with more than half of the funding for the project depending on government resources, both direct aid and a limited pool of tax-exempt financing.

Summing up

In closing the hearing, Brodsky said the general question of whether we’re subsidizing projects at an appropriate level still remains. Still, he said he appreciated the government officials’ willingness to answer questions at a public forum, calling it an important part of the governmental process.

“I hope we can move forward on these [West Side] projects,” he said. “I fear we’re in more trouble than we’re letting on.” (He noted that it was news to him that the hearing brought out the city’s commitment to spend up to $3.5 billion on the #7 line, given that he'd previously criticized the city for committing to only $2.1 billion.) He said he was recessing rather than closing the hearing, given that he hoped Port Authority representatives would testify as well.

Does the legislature have any power, he was asked after the hearing. While it may not have direct oversight of such project, he said, in the long run the legislature has the power to pass laws restricting certain actions.

Again he criticized governance mechanisms to manage projects that bypass democracy. "What we've structured is a set of governance mechanisms that eliminate democratic institutions," he said. "And the net result is that anonymous people.... this is a set of Soviet-style bureaucracies that are acting without any public accountability, even when they’re right. They would much rather discuss whether they're right or wrong.... The reason we're in this problem with these projects is that the governance is secretive and out of touch, and we don't have enough money."

Doesn't Brodsky favor a new authority, however, to oversee the Hudson Yards project?

"A foolish consistency is the hobgoblin of little minds," riposted Brodsky, never at a loss for words. "The answer is, right now, I'm wrestling with a series of emergencies and the fact of the matter is that the Hudson Yards deal does not represent a thought-out economic development strategy or priority for what the city and the region need. In defense of that, we're scrambling for ways of gaining some control. It's not necessarily intellectually consistent."

"Having said that," he continued, "what today's hearing was about was bringing out into public view the realities of decisions, like on Moynihan, like, for example, the Garden is now seeking public monies." (He said he'd seen documents that have not been made public.)

"The Dolans have every right to seek public support," he said. "The public ought to deal with it intelligently. That's what this is about. This is about returning these things to the control of public agencies."

Agencies, perhaps, but not--as per his comments--public authorities.

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