Saturday, July 10, 2010

Office towers in New York and the question of subsidies; the Observer suggests skepticism

In So You Want to Build a Skyscraper …, the New York Observer's Eliot Brown takes a look at "the International Gem Tower planned by mogul Gary Barnett and his Extell Development."

The Empire State Development Corporation issued a June 24 press release:
Empire State Development announced today that New York State will make available up to $100 million in mortgage financing for purchasers of offices in the International Gem Tower through its Job Development Authority program.
Brown sees a pattern:
Now with the Gem Tower—should it actually be built—10 of the 11 new major office towers to be constructed since late 2001 will have gone up with substantial government assistance. These include: Goldman Sachs' 200 West Street; Two Gotham Center in Long Island City (fully occupied by the city); the Hearst Tower on Eighth Avenue; the New York Times headquarters; the Douglas Durst—built Bank of America Tower; the government—built One World Trade Center; and three other heavily subsidized buildings being developed by Larry Silverstein at the Trade Center site. (Mr. Barnett's Gem Tower is probably one of the less extreme examples, as the financing is not tax free-although the government is holding the bag if the buyers default.)
Deconstructing the logic

Brown notes that developers argue they need tax breaks to make costs feasible, thus "showering the city with new jobs." However, he suggests the structure is inconsistent and "inherently vulnerable to political manipulation." (Case in point unmentioned in this article: Atlantic Yards.)

The ESDC defense

He got a quote out of the proponents:
Elizabeth Mitchell, a spokeswoman for the Empire State Development Corporation—the state agency that administered the incentives for many of these projects, including the Gem Tower—defended the existing structure, saying in a statement that "the State undertakes a rigorous cost benefit analysis that ensures that any benefits yield results in the form of economic return many times over.
Well, I'd question the concept of rigorous; after all, with Atlantic Yards, the revenue projections depend on a chimerical ten-year buildout of the project.

Brown adds another caution, suggesting that some subsidies were unwise:
Subsidies for the Bank of America Tower, for instance, were granted in 2003, as rents were too low to make the tower viable. But, by the market's peak, well into the construction, Manhattan office rents had nearly doubled-quite the leap. Even today they are 20 percent higher.

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