The Paper of Wreckage
Thanks to a deal with the Pataki and Giuliani administrations, The New York Times Company is in line to get a choice midtown property at tens of millions of dollars below market valueand city taxpayers will foot the difference, newly disclosed records show.
Under the deal Governor George Pataki announced December 13, the state-controlled Empire State Development Corporation will use its power of condemnation to take the property from its unwilling private owners and turn it over to the Times for a 52-story corporate headquarters along Eighth Avenue between 40th and 41st streets.
The outlines of the deal were reported in the Times as it developed last year, but a city official's affidavit in a lawsuit and documents disclosed in recent weeks in response to Freedom of Information requests show there are what even the city itself calls "huge" additional costs to taxpayers that officials had not revealedabout $79 million.
The property's present owners charge that the Times used its clout as a powerful newspaper publisher to grab the valuable land away from them through a sweetheart deal with city and state government.
"You just don't think things like that can happen in this country," said Scot Cohen, who runs his family's B & J Fabrics, a garment district fixture since 1958 in a 16-story office building that the Times wants to demolish. "You work hard to build something up, and then someone who is bigger than you can take it away."
The Times denied that the deal was skewed in its favor. "We believe that the deal is a fair one for both sides in light of the benefits the city will receive and the risks the company is taking," spokeswoman Catherine Mathis said in an e-mail interview. She said the Times has risked building even if the real estate market turns down.
But documents show that another developer said he was willing to undertake the risk of building a 50-story office tower on the site with no subsidy on the property's cost. After the Times expressed interest, the city and state abandoned previous plans to seek bids on the property, which is privately owned but in the Times Square redevelopment area.
Instead, the state and city signed off on a sole-source deal in which the Times and its politically connected partner, Forest City Ratner Companies, are to get the property under a long-term lease for $85.6 millionwell below market value, according to an expert at M.I.T. The deal also includes $26.1 million in tax cuts for the Times and a break on payments that substitute for property taxes.
If the court sets a higher condemnation price than $85.6 million, the developers would have to lay out the extra money. But the sweetener in the deal is that the Times and Forest City will be able to deduct the extra cost as an 85 percent credit against the payments they make in lieu of property taxes (called "PILOT"). This means taxpayers will cover all costs above $85.6 million, an amount described as "huge" in a city memo.
Just how "huge" a windfall city officials expect to give the Times has been a carefully guarded secret. Both the city and state economic development agencies have declined to answer any questions for this article and refused to release property appraisals. The Times said it did not do an appraisal.
But in an affidavit filed at state Supreme Court in Manhattan, city Economic Development Corp. senior vice president Raffaela Petrasek confirmed that city officials expect the Times to get years of subsidies from the city treasury to pay for the high cost of its land deal.
Petrasek did not quote a dollar figure, but admitted that the Times and Forest City would be able to reduce their PILOT payments for up to "six years after the construction of the project was completed."
The payments, after phasing in for the three to four years the deal permits for construction to be completed, run about $14 million a year. The developers' 85 percent break during this span would be worth at least $79 million, an attorney for the opponents said. The Times and Forest City get to charge interest on the money they advance above $85.6 million, and it's subtracted from the PILOT.
Despite the high price tag, Petrasek contends in her affidavit that the deal is justified because the city would still get much more money in PILOT payments in the long run than it now collects in property taxes on the site.
But that ignores an alternative: Another developer, Gary Barnett of Intell Management and Investment Company, said he had offered to build a 50-story office tower on the site without the "cap" the Times is getting.
State officials have questioned whether he could deliver, but Barnett responds that his company developed the 50-floor Planet Hollywood building in Times Square without a public subsidy.
The site, as seen from Eighth Avenue and 40th Street
photo: Stefan Hester
William Stern, chairman of the state economic development agency in the mid 1980s, said he also believed the property was worth far more than the Times will pay. He said anything over $85.6 million becomes "a direct subsidy from the treasury," and called the decision to cap the cost "bizarre."
"It's clearly being done because the Times is so influential," said Stern.
Robert McChesney, a communications professor at the University of Illinois, said the deal "gives the appearance of impropriety" and will undermine the Times' ability to criticize similar arrangements between government and business.
"This is a similar thing with the Los Angeles Times three years ago with the basketball arena, the Staples Center," he said, recalling how the L.A. Times staff rose in opposition upon learning that the paper and the arena had shared advertising profits from a magazine issue devoted to the arena. He said it was comparable in the sense that both papers were benefiting from deals with officials they cover closely.
"Journalism has an extraordinary amount of power in any community," said McChesney, author of the book Rich Media, Poor Democracy. "I think there's a concern there regardless of the best wishes or good will of the people involved in The New York Times."
He said the deal undermines the Times's ability to criticize other corporate-retention deals. "To be consistent, they have to back off on an important public policy issue, or they have to be hypocrites," McChesney said.
Times spokeswoman Mathis responded: "This real estate transaction does not compromise the independence or credibility of the Times editorial voice or the integrity of the Times reporting in any way. Our business and news functions operate separately." She said Times editorials have recognized the "judicious use of incentives." In addition, she said, "as long as these kinds of incentives continue to exist, it is incumbent upon us, as a publicly held company, to seek the benefit of those incentives for our shareholders."
She described the deal as "fair" because the Times risked the "uncertainties" of the condemnation process and "agreed to build regardless of the condition of the real estate market, which is unusual."
Replied Barnett: "What risk?" He said the Times will become its own anchor tenant.
Pointing to a string of other midtown land deals, opponents of the deal assert that the Times and Forest City stand to get the property for as little as a third of its value.
Sidney Orbach, who owns a 16-story office building on the site with two of his brothers, pointed to the selling price last year of a lot across the street on Eighth Avenue between 41st and 42nd streets. It's half the size of the property the Times covets, but developer Paul Milstein's family bought it at auction for $111 million.
Real estate experts usually judge property values in terms of the cost per square foot of usable space permitted to be built on the site. The Milstein deal works out to $180 per square foot compared to $62.50 for the Times deal, he said.
The Times replied that the other deals were priced at the time the owners took title to the land, while the price of the Times deal factors in the risk the company faces in getting possession.
W. Tod McGrath, a professor of real estate finance at the M.I.T. Center for Real Estate, said that even when the developers' risks, demolition costs, and such amenities as a subway improvement were considered, they were getting "at least a 25 percent discount" on the property.
McGrath said a recent appraisal found costs "in that part of town" to be between $100 and $140 per square foot, compared to $62.50 for the Times deal.
"It seems as though it's a good deal for the Times and Forest City," McGrath said.
The Times noted as much in a December 14 article. In the 14th paragraph of an 18-paragraph story, it said that as a result of the cap, "the city is likely to forgo millions in future revenue."
Sidney Orbach in his 16-story building
photo: Stefan Hester
On February 19, a Manhattan appeals court postponed condemnation proceedings until it decides if the deal violates a state law that says property can be condemned only for a "public purpose."
The opponents also opened up a second front with a "taxpayer" lawsuit at state supreme court in Manhattan. Most of it was dismissed on April 1, with the possibility left open for the case to be renewed once the opponents get access to documents being withheld.
In asking to have the suit reinstated, current owners of the site, including a company Barnett controls, contend that city and state economic development officials fraudulently concealed the truth about the project's cost to the public, even from the mayor's office. Petrasek's affidavit was filed in response.
She said she told Deputy Mayor Robert Harding and Anthony Carbonetti, Mayor Rudolph Giuliani's chief of staff, about the deal's cost to the city in a meeting on December 11.
Documents show that in 2000, EDC president Michael Carey sent memos to City Hall saying that "initial property appraisals indicate a property value well below $75 per square foot," the value of the Times' initial offer. That implied the city would not have to subsidize the land deal.
A preliminary agreement hammered out the deal's financial terms in May 2000. With negotiations continuing the following year, a city memo noted, "Current estimates of this cost far exceed original projections, thus representing a huge upfront cost for the developers." The "huge" cost above $85.6 million would eventually be covered by taxpayers, though.
Since city and state economic development officials have refused to discuss the project, there has been no explanation of how their estimate of the property's value could swing so wildly from one year to the next.
But the suit faces a high thresholdthe opponents must prove, essentially, that a crime occurred. As the Times argued in legal papers, it is not enough for the opponents to show the Times is getting a windfall at public expense.
But to condemn the property, the state will need to prove in a separate case that the area is "blighted."
In a pointed page-one article in 1997which said Reuters' heavily subsidized Times Square building was an example of how companies were getting tax breaks "at a time when New York's economy appears to be thriving"the Times noted that "blighted is not a word anyone would use to describe Times Square today."
The Opening Move
Scot Cohen runs his familys fabric business on the planned Times HQ site.
photo: Stefan Hester
With the real estate market in Times Square booming, Times vice chairman Michael Golden sent an October 19, 1999, letter to city and state officials that sought the Times Square property, saying he wanted to keep the company in its "namesake district."
He said the Times had two choices for expansion. One was to renovate its current headquarters and transfer 750 workers to offices built on the site of a Times printing plant in Edison, New Jersey. The second was to sell the existing headquarters and build an office tower on Eighth Avenue between 40th and 41st streets.
Golden, a cousin of Times chairman and publisher Arthur Sulzberger Jr., offered an analysis that said it would cost $135 million more over 30 years to keep all the jobs in New York. It was up to the state and city, the letter indicated, to make up the "gap."
In February 2000, the Times teamed with Forest City Ratner Companies, headed by Bruce Ratner, a key Giuliani fundraiser.
When negotiations began in earnest in April 2000, the state and city offered to condemn the site at $90 per square foot, or $123 million. On April 4, Ratner swung into action, meeting with Empire State Development Corporation chairman Charles Gargano, according to city lobbyist disclosure records. He also met with Carey on April 18 and then deputy mayor Harding the following day, records show.
On May 18, 2000, a preliminary deal was reached on the financesfor $85 million, well below the $102.7 million records show the Times and Ratner proposed. As part of the deal, the PILOT was set at $10 per square foot, higher than the $4 the Times proposed.
While state officials have portrayed the PILOT as approximately the same as real estate taxes, the city Finance Departmentcalculated the property tax at $11.62 per square foot, records show. This means the developers were getting a 14 percent break.
But opponents of the deal charge the PILOT is further skewed in the developers' favor because it is based on rental prices of $52 per square foot, while, as the Times reported, Ratner has said he'll seek tenants at $75 to $85.
The city also negotiated a deal for the New York Times Co. to get $29.7 million in additional tax breaks because it had agreed to "retain" 4142 jobs, including the 750 "at risk of leaving," and add other jobs over 30 years.
The following year, the deal had to be changed because the Times workforce in New York was already shrinking. While the workforce estimate dropped 20 percent, the Times' tax break fell only 12 percent, to $26.1 million.
In an internal document, the city EDC acknowledges that there is a discrepancy in the Times' favor. The reason, it explains, is that the Times' initial cost of acquiring the land had risen sharply and was "huge."
The EDC, having told the mayor's office repeatedly that an appraisal showed the land's cost was lower than projected, was now concluding the oppositeonce again, in the Times' favor.
Paul Moses, a former city editor at Newsday, is a freelance writer.
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