With great fanfare, a development team led by publishing magnate Mortimer Zuckerman announced in late March that it would pay an astounding $330 million for the Prudential Insurance Company of America’s two remaining properties on 42nd Street. But what went unnoticed in the resulting clamor was that the amount of buildable space at the sites had grown in the weeks before the sale.
According to documents obtained by The Observer , the Empire State Development Corporation stepped in and added an additional 71,442 square feet–the equivalent of a total of perhaps three and a half floors–to the two sites at the southern corner of 42nd Street and Seventh Avenue. A spokesman for the E.S.D.C., which is an arm of state government, confirmed that the changes had been made and insisted they would not add to the height or bulk of any skyscrapers that may be erected on the two properties. Some real estate executives familiar with the sites, however, find this difficult to believe.
If the changes increase the size of the as-yet-unbuilt office towers, there may be public outcry, and Mr. Zuckerman may yet again find himself in the midst of a nasty neighborhood battle. Community and civic groups have long objected to plans that would allow massive skyscrapers to be erected on the eastern end of the Deuce with huge taxpayer subsidies, just as a previous generation of activists shot down Mr. Zuckerman’s plans to develop Columbus Circle.
Even if the changes do not result in larger buildings, however, they have made it easier for Prudential to market the sites to a partnership consisting of Mr. Zuckerman’s Boston Properties, developer George Klein and the Blackstone Group. The partnership paid an estimated $180 a square foot for the two sites. “I would say the average in midtown is $80 to $100 a foot,” said Gerard Mason, senior managing director of Granite Partners Inc., a real estate investment bank. “So this sort of blew the socks off things.”
The adjustments may have enabled Prudential to reap an additional $12 million from the deal, which has yet to be completed. The two sites now total 1.9 million square feet, according to confidential Prudential sales materials and an E.S.D.C. document.
The E.S.D.C.’s intervention is another reminder of the lengths to which the state is willing to go to assist developers in Times Square even though the real estate market is hot. Prudential was selected by the city and state in the mid-1980’s to develop skyscrapers on four 42nd Street sites with Mr. Klein’s Park Tower Realty Corporation and was awarded numerous tax incentives. But their plans fell apart with the real estate recession of the early 1990’s, and Prudential abandoned its development plans. Now, however, the insurance company is profiting from the upswing in real estate, with the help of the state.
An E.S.D.C. spokesman said the agency decided to make the changes because of a flap earlier this year between a partnership consisting of Reuters America Holdings Inc. and the Rudin Management Company on one side and Prudential on the other over the purchase of a third development site that the insurance company had controlled on the northwest corner of 42nd Street and Seventh Avenue. According to real estate sources, Reuters and Rudin decided that the $90 million site didn’t have enough square footage for the 30-story Reuters corporate headquarters that they had planned to build there.
Dismayed, the partnership went to Prudential and demanded that the insurance company transfer some of the development rights it owned on 42nd Street. Prudential refused, saying the partnership’s office tower didn’t fit on the site because Reuters and Rudin had changed their building plans. Other insiders, however, believe it was Prudential’s method of measuring that caused the problem. The partnership finally was forced to enlarge the site by purchasing a small four-story building and alley on West 43rd Street owned by the New 42nd Street, the group that oversees 42nd Street’s landmark theaters.
Time Out for a Measurement
To avoid another such dispute, the E.S.D.C. remeasured the two remaining sites and found additional square footage. The state agency has the final say over the design of the four sites, which were originally supposed to have been developed by the insurance company.
The E.S.D.C. spokesman was adamant that the extra square footage would not result in a larger building for the two sites. However, he added that “if a developer can make use of those [additional] square feet adhering to the [E.S.D.C.] design guidelines, then the developer can do that.” According to the Prudential documents, the amount of rentable space in at least one of the allowable buildings didn’t change at all because of the remeasuring.
Even so, some real estate executives wonder how the state can add roughly three and a half floors of buildable square feet to the two sites without producing some commensurate heft in the skyscrapers that are eventually built there. If nothing else, they add, it’s possible that whoever bought the sites might have run into the same problem that Reuters and Rudin encountered and been forced to build smaller buildings if there were no adjacent land or development rights to be had.
One thing’s for sure: The Zuckerman team will need to develop all the space it can get on the two sites. Top brokers estimate that the publisher and his partners will have to get more than $50 a square foot from tenants to break even after paying Prudential such an astronomical price. Not all of them are convinced the skyscrapers will command such high prices, although some are cautiously optimistic. “Times Square doesn’t have the prestige of Park Avenue or Sixth Avenue,” said David Levinson, executive managing director of Insignia-Edward S. Gordon Company. “But there are some tenants that are going to want to be there because of [Times Square’s] high-energy image, which is very entertainment- and media-driven.”
If that’s the case, the Zuckerman team would seem to have done quite well from the deal. Certainly, Prudential already has. (Boston Properties did not return a call from The Observer seeking comment. A Prudential spokesman declined to comment.)
But some people wonder what the taxpayers are getting out of this latest concession to Prudential. Prudential and Mr. Klein were supposed to spend $91 million to renovate the ailing Times Square subway station in exchange for the right to develop their office buildings.
When the real estate market went into a tailspin, critics complain, the city and state relieved the development team of that costly obligation. Prudential and Mr. Klein still failed to build anything. Times Square turned around only after the Walt Disney Company leased the dilapidated New Amsterdam Theater in 1995. By then, Prudential had pretty much decided to abandon Times Square after investing $433 million on its failed plan.
Top o’ the Market!
Now it is selling its remaining 42nd Street parcels–along with its copious tax incentives–at the top of the market. And some people believe the insurance company will actually recoup its losses without having built anything. Moreover, they question the need to build the publicly subsidized office buildings as part of an outdated plan to revitalize Times Square when Disney essentially has done the job already. “We think that the goals of the 42nd Street redevelopment have already been achieved without this additional office construction,” said Lola Finkelstein, chairman of Community Board 5, “and we are concerned that the improvements to the subway don’t seem to have happened. We are going to be asking about that.”
Brendan Sexton, president of the Municipal Art Society, argued that the state could have used the remeasurement of the two heavily subsidized sites to extract some money for the subway station or some other public benefit from the deal. “What are we getting for this investment?” he asked. “We are a huge equity partner in this deal. We are the largest equity partner until these buildings go up, and what are we getting for our money … This is going to be the most congested corner in the city once these buildings are built.”
The E.S.D.C. official seemed puzzled by such arguments. He replied that two more office buildings in the revitalized Times Square would themselves be of some benefit to the public.