Get Your Bids In! Developers Crave Subsidies for Javits Hotel

010806 article schuerman Get Your Bids In! Developers Crave  Subsidies for Javits HotelSome of the biggest real-estate names, locally and nationally, are drawing up plans for a 70-story hotel across the street from the Javits Center in the West Side’s emerging Hudson Yards district, contemplating such revenue enhancers as luxury condos and retail boutiques to make the building work for them.

They’re also trying to figure out how much public subsidy they can get away with asking for.

The state officials guiding the $1.7 billion Javits Center expansion, of which the new hotel is just a part, say that it’s too early to comment on the extent—or even the possibility—of subsidies, because bids aren’t due until Jan. 12.

But their own request for proposals, issued in October, spells out seven possible subsidies that developers may wish to take advantage of and hints at an eighth: about $33 million worth of free air rights that could bring the hotel, slotted for a lot at 35th Street and 11th Avenue, up to 1.25 million square feet.

“Officials are saying that subsidies will be available,” said one individual close to the bidding. “They are saying that the least subsidy wins.”

Developers are saying that those subsidies will be much deserved.

On the one hand, the winner of the hotel contract will be virtually assured of guests without having to advertise for them and even has the option of putting luxury condominiums with stunning Hudson River views on top.

On the other hand, the developer must, according to the state’s specifications, reserve three-quarters of the rooms for conventioneers at “competitive” rates; incorporate large ballrooms; and build on a parcel spliced by an Amtrak rail line.

The developer must also build one of the first skyscrapers on Manhattan’s far West Side, in an evolving neighborhood that, for the first two or three years at least, won’t even have a subway line anywhere close.

“Convention-center hotels typically have huge volumes of people checking in and out at the same time,” said Eric Lewis, a managing director and the leader of the hospitality and gaming group at Cushman & Wakefield, the real-estate services firm. “You need very large common areas, very large meeting spaces, very large eating facilities. That raises the per-room cost. At the same time, the convention and meeting planners are looking for cities that can be competitive on a total cost basis, and therefore the convention-center hotel needs to keep the cost rate down. The interplay of those two pressures makes the economics very difficult to achieve.”

In the pecking order of desperation, in other words, the convention planners call the shots, the hotel developer takes the orders, and the government—hoping for hundreds or even thousands of promised jobs—picks up the check.

John Lam, who is one of some eight developers who have expressed interest in bidding on the hotel contract, nevertheless called the location “perfect” because of its future potential. He plans to propose building 1,500 hotel rooms, about 50,000 square feet of office space, and several floors of “hotel-condos” for owners to live in or rent out. The hotel would consist of four different towers, arranged to avoid putting weight on the Amtrak line, and would reach 66 stories high. Mr. Lam wouldn’t specify what sort of subsidies he is seeking, however, saying that he is still working on his financial plan.

“That area doesn’t have any five-star hotels, and I see the opportunity is increasing,” said Mr. Lam, who is the owner and founder of the Lam’s Group, which built a Best Western just a block away from Javits and is completing another 3,000 rooms around the city in the next three years. “Right now, people who go to the Javits Center have to travel quite a bit, because there are no hotels around there.”

His plan, drawn up by architect Gene Kaufman, contrasts with a schematic design that the Javits expansion architects drew up for illustrative purposes. That design shows just one tower, set back from 11th Avenue, on top of a seven-story pedestal that includes two ballrooms, an underground connection to the Javits Center and shops.

The hotel has been touted as a crucial adjunct to the 520,000-square-foot Javits expansion that will help restore New York to the top tier of convention destinations, and yet its finances have always been a bit of a mystery. The hotel is typically described in press releases as “largely privately financed,” but the public contribution, or benefit, is never detailed.

Originally, the state was going to purchase a vacant site at 42nd Street and 11th Avenue, a little to the north of Javits, and lease it to a private developer. The developer would then likely team up with a hotel chain to operate the facility.

To avoid the expense of acquiring property, planners moved the hotel location south to 35th Street, to a plot of land across the street from Javits. The state already owned most of that site, which is known as Stonehenge Park: a plaza littered with odd concrete sculptures that nobody can make much sense of.

Back in November, 46 people showed up at a mandatory site tour for hotel bidders. While many were engineers or from hotel chains that were part of larger teams, the attendance sheet made public includes nine identifiable development companies. A spokeswoman for one of them, Portman Holdings, said last week that the company was no longer interested, but The Observer was able to confirm that three others—Mr. Lam, Gary Barnett of Extell Development, and FaulknerUSA, a Texas-based hotel developer—were still intending to submit bids.

Other developers on the list who would not comment or return messages include Vornado Realty Trust, Rudin Management Company, the Moinian Group, Colgate Development and BD Hotels. The Witkoff Group, which had expressed interest back in 2005, did not send a representative.

“From what we understand, there is going to be a lot of interest, and that’s all to the good,” said Michael Petralia, the president of the Convention Center Development Corporation, the state agency supervising the Javits expansion. “I am not going to speculate on what we may or may not do. Our job is to get the hotel built with the least amount of financial exposure to the state and the city.”

Faulkner is a 45-year-old company that has built four convention-center hotels and is building a fifth, in San Antonio, Tex. For its New York bid, the company is teaming up with Hilton Hotels, according to Tim Garbutt, Faulkner’s director of business development and corporate communications.

“New York is attractive for a lot of reasons, and we are a convention-center hotel developer, so of course we would want to be there,” Mr. Garbutt said. He said it would not be surprising if the company included luxury condominiums as part of its Javits bid, but he wouldn’t detail the proposal’s financial aspects.

“It’s kind of a double-edged sword,” he told The Observer. “If you are in this business, you want to be at the show, and New York is it. At the same time, it takes quite a considerable wherewithal and financial resources to pull it all together.”

The request for proposals specifies that the state development corporation wants to “minimize the level of public financial participation in the Javits Hotel,” but that it will consider helping developers, “subject to demonstrated evidence that financial assistance is needed.”

Among the subsidies mentioned are below-market rent; reduced property, mortgage-recording and sales-tax payments; electricity-rate discounts; and “an additional capital contribution.” In addition, the request for proposals asks bidders to submit financial projects that assume that they could obtain 312,000 square feet of zoning rights, or about 22 stories of the hotel tower, for free.

It is unclear whether the state is willing to give away those rights, which belong to the Metropolitan Transportation Authority and would be transferred from the Eastern Rail Yards between 10th and 11th avenues, two blocks to the south.

The convention-center agency said in a statement: “Those assumptions may not dictate the financial terms of the hotel development agreement,” and added that bidders were asked not to include the cost of the Eastern Rail Yards’ rights because that exact price is not known.

But one could make an educated guess as to the air rights’ cost. The M.T.A. this past fall commissioned an appraisal that determined that the Eastern Rail Yards’ rights were worth $106.71 a square foot. And the city is selling extra development rights in Hudson Yards for $106.48 a square foot.

When asked to elaborate why hotel bidders didn’t need to account for the M.T.A. rights in their proposals, Mr. Petralia said that he didn’t want to negotiate in public.

“What we want to do is to see what the market is right now, to see what we get back in terms of what the developers can offer, and then take it from there,” he told The Observer.

Governor Eliot Spitzer, who has insisted that the M.T.A. get “full value” for its assets, will likely play a role in determining the cost of the air rights as well as the extent of any other subsidies, as will Mayor Michael Bloomberg, who has been negotiating to control the sale of some of the M.T.A.’s air rights.

Other cities typically—though not always—provide subsidies for convention-center hotels. Sometimes they even build and own them outright, taking on the risk of insufficient bookings in exchange for getting hold of all the revenues. In San Antonio and Denver, convention-center hotel developers are taking advantage of tax-exempt bonds that can save them 3 or 4 percentage points’ worth of interest every year. Washington, D.C., just agreed to provide $150 million in tax-increment financing—meaning that the property taxes pay off part of the cost of building the hotel instead of going to the city’s general fund.

But in Philadelphia, which is embarking on a 376,000-square-foot expansion of its convention center, hotels are springing up nearby without any public help whatsoever.