Apple has been one of the hottest companies on the planet for going on a decade now, and that includes its retail stores. That glass cube on Fifth Avenue is perhaps the architectural icon of the city this century.
When The Observer learned that Apple was thinking of bringing its biggest iStore to Grand Central Terminal last year, it was viewed as a coup for both the company and the MTA—could there be a more desirable shop in a more desirable location? The fanfare that greeted the store’s opening rivaled that of an Apple product launch, with lines for days.
But then it was revealed that Apple was not paying a share of its profits to the MTA, as every other retailer at Grand Central does. The MTA insisted it was a good deal, but State Comptroller Tom DiNapoli promised an investigation last fall, and he has concluded in a new audit [PDF] that Apple got a sweetheart deal that is rotten for the MTA and tax payers.
The audit found that as far back as November 2008, nearly three years before an official RFP was released for the project, the MTA’s real estate department (MTA RED in the words of the audit) had begun negotiating with the Cupertino-based tech giant. There were a number of negotiations between that period, not only with the MTA but also Metazur, the Mediterranean restaurant that occupied the concourse Apple would later take over for a $5 million buyout.
“Our analysis shows that the playing field was not level and fair for all vendors,” the audit reads. “We conclude that the competitive process reported by MTA RED in this instance was significantly slanted in Apple’s favor.”
Among the more damning passages in the audit is the fact that Apple agreed to front $2 million to Metazur five days before the RFP was released, suggesting it already had a lock on the space. It also suggests that there were no other respondents to the RFP besides Apple in part because it was tailored expressly for the company.
According to the audit: “One vendor’s correspondence to the MTA dated June 17, 2011 stated that the upfront cost of $5 million was too great of an investment and precluded the vendor from submitting a formal bid on the space. The vendor further indicated that only an entity with a lot of liquid capital would be able to afford the lease under these terms.”
In a fiery statement, MTA chairman and CEO Joe Lhota said that the agency followed the letter of the law in issuing its RFP and the comptroller’s report demonstrates an ignorance of real estate negotiations.
“The Comptroller’s audit staff clearly has no understanding of how high-profile commercial real estate works, given the shockingly inaccurate and clearly biased audit they issued,” Mr. Lhota said. “Remember Senator Daniel Patrick Moynihan’s old adage, ‘You have the right to your opinion, you don’t have the right to your own facts’? This audit is not fact-based, and accordingly, the auditors’ opinion is worthless.”
It is true that the RFP process presents its own problems for finding a tenant in a market-based way closer to what private landlords can undertake, but that means the RPF process needs reform, not subversion.
There is a political dimension to the audit in that the comptroller is now seeking authority to oversee similar RFPs in the future. Currently, that authority only extends to non-competitive contracts. While this one was deemed competitive, the comptroller is arguing that was merely a sugar coating—the MTA spent two years negotiating with Apple, then essentially used the agreed upon terms to issue the RFP.
Yet the comptroller is not saying this is necessarily a bad deal for the agency so much as a matter of bad practice—what if next time the insider is not Apple but someone less impressive? Had the process been a single-source contract, which would have been reviewable, so be it.
“While Apple may turn out to be a good tenant, the MTA set a troubling precedent when it played favorites and gave Apple a competitive edge over others for the Grand Central space,” Mr. DiNapoli said in a release. “Apple was directly involved in setting the terms of the lease and given exclusive access to information more than a year before any other vendor knew the Grand Central location was available.”
In fact, the comptroller is quite fond of Apple: the state pension fund owns more than 3.1 million shares of the company’s stock worth $1.9 billion.