The Perils of Public-Private

Mayor Bloomberg, Governor Paterson, the Port Authority, developer Larry Silverstein and a list of other top officials are slated to convene in a summit at Gracie Mansion this week to discuss a familiar subject. As done after Sept. 11, 2001, and then again in 2006, the redevelopment of the World Trade Center is being renegotiated, this time with Mr. Silverstein seeking public sector financing to help build two of his three planned office towers at the site.

Mr. Silverstein and the Port Authority are at an impasse—one that is being driven by the inability to privately finance office towers in an inclement economy, and one that, if unresolved, threatens to derail numerous components of the site given its interdependent physical structure.

The imbroglio downtown brings into glaring view a flaw common to public-private development deals in New York, a city where progress on large-scale projects so often proves elusive. Struck in strong economic times under aggressive assumptions, agreements on large government-administrated developments almost inevitably falter when the economy shifts, causing private developers to petition the public sector for new concessions or subsidies to keep the deals alive. The result is a system in which large projects seem to rarely provide the public with the value initially advertised, at least not within the time frame once imagined.

While the World Trade Center is by all measures an extreme example, with a host of other factors contributing to the mess, this pattern appears again and again in a glance at some of the city’s largest real estate projects on public land in recent years.

In Brooklyn, at the imperiled $4 billion Atlantic Yards project, developer Forest City Ratner is negotiating with a host of agencies to delay or decrease its hundreds of millions in obligations to the public sector, as the viability of the project is now threatened. In February, the economic crisis led the Related Companies to delay signing a contract for a planned $15 billion development on the West Side rail yards, pushing off the start of what would ultimately be about $1 billion in rent payments to the M.T.A., which owns the property. The Yankees and the Mets received approval for additional tax-free bonds in January to finish their new stadiums, which had risen in cost.

And, looking further back, it took more than a decade to ultimately approve and build the Time Warner Center on the former Coliseum site, as the original designated developer, Boston Properties, repeatedly tried to renegotiate its contract amid a downturn.

Certainly, much of the tendency to renegotiate is owed to an inherently sluggish structure on the public sector side. The deals are often launched when the economy is strong; bidding documents take months to prepare; environmental review and approvals can take years. Restrictions and requirements are tacked on throughout what is often a heavily political process, so by the time a developer is nearly ready to build, the margins can be thinner and the economy may well have turned sour.

Seth Pinsky, president of the city’s Economic Development Corporation, said his agency has numerous projects in the pipeline that developers have come back to renegotiate in recent months.

“The first thing we hear is, ‘We want to still be the developer of the project, but we can’t do it when we promised, and we can’t do it for the amount of money we promised,’” he said.

In response, the city’s position, Mr. Pinsky said, has generally been an openness to spreading out a developer’s obligations over a longer period of time, but not decreasing the amount the developer ultimately owes.

“Everyone likes the idea of someone else paying for a project, and therefore in the general public, public-private partnerships have gotten a fairly good reputation,” he said. “But when you’re not spending the money and you’re relying on a partner, it’s inevitable that you give up a certain amount of leverage.

Mr. Pinsky said the city tends to structure its deals to require significant investment up front, giving the city leverage and making it expensive for a developer to abandon a project when the environment changes.

“We’re still moving projects forward,” he said. “It’s so costly for these developers to back out of the deals, they have an incentive to negotiate with us.”

 

THE CASE OF the World Trade Center is an extraordinary one that is far more complex than the typical deal undertaken by the state or the city. Not only was the economic structure of the agreement built on highly aggressive assumptions—about 7 million square feet of office space, including two towers with no tenants at all, was slated to hit the downtown market at the same time—but the physical structure of the deal is proving highly problematic as well. (Silverstein Properties has put much of the blame for its financing troubles on the Port Authority’s delays at the site, though lending has been tight for well over a year.)

From 80 feet underground to the first few floors of the towers, the Port Authority and Mr. Silverstein are dependent upon each other for completing the project. And if they do not, the entire 16-acre site could cease to function as planned, as common infrastructure like an underground roadway and ventilation would not work unless the entire site is finished at least up to street level.  

Thus with the Port Authority dependent on Mr. Silverstein for its own portions of the site to function, Mr. Silverstein has a very strong hand in negotiations—a position that is driving much of the current stalemate. An impasse in the renegotiation of a more typical public development project simply would mean the government might not take in money from the private developer in scheduled payments. Here, impasse threatens delays on crucial elements of the Port Authority’s portion of the site—such as the PATH hub and bus parking—on top of the lack of payments.

Just how much the Port Authority and others should put in to get the site moving is the key question, with the number ranging anywhere from $1 billion to $3 billion in financial backing.

ebrown@observer.com

 

The Perils of Public-Private