Public-Private Partnerships – Changing New York City's Skyline

PUBLIC PRIVATE PARTNERSHIPS – CHANGING NEW YORK’S SKYLINE

New York State Bar Association Real Property Law Section Advanced Real Estate Topics 2016 December 12, 2016

Meredith J. Kane, Esq. Andrea D. Ascher, Esq. Partner Deputy General Counsel, Real Estate Paul, Weiss, Rifkind, Wharton & Metropolitan Transportation Authority Garrison LLP 2 Broadway 1285 Avenue of the Americas New York, New York 10004 New York, New York 10019

PUBLIC PRIVATE PARTNERSHIPS – CHANGING NEW YORK’S SKYLINE

A public–private partnership (PPP) is a cooperative arrangement among government agencies and private sector partners to undertake a complex large-scale development project, typically with a large infrastructure component. Governments have used such a mix of public and private arrangements in large-scale projects for years. In modern times, almost no private development project is done without public subsidy. Tax and interest rate subsidies, and land use policy, with its implicit subsidies, have played, and continue to play, a critical role in promoting and directing private development in New York City and New York State. For example, consider the roles of:

 Real Property Tax Incentives – J-51, 421-a, ICAP  Multi-Family Housing Incentives: Tax-Exempt Bonds, Inclusionary Housing Zoning Bonuses  Zoning Bonuses, Zoning Overrides, Zoning Special Districts (for Affordable Housing, Landmarks Preservation, Creation of Open Space)  IDA Benefits for Commercial Tenant Retention and Relocation

All of these mechanisms have been used variously in privately-sponsored projects having major public improvements, such as Atlantic Yards, Bank of America Headquarters, Columbia University Expansion and, most recently, One Vanderbilt.

Similarly, almost no publicly-sponsored project in New York City is done without private developers – consider, for example, 42nd Street, Battery Park City, Hudson Yards, CornellTech Roosevelt Island, Queens West, World Trade Center, Fulton Center, the Moynihan Farley Post Office Building, Penn Station, and 347 Madison - MTA Headquarters Development.

In its broadest sense, nearly all publicly-sponsored projects and many large-scale privately-sponsored projects involve the public and private sectors working together.

PPPs in Infrastructure Development

Our focus in this paper will be specifically on methods for using public-private partnerships in constructing and maintaining public infrastructure. When the public sector wishes to create, improve, rehabilitate or expand public infrastructure, doing so typically involves an extended process of public approvals and procurement. Pressure to change the standard model of public procurement arose initially from concerns about the level of public debt, which grew rapidly during the 1970s and 1980s. The idea that private provision of infrastructure (i.e., “privatization”), represented a way of providing infrastructure at no cost to the public has now been generally abandoned; however, interest in alternatives to the standard model of public procurement persist. PPPs often involve a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, construction and operational risk in the project.

Structures of public-private partnerships commonly used in connection with public infrastructure are:

1. Privatize ownership of infrastructure such as toll roads, water systems, etc. This method typically involves a private entity financing, constructing, and/or managing a project in return for a promised stream of payments directly from government or indirectly from users over the projected life of the project or some other specified period of time. These structures have not regularly been used in New York.

2. Private funding, through zoning “exactions”, to support public infrastructure. This typically involves a private payment, in return for zoning entitlements, to go to a public fund through which a public agency will provide area-wide improvements throughout a zoning district. Examples include the Hudson Yards “District Improvement Bonus” contribution, High Line District contributions, Theater District Air Rights contributions to the Theater Improvement Fund, the original East Midtown zoning proposal.

3. Direct funding and performance by private party of public infrastructure as part of zoning “exactions”, either as-of-right, or as part of a discretionary zoning approval. Examples include the recent Vanderbilt Corridor zoning and the One Vanderbilt project,

3 in which transit improvements are to be performed by the private developer in return for a zoning density bonus. Other examples include zoning density bonuses available in select districts for private developers to reconstruct subway entrances within the private property footprint, and zoning density bonuses for private developers to construct publicly-accessible open space on private property.

From the public sector perspective, PPPs, in any of the foregoing structures, can present certain advantages. Through a PPP the public sector may harness the expertise and efficiencies that the private sector can bring to the construction and/or management of certain facilities and services traditionally procured and delivered by the public sector. Another benefit is that PPPs may be structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project. On PPP projects where the cost of using the service is intended to be borne exclusively by the end user, the PPP is, from the public sector's perspective, an "off-balance sheet" method of financing the delivery of new or refurbished public sector assets. On PPP projects where the public sector intends to compensate the private sector through availability payments once the facility is established or renewed, the financing is, from the public sector's perspective, "on-balance sheet"; however, the public sector will regularly benefit from significantly deferred cash flows. Generally, financing costs will be higher for a PPP than for a traditional public financing, because of the private sector higher cost of capital. However, extra financing costs can be offset by private sector efficiency, tax depreciation benefits to the private investor, savings resulting from a holistic approach to delivering the project or service, and better risk allocation in the long run.

MTA’s Public Private Partnerships

Recent examples of PPPs reshaping the New York City skyline, in which New York’s Metropolitan Transportation Authority benefited from major infrastructure improvements, include the Hudson Yards project on Manhattan’s Far West Side, being constructed by a joint venture of the Related Companies and Oxford Properties, including significant infrastructure for MTA and Amtrak; the One Vanderbilt project being constructed by S.L.

Green on the full block adjacent to Grand Central Terminal bounded by 42nd and 43rd Streets, Madison Avenue to Vanderbilt Avenue, which will include major improvements to the 42nd Street stations on the Lexington Avenue and #7 Subway lines, and connections to other transit modes within Grand Central Terminal; and the future development of the former MTA Headquarters at 341-347 Madison Avenue to include additional Grand Central area public transit and pedestrian circulation improvements.

Hudson Yards

Hudson Yards represents a remarkable collaboration between a private developer and its private equity and financing partners, working in partnership with New York’s development and transportation authorities. It is the largest private real estate development in the history of the United States and the largest development in New York City since Rockefeller Center. The development consists of 26 acres in far West Midtown Manhattan – 6 full City blocks – from 30th to 33rd Streets, Tenth Avenue to the Hudson River – in the airspace over the MTA’s Long Island Railroad Yards. The site, which is owned by MTA, was rezoned by the City to permit the development of approximately 25 million square feet of office, hotel, residential and retail space, including 15 acres of open space, a restored High Line Park extending around the Yards, a major performing arts center and a new public school. The project is part of a larger public initiative to reshape far West Midtown Manhattan into Manhattan’s third central business district, as a 24-hour live-work community rivaling Lower Manhattan and Midtown. MTA, as landowner, ground leased the entire site to a development joint venture of The Related Companies and Oxford Properties, and will remain in place as ground landlord at least through the completion of the development. MTA’s goal was to generate the maximum ground-rental revenues from the development of the airspace over its railyards to support the agency’s multi-billion dollar capital program, while maintaining uninterrupted operations of the Long Island Railroad train yards, serving the nation’s busiest commuter railroad, throughout construction of the massive development in the airspace over the yards. In addition to generating over $1 billion in net present value of ground rent to the MTA, the developer has also constructed upgraded service equipment for Long Island Railroad train operations as part of the project.

One Vanderbilt One Vanderbilt, when completed in 2020, will become the City’s second tallest office building, with 57 floors containing approximately 1.6 million square feet of space. One Vanderbilt is the first project to be permitted and built under the Vanderbilt Corridor zoning provisions, which permit construction of a building with a 30 FAR (floor area ratio) density based upon the commitment of the develope to construct and/or pay for mass transit and public realm improvements in the Grand Central area which, in the case of this project, are valued at approximately $220 million. Kohn Pederson Fox Associates, the architect of One Vanderbilt, describes the project on its website as follows:

“One Vanderbilt fits into the city’s network of public transport more than any other building in the city, blending private enterprise and the public realm. The base of the building becomes part of the spatial sequence of Grand Central and a doorstep to the city, greeting thousands of commuters daily. An integrated complex of below grade conditions offers connections to the terminal, the new East Side Access and an active urban base.”

The owner/developer of One Vanderbilt entered into a Restrictive Declaration in connection with obtaining the zoning entitlements, which provide for the construction, by the developer and at the developer’s cost, of off-site and on-site transit improvements specified by MTA and the City. The off-site transit improvements to be constructed by the developer include new vertical transportation access, including stairway entrances and ADA-accessible elevator, into the Lexington Avenue subway station from multiple locations around Grand Central Terminal, and improved subway platform visibility, access and circulation. The on-site transit improvements include new access points from the One Vanderbilt building into Grand Central Terminal and the subway stations, a new corridor connection to MTA’s East Side Access, which is the extension of the LIRR into Grand Central Terminal, and the creation of pedestrian circulation space on Vanderbilt Avenue. The on-site improvements will be both constructed by the developer at its cost and expense, and maintained, repaired and operated in perpetuity at the property owner’s cost and expense.

MTA Headquarters – 341-347 Madison Avenues

A future project on MTA’s agenda is the redevelopment of MTA’s former headquarters site at 341-47 Madison Avenues. This site, which MTA intends to ground lease to a selected developer, is also intended to benefit from the Vanderbilt Corridor zoning provisions and to provide significant Grand Central Terminal area transit, circulation and public realm improvements. This project will both generate a stream of ground lease revenues for MTA’s Capital Program, as well as provide the funding under which MTA, as landowner, will perform the mass transit improvements required for the zoning bonus under the Vanderbilt Corridor zoning.

Important Concerns

The success of public private partnerships depends in large measure upon a clear and open process in the collaboration between the private and public sectors. The issues and challenges that the public sector and its private partner face in structuring a PPP include:

1. Flexibility, Communications and Understanding of Goals and Priorities: The cross-sector partners must be flexible in order to achieve their respective objectives. Partners may not have the same focus when entering into a partnership. Understanding each other’s goals and inherent motivating factors, determining where they are aligned and where they diverge, structuring protections around those inherent motivating factors and communicating clearly with each other are key factors to a successful process. Items like performance measures, goal measurements, government regulations, and the nature of funding can all be interpreted differently, thus causing blurred lines of communication which will undermine the collaborative process. 2. Timeline: The public and private sectors often operate on different time lines. Public sector typically works on a long-term timeline. Many of its goals can only be achieved with long-term commitment; this is where public sector’s focus will lie. Private entities are more short-term oriented because of mandates to focus on short-term profitability. Finally, government agencies' timelines depend a lot on election timelines and therefore can change regularly. An example of that is 7

the history of East Midtown zoning change which was derailed, at least for a time, with the change of mayoral administrations. 3. Funding needs and priorities: When parties cannot agree on where funding will come from and the role of the finance partner, this can lead to losses in time, resources, and the overall funding for the project. 4. Accountability: With the rise in public-private partnerships there is also a rise in the responsibility that the private sector partners tend to hold and the accountability that the public sector partners need to impose. With the government relying on many more private organizations to provide the public services that the public sector cannot, it is of paramount importance that the public sector have the meaningful tools and necessary power to hold these private entities accountable. 5. Autonomy within the Partnership: While working together is important, it is still a strength to be able to work on parts of the project separately to maximize efficiencies, take initiative when needed, and keep some individualism throughout the process. 6. Conflicts and Resolutions: Even though PPPs are entered into with the best of intentions, trivial issues can snowball into greater conflict, halting a productive partnership in its tracks. It is important to have a built-in framework for conflict resolution and an outline for termination procedures if necessary.