An Evaluation of the Costs and Benefits of New York City’s Hudson Yards Redevelopment Project
Michael Meola Eric Kober Kei Hayashi
March 13, 2019
An Evaluation of the Costs and Benefits of New York City’s Hudson Yards Redevelopment Project
Michael Meola Eric Kober Kei Hayashi
March 13, 2019
Executive Summary:
• The City’s goal to transform the Hudson Yards District from a largely vacant, underdeveloped transportation and distribution zone into a vibrant mixed-use, medium to high density district of workers, residents and visitors is being achieved ahead of projections, with over 30 million square feet of new development completed or in construction since the rezoning in 2005
• The $3.5 billion infrastructure investment that the City made, or has committed to fund, through Hudson Yards Infrastructure Corporation (HYIC) bonds to facilitate this transformation is paying off as the essential first step to attract vast private investment in the District that otherwise would not have occurred
• Tax abatements in Hudson Yards are consistent with long-standing City practice to stimulate development where it is not occurring, and have contributed to the viability of commercial development in a previously fringe location
• City payments to cover interest on HYIC’s bonds from 2007 to 2018 totaled $358 million; it is now estimated that future revenues from the District will not only pay off the bonds but will generate more than $21 billion in net revenues to the City
• The opening on March 15th of the Related/Oxford Hudson Yards Project, the largest in the City’s history, built over the MTA Rail Yard on a billion-dollar privately funded platform, is the symbol of this remarkably successful public/private development that evidences the enormous strength of the City’s economy
• The MTA has received over $1.2 billion for its property over the MTA Rail Yard and retains valuable development rights that it will be able to sell in the future
• Additional benefits to the City include extension of the No. 7 Subway Line and a new Bella Abzug Park that serves all New Yorkers and visitors and that is maintained at no cost to the City, both funded by the City out of future revenues from the District, new cultural and educational facilities, and over 3,000 new affordable housing units (28% of all new housing)
1 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
The map below, from the HYIC 2017 Official Statement, presents the Hudson Yards Financing District (HYFD) outlined in red, and identifies the major infrastructure investments.
Exhibit 1: Hudson Yards Financing District (HYFD)
Credit: HYIC 2017
2 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
1. Introduction
Fourteen years after the New York City Council approved the comprehensive rezoning of a vast swath of the Far West Side of Manhattan that has become known as the Hudson Yards District, a look at the skyline reveals a burgeoning forest of new towers. During the period from the rezoning in 2005 through early 2019, over thirty (30) million square feet of new office, residential, hotel, retail, cultural and educational buildings have been completed or are in construction within the district. See Table 1. An additional over twenty (20) million square feet of new buildings are in planning. See Table 2. The No. 7 Subway Line (No. 7 Line) was extended into the area to a new station at West 34th Street and Eleventh Avenue. During 2018 No. 7 Line entries at the 34th Street station averaged approximately 8,800 per day, ranking it among top 1/3 of stations in terms of usage, even before many of the new buildings are fully occupied.1
The Metropolitan Transportation Authority’s (MTA) John D. Caemmerer West Side Storage Yard (MTA Rail Yard) has been decked over by the Related Companies and Oxford Properties for the first section of their enormous Related/Oxford Hudson Yards Project on the Eastern Rail Yard, including office, residential, retail, hotel, 5 acres of public open space, the Vessel, and non-profit venue The Shed. The second phase, the Western Rail Yard, will bring additional residential and commercial space, a public school, and another 5 acres of public open space. This has already involved a private investment of $16 billion, toward an anticipated $26 billion total project cost, with $3 billion needed just to construct the platforms covering 26 acres of the MTA Rail Yard without any public subsidy or support. Other private developers have also invested billions of dollars in dozens of commercial and residential projects throughout the District. The first phase of a new boulevard and park system, Hudson Boulevard and Bella Abzug Park2 was completed in 2015, and an expansion to double its length is in planning. The Hudson Yards/Hell’s Kitchen Alliance, a business improvement district (BID), was formed to provide services to the district and to pay for the maintenance, public programs, and management of Bella Abzug Park3.
1 Daily ridership at the 34th Street Station provided for 2018 by MTA New York City Transit. 2 The former Hudson Boulevard Park was renamed Bella Abzug Park on March 1, 2019. 3 BIDs, controlled by district property owners, have authority to assess property, in addition to the City’s real property tax, to pay for district services. 3 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
Table 1: Completed and In Construction Development
Category / Name Address SF Units Completion 10 Hudson Yards 501 West 30th Street 1,900,000 NA 2016 55 Hudson Yards 380 11th Avenue 1,300,000 NA 2018 30 Hudson Yards 500 West 33rd Street 2,800,000 NA 2019 35 Hudson Yards 560 West 33rd Street 150,000 NA 2019 Hudson Commons 441 9th Avenue 700,000 NA 2019 1 Manhattan West 391 9th Avenue 1,900,000 NA 2019 Hudson Spiral 509 West 34th Street 2,575,000 NA 2022 50 Hudson Yards 427 10th Avenue 2,500,000 NA 2022 Office 13,825,000 Shops at Hudson Yards 500 West 33rd Street 1,100,000 NA 2019 Manhattan West Retail 391 9th Avenue 240,000 NA 2020 Retail 1,340,000 36 Hudson Hotel 449 West 36th Street 20,000 40 2006 Element 309 West 39th Street 140,000 345 2006 Lord & Moris 305 West 39th Street 30,000 80 2007 Wyndham Garden Inn 341 West 36th Street 80,000 225 2008 Candlewood Suites 341 West 39th Street 85,000 190 2009 Hampton Inn 337 West 39th Street 70,000 185 2009 Holiday Inn Express 343 West 39th Street 75,000 210 2009 Four Points 326 West 40th Street 100,000 250 2009 Fairfield Inn 330 West 40th Street 100,000 245 2009 Staybridge Suites 334 West 40th Street 130,000 310 2010 Distrikt 342 West 40th Street 65,000 155 2010 Yotel 570 10th Avenue 235,000 670 2011 Tryp 345 West 35th Street 90,000 170 2012 Cachet NYC 510 West 42nd Street 80,000 100 2012 Fairfield Inn 325 West 33rd Street 120,000 240 2013 Courtyard 307 West 37th Street 100,000 220 2013 Homewood Suites 312 West 37th Street 120,000 300 2014 Cassa Times Square 515 9th Avenue 40,000 90 2014 EVEN 321 West 35th Street 60,000 150 2015 DoubleTree 350 West 40th Street 180,000 610 2017 Four Points 444 10th Avenue 48,000 150 2017 POD 42nd Street 400 West 42nd Street 210,000 510 2017 Aliz 310 West 40th Street 140,000 280 2017 Hilton Garden Inn 330 West 37th Street 125,000 250 2018 Crowne Plaza 320 West 36th Street 100,000 250 2018 Staypineapple 337 West 36th Street 40,000 90 2018 Optima 333 West 38th Street 35,000 80 2018 Spring Hill/Fairfield Inn 338 West 36th Street 200,000 570 2019 Courtyard 461 West 34th Street 240,000 400 2019 Pestana 350 West 39th Street 200,000 610 2019 Equinox - 35 Hudson Yards 560 West 33rd Street 330,000 220 2019 Unnamed Hotel 342 West 39th Street 80,000 175 2019 Arlo 351 West 38th Street 125,000 500 2021 Pendry - Manhattan West 440 West 33rd Street 70,000 160 2021 Hotel 3,863,000 9,030 Olivia 315 West 33rd Street 580,000 340 2005 Hudson Crossing 400 West 37th Street 210,000 260 2005 Orion 350 West 42nd Street 510,000 550 2005 Atlantic Project 521 West 42nd Street 95,000 70 2005 Atelier 635 West 42nd Street 430,000 480 2006 38Nine 502 9th Avenue 30,000 40 2008 455 W 37 455 West 37th Street 440,000 400 2008 Emerald Green 320 West 38th Street 720,000 570 2009 Silver Towers 600 West 42nd Street 1,050,000 1,360 2009 505 W 37 505 West 37th Street 810,000 840 2010 Townsend 350 West 37th Street 170,000 210 2010 Unnamed 552 West 43rd Street 10,000 10 2010 MIMA 440 West 42nd Street 865,000 650 2011 Mantena 433 West 37th Street 100,000 100 2012 Crystal Green 330 West 39th Street 220,000 230 2013 Lana 511 9th Avenue 150,000 114 2014 Sienna 37 321 West 37th Street 80,000 80 2015 SKY 605 West 42nd Street 890,000 1,180 2016 555 Tenth Avenue 555 10th Avenue 620,000 600 2016 Eugene - Manhattan West 401 West 31st Street 590,000 840 2017 Skylight House 411 9th Avenue 12,000 25 2017 Madruga Project 445 West 35th Street 120,000 120 2017 Lewis 411 West 35th Street 190,000 190 2017 Henry Hall 509 West 38th Street 240,000 220 2017 15 Hudson Yards 545 West 30th Street 775,000 390 2019 Lalezarian Project 515 West 36th Street 320,000 250 2019 35 Hudson Yards 560 West 33rd Street 580,000 140 2019 Unnamed Project 441 West 37th Street 20,000 11 2020 Residential 10,827,000 10,270 Signature Theatres 480 West 42nd Street 75,000 NA 2012 Success Academy HY 500 West 41st Street 90,000 NA 2017 The Shed 545 West 30th Street 205,000 NA 2019 Cultural / Educational 370,000 Source: BJH TOTAL 30,225,000 19,300 Sources: HYIC OS 2012, 2017, NYCDOB, NYCDOF, NYC City Map Buildings under construction in blue. 4 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
Table 2: Planned Development Future Planned Development In Hudson Yards BJH Advisors LLC March/2019 Estimated Completion Owner/Name Address Category SF Units Status Date Related- WRY 300 12th Avenue Residential/Office/School 6,100,000 3,000 Planning 2030 3 Hudson Boulevard 400 11th Avenue Office 1,800,000 NA Foundation Construction Douglaston-Block 675 613West 29th Street Residential 730,000 900 Site Demolition 2023 Lalezarian-Block 675 606 West 30th Street Residential 210,000 260 Planning 2022 Georgetown-Block 675 260 12th Avenue Residential/Commercial 1,100,000 NA Planning McCourt 358 10th Avenue Residential/Commercial 840,000 100 Planning Rockrose- 11th Ave 476 11th Avenue Residential/Commercial 1,400,000 600 Planning Silverstein- Mercedes 514 11th Avenue Residential/Commercial 1,600,000 750 Planning Related/Spitzer Residential 451 10th Avenue Residential 450,000 400 Planning 2023 Related/Spitzer Office 517 West 35th Street Office 1,000,000 NA Planning Marx Hotel 450 11th Avenue Hotel 270,000 530 Building Permit 2021 2 Manhattan West 389 9th Avenue Office 1,900,000 NA Building Permit 2022 Tishman Speyer-Block 708 438 11th Avenue Office 1,300,000 NA Planning Javits Plaza Site-Block 707 418 Eleventh Avenue Office 1,185,000 NA Planning Covenant House 460 West 41st Street Community Facility 80,000 60 Building Permit 2021 Gotham Covenant House 538 10th Avenue Residential 420,000 300 Planning 2024 Total 20,385,000 6,900 Source: BJH
Table 3: Affordable Housing Units Affordable Housing Units Attributable to Hudson Yards Name Address Units Hudson Crossing 400 West 37th Street 52 Orion 350 West 42nd Street 110 Atlantic Project 521 West 42nd Street 72 Atelier 635 West 42nd Street 96 38Nine 502 9th Avenue 7 455 W 37 455 West 37th Street 80 Emerald Green 320 West 38th Street 120 Silver Towers 600 West 42nd Street 317 505 W 37 505 West 37th Street 167 Townsend 350 West 37th Street 42 MIMA 440 West 42nd Street 163 Mantena 433 West 37th Street 20 Crystal Green 330 West 39th Street 46 SKY 605 West 42nd Street 294 555 Tenth Avenue 555 10th Avenue 120 Eugene - Manhattan West 401 West 31st Street 169 Madruga Project 445 West 35th Street 24 Lewis 411 West 35th Street 38 Henry Hall 509 West 38th Street 46 15 Hudson Yards 545 West 30th Street 106 Lalezarian Project 515 West 36th Street 63 Clinton HPD Sites (1) 860 TOTAL 3,012 (1) Gotham West Site completed, MTA and DEP sites in development. Buildings under construction in blue. Source: HPD, DOF, MAS, City Council Inclusionary Housing Study 2013, BJH
5 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
2. Project Definition
The Hudson Yards Redevelopment Project as conceptualized in 2002 was a complex undertaking with several components. The components that this report will focus on are the items that Hudson Yards Infrastructure Corporation (HYIC) ultimately funded: extension of the No. 7 Line to a new terminal station at West 34th Street and Eleventh Avenue; construction of the first phase of a boulevard and park system, now known as Hudson Boulevard and Bella Abzug Park; and a $200 million payment to the MTA for an interest in transferable development rights from the Eastern Rail Yard (ERY TDRs)4. A comprehensive rezoning (HY Rezoning) for the entire 46 city block district was undertaken that provided for a mix of low, medium and high density zones, residential and commercial development, provisions for community facilities and educational and cultural uses, and density bonus and transfer mechanisms. The MTA Rail Yard was to be decked over- with the Eastern Rail Yard available for a mix of commercial, residential and cultural development and public open space, and the Western Rail Yard to host a venue for the New York Jets and a possible Olympic Stadium, the NY Sports and Convention Center, a facility that would have been linked to Javits as additional exhibition space. Expansion and renovation of the Javits Center was planned at the same time in close coordination with the State of New York. These components were all included in the environmental review of the proposed mega-project: the subway extension, rezoning, development over both portions of the MTA Rail Yard, and the renovation and expansion of the Javits Center. Planning for the transformation of the abandoned High Line into public space and the rezoning of West Chelsea immediately to the south was also undertaken concurrently.
Subsequently, as a result of the inability to secure State approval for the Sports and Convention Center,3 the Western Rail Yard was rezoned in 2009 for mixed-use development.
Commitments were made to achieve approximately 28% affordable units in the prospective residential development associated with the project. Approximately 3,000 of the 10,270 housing units constructed since 2005 are affordable through a variety of programs including 421-a and Inclusionary Housing5, exceeding this goal. See Table 3.
5 The zoning plan permitted such transfers to facilitate the creation of a large public open space as part of the rail yard development.
5 Review of HPD website, DOF Benefits Tracker website, MAS website, NYC City Council IHB Report, August 2013. 6 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
A geographic area of approximately 46 city blocks6 was identified- the Hudson Yards Financing District (HYFY)- from within which revenues would be dedicated to fund the infrastructure. This is the area to which this report will refer to as the Hudson Yards District. The Related/Oxford Hudson Yards Project, primarily on the MTA Eastern and Western Rail Yards and on one additional block between West 33rd and West 34th Streets and 10th and 11th Avenues, will be referred to as the Related/Oxford Hudson Yards Project. Academics and reporters continue to conflate the larger Hudson Yards District of approximately 165 acres, and the Related/Oxford Hudson Yards Project within it, which is about 28 acres. This is an important distinction, as the infrastructure investments, particularly the No. 7 Line extension, serve the entire Hudson Yards District, as well as the Javits Center, Hudson River Park and the High Line Park, the 39th Street Ferry Terminal, and the West Chelsea gallery and residential district to the south. Of course, the Related/Oxford Hudson Yards Project benefits from these investments, as do longtime residents and workers, and the dozens of projects that have been completed, are in construction, and in planning by many other developers.
3. What problem was Hudson Yards meant to address?
In 2000-01, Sen. Charles Schumer convened the Group of 35 to study the need for new commercial office space in New York City, a pre-requisite for the city’s employment growth and a healthy economy. Sen. Schumer and other public officials and business leaders were concerned that the city’s traditional office areas in Midtown and Lower Manhattan were largely built out, and with aging structures, did not have the capacity to accommodate the modern commercial space needed for future office-based employment growth. In particular, the Group of 35 recommended that the City rezone three areas: Downtown Brooklyn, Long Island City, and the Far West Side of Manhattan, later known as the Hudson Yards District. The City proceeded to rezone all three areas in accordance with these recommendations – Long Island City in 2001, Downtown Brooklyn in 2003, and Hudson Yards in 2005.
For decades prior, the Department of City Planning (DCP) and MTA had been studying the possibility of expanding Midtown Manhattan’s commercial office market boundaries, and the mass transit infrastructure that supports such high density districts. The City had rezoned the area around the new Javits Center in the 1980’s and the MTA had studied development over the MTA Rail Yard, which is used by the Long Island Rail Road (LIRR). However, no significant development took place and the overbuild of the yards was not considered to be economically feasible. Indeed, a 2001 study showed
6 The HYFD is defined in City Council legislation and includes some or all of 46 city blocks, where superblocks are counted as if they are made up of standard 200 x 800 blocks (e.g. the ERY and WRY each count as 3 blocks, Moynihan Station and Penn Station superblocks count each as 2 blocks). 7 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
that real estate tax revenues from the core of the area actually declined from 1990 to 20007. In the late 1990’s, the City began to study the extension of the No. 7 Line to the West Side as a solution to making the area more feasible for development. However, due to the MTA’s inability to fund the costs of the No. 7 Line extension, it was not until 2002 that the City’s 2012 Olympic bid re-focused efforts on the Hudson Yards area, its needed infrastructure investment, and a potential rezoning that would unlock development and revenues to pay for the infrastructure.
4. Financing Structure Background
New York City generally finances its capital program using general obligation (G.O.) bonds backed by the full faith and credit of the City, which are highly rated and have among the lowest interest rates available to local governments.
To fund the estimated $3.0 billion cost of the subway and parks for Hudson Yards, the City, working with its financial advisors, decided that issuing G.O. Bonds would not be feasible because of borrowing limits imposed by the New York State Constitution. The City was concerned that the Hudson Yards borrowing was large enough that it might cause its G.O. debt limit to be exceeded and limit its ability to fund other pressing capital projects. However, bond rating agencies and investors do not use the constitutional debt limit to determine the amount of long-term debt that is prudent for New York City. Therefore, the City has the ability to borrow cheaply and at high ratings beyond this limit, which borrowing would not be backed by the full faith and credit of the City, but nonetheless have sufficient backing to assure investors of the safety and security of their investment.
The City has thus has begun to use special financing vehicles to allow it to meet its long-term capital needs without running afoul of the State Constitution’s G.O. debt limit. These were local development corporations under City control, which each used a dedicated stream of revenues to achieve a high bond rating, very close to that for G.O. debt. One such vehicle that pre-dated Hudson Yards is TSASC, which issues bonds backed by revenues paid by cigarette companies as part of the settlement of tobacco litigation with 46 states, including New York.
7 Appleseed, Hudson Yards: Assessing Its Impact on New York City’s Economy, 2001. 8 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
The City decided to create a special financing vehicle called the Hudson Yards Infrastructure Corporation (HYIC) which could issue bonds that would be supported by dedicated revenues from within the HYFD.
5. Tax Increment Financing
Tax increment financing (TIF) was considered but ultimately not utilized in Hudson Yards. New York State’s TIF statute was incompatible with the City’s land use approval process, and TIF borrowings are typically much smaller than that which would be required for Hudson Yards and there was doubt about the financial market’s appetite for such a large TIF borrowing. The Hudson Yards structure can, however, be described as a TIF-like program, which used existing legal authority and financial mechanisms to achieve the same result as TIF borrowing.
6. HYIC Financing Program Described
As mentioned above, in addition to funding the No. 7 Line extension and Bella Abzug Park, HYIC was also used to make a $200 million payment to the MTA for an interest in transferrable development rights over the Eastern Rail Yard (ERY TDRs). This was a way for the City to advance greatly needed funding to the MTA for a portion of the value of its property before it could select a developer and commence receiving ground rent. This point has generally been overlooked in analyses of Hudson Yards- the City’s investment in the District through HYIC resulted in a $200 million payment up-front to MTA, and through the Related/Oxford Hudson Yards Project, a stream of lease payments followed, against which the MTA issued over $1.0 billion in bonds in 2016. The MTA also retains valuable additional ERY TDRs that it can sell to future developments in the Hudson Yards District.
In 2007 HYIC announced a $3.0 billion financing program backed by certain future revenues from within the HYFD that were assigned by the City to HYIC. These five revenues are 1) Real Property Tax Equivalency Payments (TEPs) on residential and hotel projects, 2) Payments in Lieu of Real Property Tax (PILOTs) on new Class A office developments, 3) payments pursuant to the Hudson Yards District Improvement Fund Bonus (DIB) as per the Zoning Resolution, 4) payments from the sale of ERY TDRs, and 5) Payments in Lieu of Mortgage Recording Tax (PILOMRTs) on PILOT projects.
9 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
HYIC sold $2.0 billion of its bonds in 2006 (FY 2007 Bonds), followed by $1.0 billion in 2011 (FY 2012 Bonds). The 2006 issuance was supported by a financial feasibility study from Cushman & Wakefield, Inc. (C&W), the 2006 C&W Study. The C&W Study provided investors with essential projections of the the amount of new commercial and residential development that could be expected in the HYFD over a 30 year period, and the amount of revenues from each of the five sources that would be generated therefrom.
Development Activity in the District
The C&W Study in 2006 projected that by 2035 the HYFD would see a total of 40.8 million square feet of new office, residential, hotel and retail development. As seen in Table 4 actual cumulative completions of new buildings exceeded the C&W projection from 2007 to 2013 then, due to the effects of the Great Recession, fell behind from 2014 to 2018. However, as of 2019 actual cumulative new development in the district has caught up and moved ahead of the original projection at 22.4 million square feet, and when all buildings currently under construction are completed in 2022 the total revenue producing buildings will be 29.7 million square feet (versus the 23.4 million square feet in the 2006 C&W projection).
Table 4: 2006 C&W Study Compared to Actual Development
HUDSON YARDS: 2019 ACTUAL VS 2006 PROJECTION Cumulative SF Office, Hotel, Residential, Retail 30,000,000
25,000,000 2006 C&W Study Actual
20,000,000
15,000,000
10,000,000
5,000,000
- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: HYIC FY 2007 Bonds OS, BJH
10 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
Project Revenue Performance
Revenues likewise are on a sustained upward trajectory. While cumulative project revenues were lower through 2018 than projected in 2006, due in part to the effects of the Great Recession, FY 2018 project revenues surpassed the 2006 projection ($312 million actual to $310 million projected in 2006), and as presented in Table 5, are now likely to rise strongly in each succeeding year as new buildings are completed and tax incentive programs, discussed below, burn off.
One of the issues that has been contentious is the City’s commitment to provide interest support payments and whether the project is “self-financed”. The term self-financed is applied to a special financing entity, or other structure, where the project revenues exceed the project costs over the term of the financing. Every revenue-producing capital investment has a funding gap, as the investment needs to be financed from the start of construction but the revenues are only realized upon completion and over time. Some form of gap financing is therefore necessary. Self-financed does not mean that the project financing structure is devoid of debt service support from non-project revenues, such as bond insurance, capitalized interest, interim or gap funding supported by non- project revenues, or other non-project appropriated funding, as long as the total project revenues exceeds all project costs including the repayment of any non-project funding. The offering documents for the 2006 HYIC bonds made clear that City interest support payments would be necessary in the early years of the plan (estimated to be for the 10 years from FY2007 through FY2016)8 before development revenues would become sufficient to fully cover debt service - this was key to achieving an investment grade bond rating and interest rates close to that of G.O. debt.
A 2018 paper by Bridget Fisher and Flavia Leite (Fisher/Leite) of the New School University mentions that the City of New York made interest support payments totaling $358 million, but that report failed to note that in 2017 HYIC made a payment to the City’s Transitional Finance Authority (another City controlled entity) in the amount of $112 million. Thus the net financial support by the City to HYIC over 14 years has been reduced to $246 million, and per HYIC budget documents it is unlikely that the City will need to make any further such interest support payments. HYIC’s FY2019 budget carries a payment of $100 million to the City, and as presented in the FY2017 Bond Official Statement, every year thereafter HYIC is projected to make a payment to
8 HYIC Bond Offering Statement 2017, p. 27 11 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
the City in increasing amounts, totaling $22 billion by 2047. This makes abundantly clear that the Hudson Yards TIF-like structure is an unqualified success. It has more than just self-financed the No. 7 Line extension and new parks, but is well along to creating a multi-billion dollar revenue stream for the City to fund future services.
12 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
Table 5: Project Revenues and Expenses 2007-2047
Actual Projected 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019-2047 PROJECT REVENUES Recurring Revenues PILOT ------1,950,000 4,577,000 7,994,000 10,947,000 30,879,000 13,031,055,000 TEPs - - 8,800,000 5,731,000 13,318,000 25,938,000 27,679,000 32,647,000 38,553,000 48,563,000 58,656,000 70,545,000 84,332,000 13,698,593,000 Total Recurring Revenues - - 8,800,000 5,731,000 13,318,000 25,938,000 27,679,000 32,647,000 40,503,000 53,140,000 66,650,000 81,492,000 115,211,000 26,729,648,000
Non-Recurring Revenues PILOMRT ------8,661,000 4,688,000 - 22,496,000 31,384,000 17,782,000 246,499,000 DIB 11,120,000 52,330,000 12,538,000 4,488,000 - 4,635,000 2,951,000 3,261,000 10,827,000 193,652,000 45,183,000 20,705,000 75,099,000 610,242,000 ERY TDRs ------90,547,156 99,154,000 - 104,840,000 - Total Non-Recurring Revenues 11,120,000 52,330,000 12,538,000 4,488,000 - 4,635,000 2,951,000 11,922,000 15,515,000 284,199,156 166,833,000 52,089,000 197,721,000 856,741,000
Total Project Revenues 11,120,000 52,330,000 21,338,000 10,219,000 13,318,000 30,573,000 30,630,000 44,569,000 56,018,000 337,339,156 233,483,000 133,581,000 312,932,000 27,586,389,000
PROJECT EXPENSES Debt Service (1) - 46,542,000 89,122,000 87,576,000 86,030,000 85,652,000 122,624,000 140,393,000 140,393,000 129,359,000 142,425,000 129,526,000 134,300,000 5,518,856,000 HYIC Admin (2) - 396,000 589,000 633,000 728,000 837,000 695,000 458,000 435,000 514,000 503,000 1,322,000 947,000 40,629,000 Debt Service - 46,938,000 89,711,000 88,209,000 86,758,000 86,489,000 123,319,000 140,851,000 140,828,000 129,873,000 142,928,000 130,848,000 135,247,000 5,559,485,000
Interest Support Payments - - - - - (42,667,000) (79,347,000) - (38,130,000) (28,047,000) - - - - City Grants - - - (15,000,000) - - (155,595,000) ------Payments to City/TFA ------112,793,000 - 27,586,389,000
NET TO CITY (3) - - (15,000,000) - (42,667,000) (234,942,000) - (38,130,000) (28,047,000) - 112,793,000 - 22,026,904,000 (1) Debt service 2019> includes $150M in Completion Bonds (2) Inflated at 2.5% from 2019 (3) Net to City does not equal Project Revenues Minus Expenses Before 2019 due to interest earnings and availablity of bond proceeds to fund costs, etc.
Current HYIC Program City to HYIC 2007-2018 (358,786,000) HYIC to City 2007-2018 112,793,000 Net to City 2007-2018 (245,993,000)
HYIC to City 2019-2047 22,272,897,000
With HYIC Additional Bonds and Additional Infrastructure Capital Amount Additional HYIC Bonds (4) 350,000,000 732,212,000
Additional Infrastructure City Grant to The Shed (5) 75,000,000 156,903,000 WRY School (5) 100,000,000 216,418,000 Total 175,000,000 373,321,000
HYIC to City 2019-2047 w/ Additional Costs 21,167,364,000 (4) Assumes HYIC issues 30 Yr debt at 6.025% (5) Assumes City 30 Yr G.O. debt at 6.025%
Source: HYIC Continuing Disclosure, BJH
13 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
Table 6: Project Revenues and Debt Service
PROJECT REVENUES AND DEBT SERVICE
Recurring Revenues Non-Recurring Revenues Debt Service
$2,000
$1,800
$1,600
$1,400
$1,200
Millions $1,000
$800
$600
$400
$200
$0 2007 2008 2009 2011 2015 2017 2018 2019 2021 2025 2027 2028 2029 2031 2035 2037 2038 2039 2041 2045 2047 2010 2012 2013 2014 2016 2020 2022 2023 2024 2026 2030 2032 2033 2034 2036 2040 2042 2043 2044 2046 Source: HYIC FY 2017 Bonds OS, BJH
7. Tax Incentives and Project Costs
In addition to existing city-wide tax benefits like 421-a, new developments in Hudson Yards are eligible for a special tax incentive extended in 2006 to office developments pursuant to the Uniform Tax Exemption Policy adopted by the New York City Industrial Development Agency (IDA) for Hudson Yards (HY UTEP). By statute, the IDA may enter into agreements with developers to exempt sites from property taxes in exchange for a payment in lieu of taxes (PILOT) at a reduced level, when it finds that such benefits area necessary to induce new investment. The HY UTEP specified deeper incentives for earlier developments and for developments in the westernmost portions of the area. The HY UTEP provides that new construction, and certain renovations, Class A office developments in excess of 1.0 million square feet, and meeting other requirements, can qualify for an abatement of real property tax due and a lower PILOT payment. The program was established as a declining benefit that would reward early movers who would be pioneering a new office district, while later developers could qualify for a lesser benefit. The program was structured such that the first 5.0 million square feet of Class A office development could qualify for a 40% reduction of real property tax payable for 15 years, with a phase-in to full taxes in the 20th year.
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Subsequent developments could qualify for 25%, 20% and 15% discounts, each for the same 20-year term.
The practice of providing reduced property taxes to new Class A commercial developments was of long standing when the IDA adopted the Hudson Yards UTEP policy shortly after the zoning plan was approved. The decision makers in 2006 believed that the HY UTEP benefit was needed to stimulate private investment to ensure that the projected development schedules would be met, thus providing a strong revenue stream to minimize the City's financial exposure through interest support of the bonds. Given the lack of development in the District in the decades prior to 2006, and resultant dearth of real property tax revenue growth and the failure of prior redevelopment initiatives, it was unlikely that significant commercial development would occur without both the City’s investment in the No. 7 Line extension and new parks, and an incentive to developers to take on the risks of building. This was especially true in the case of the Related/Hudson Yards Project to be built over the MTA Rail Yard, and several other sites with technically challenging and costly conditions, in a setting that lacked an attractive environment and the amenities that tenants expect in an office district. Since the area was so challenged, the barriers to bringing in early investors and occupants were great and the early movers would have to take on greater risks that others would. Thus there was the need to incentivize the early projects, which depended on commercial tenants willing to be “pioneers”. As it turned out, the Related/Oxford Hudson Yards Project was the first to apply for the HY UTEP benefit for the site with the greatest fixed costs- the Eastern Rail Yard that required decking over the active LIRR operations. As of 2019 the 40% benefit is no longer available to future projects.
In 2005 and 2006 the city was still recovering from the post-9/11 recession. It is difficult to recall that economic environment from today’s vantage where employment in 2018 was 32 percent higher than in 2004.9
Some commentators have suggested that reduced tax payments under the HY UTEP are “foregone revenues” and therefore a form of subsidy. But the evidence is strong that this private investment would not have occurred without both the No. 7 Line extension and new parks, and the HY UTEP incentives. No direct subsidy payments have been made to developers in Hudson Yards, only a reduction in taxes that otherwise would not have been received by the City.
There are much deeper benefits (ICAP) available as-of-right in most other areas of the City outside of Midtown Manhattan, which facilitate new office construction and the expansion of employment centers into the boroughs. The Hudson Yards benefit was calibrated to spur development that was not otherwise likely otherwise occur. Since no such development was realistic without these tax incentives, the reduced taxes can hardly be seen as “forgone revenues” as some commentators have suggested.
9 New York State Department of Labor, Current Employment Survey, annual averages. 15 BJH Advisors, LLC | 224 Centre Street, 6th Floor | New York, NY 10013
Additional Costs
Fisher/Leite also assert that additional items such as a City capital contribution to The Shed, and to a planned school on the Western Rail Yard should be included as a project cost. These items were or will be appropriated through the City’s normal capital budgeting process, as it does for funding for cultural and educational facilities across all five boroughs. In the case of The Shed, the City’s capital contribution of $75 million is being matched by $475 million in private donations and pledges toward a total budget of $550 million. As with the No. 7 Subway Line and Bella Abzug Park, The Shed will be available to all New Yorkers and visitors. Likewise the new public school will serve eligible children from the area. These are traditional City investments providing and expanding needed services, which are never charged to a nearby project or building.
Hudson Yards and “Shifts” in Economic Activity
Some analyses of Hudson Yards have asserted that rather than promoting new economic activity, it has merely shifted economic activity from Midtown. Such assertions are belied by the city's continued capacity for growth. New York City in the 2010's is experiencing its longest sustained period of employment growth since at least the 1920's. The city's economy has diversified as it has decreased its dependence on financial services and developed strong professional and business services, media, tourism, health care and higher education sectors. The idea that real estate development is a zero sum game in a stagnant city is simply not correct. The city is subject to the vagaries of the national economy, which is likely to slow down in the coming years, but the long-term strengths of the city's economy remain strong. Expanding Midtown into Hudson Yards has created a whole new office sub-market to meet the needs of New York’s most dynamic companies. Those companies that have moved from other areas of Midtown opened up the former space for repositioning and reinvestment. In many cases the space vacated was aged and not attractive in today’s market and needed investment and modernization to meet new technology and tenant standards. For example, Time Warner Center which set the standard for corporate space when completed only 15 years ago, with 1.25 million square feet being vacated by Warner Media for its move to 30 Hudson Yards, will be totally stripped and renovated to modern office standards and become the Deutsche Bank Center. This dynamic is at play, at a slower pace and magnitude, with the City’s policy to encourage commercial and mixed-use districts in Long Island City, Downtown Brooklyn, Jamaica, East New York, and other areas. These programs are fundamentally healthy initiatives to keep the city’s commercial inventory attractive to tenants and competitive with offerings elsewhere.
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8. Conclusion
In the early 2000s it was obvious to the City government, civic leaders, and the business community that the city desperately needed more and modern commercial space. The Hudson Yards District was the clear expansion zone for the Midtown business district, and also had great capacity for new housing stock, hotels, retail and cultural uses. It also had daunting challenges, particularly a lack of transit access, little public open space, a dilapidated building stock, and an unsafe and unappealing streetscape. The City determined to make targeted investments to spur new development—office space to retain and grow employment, and new housing and other uses to create a twenty-four/seven District for New Yorkers of all incomes. It committed to invest $3.0 billion, since increased to $3.5 billion, to accomplish this goal, through a creative and prudent finance structure that effectively is self-financed. With the passing of 14 years the verdict is in: over 30 million square feet of new development has already occurred, more than initially projected by this time. The commercial development was spurred by a District-wide tax abatement program, with carefully defined levels that reduce as the need for incentives declines and uses no direct cash subsidy, only a reduction in taxes that would otherwise not be generated. From a financial perspective, HYIC required interest support for 5 of the last 14 years, but has now commenced paying dividends to the City and is likely to remit over $21 billion in new revenues by 2047, giving the City a new revenue source for the future. The MTA has received an immediate $1.2 billion in payments and retains valuable development rights, obtained an improved storage yard for the LIRR, and it accomplished the first subway system expansion in decades. By any reasonable definition the Hudson Yards project can be seen as a success in terms place-making, providing affordable housing, growing the City’s economy, expanding the City’s tax base, and securing a new revenue stream that will augment the City’s ability to provide quality services to all New Yorkers for decades to come.
Acknowledgement: This report was prepared with the support of the Related Companies and Oxford Properties.
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