STATE OF PUBLIC SERVICE COMMISSION

At a session of the Public Service Commission held in the City of Albany on November 7, 2007

COMMISSIONERS PRESENT:

Patricia L. Acampora, Chairwoman Maureen F. Harris Robert E. Curry, Jr. Cheryl A. Buley

CASE 07-C-0992 - Petition of Inc. Pursuant to Section 99 of the Public Service Law for Approval to Sell a Portion of an Office Building.

ORDER APPROVING TRANSFER

(Issued and Effective November 7, 2007)

BY THE COMMISSION:

INTRODUCTION By petition dated August 17, 2007, Verizon New York Inc. (Verizon) notified us of its intention to sell approximately 90%1 of an office building located at 375 , New York, New York to TIP Acquisitions LLC (TIP). Verizon would retain an ownership interest in the portions of the building used for operation of central office equipment and cable facilities. Verizon intends to use the proceeds of the sale for general corporate purposes in New York State, including relocation of employees to other areas in the State, maintaining service quality, network reliability and security, and reducing costs. Verizon asked that we allow the transaction to become effective under the

1 The portion of the building subject to the sale includes the ground floor, including the lobby , the Low Rise Unit (floors 2-7 and 11-13), the High Rise Unit (floors 14-32), and a portion of the cellar (Buyer Units). CASE 07-C-0992 constructive approval provisions of Public Service Law (PSL) §99(2), or, in the alternative, rule on the petition at the Commission session scheduled in November. Expeditious action would allow Verizon to begin relocation of its personnel and TIP to obtain financing and begin the renovation and leasing process.

THE PROPOSED TRANSFER Verizon states that it owns a 100% fee interest in the property, with the right to occupy the entirety of the 32-story office building, a portion of which houses Verizon telecommunications switching equipment and cable facilities. Specifically, the petition describes Verizon’s fee simple ownership of as including land, an office building, a plaza and certain below grade improvements at Block 113, Lot 150 of the tax map of the City of New York, Borough of , and the air rights to Block 113, Lot 100. 375 Pearl Street will be conveyed subject to certain easements along the western boundary of the premises benefiting Bergtraum High School. The air rights are part of the Buyer Units. Verizon explains that it regularly reviews its real estate holdings to determine whether cost savings and other efficiencies can be realized through consolidation of work locations and selling properties or terminating leases. Verizon plans to relocate its employees to some of its other New York properties. According to Verizon, the market for high-end office space in downtown Manhattan, where 375 Pearl Street is located, is strong and demand for such space continues to outpace supply. As a result, Verizon has the opportunity to realize significant value from its sale of 375 Pearl Street, while at the same time reducing its expenses. Following the sale, Verizon will be able to more efficiently utilize some of its other New York properties, to which the office functions maintained at 375 Pearl Street will be relocated. Because central office equipment is located within the

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CASE 07-C-0992 building, Verizon will retain an ownership interest in floors 8-10 and portions of the cellar, including the cable vault. In April 2007, the petition states that Verizon engaged the services of a real estate broker; the broker prepared an information package distributed to 201 prospective purchasers, solicited bids, provided a confidential offering memorandum to 48 potential purchasers, and contacted potential purchasers to determine their interest. With the broker’s assistance, Verizon obtained and reviewed five offers during an initial round of bidding and four offers during a second round. Verizon states that, on August 14, 2007, it entered into a Contract of Sale for 375 Pearl Street to TIP, described in the petition as the most responsible and responsive final bidder, with substantial experience in acquisition and redevelopment of office, residential, and mixed-use properties. The total purchase price under the Contract of Sale is $172.5 million. The petition states that the Contract of Sale allows Verizon to lease some of the Buyer Units on: floors 19-32 for up to 9 months from the closing date and on floors 1-18 for 14 months from the closing date, for a net rent of $20.00 per square foot per annum, plus electric, real estate taxes, and operating costs. Verizon has the right to terminate the lease after 9 months by providing 60 days written notice, with no further obligations on the part of Verizon. Verizon also has the right to maintain the illuminated Verizon sign at the top of the building during the first nine months after the closing for no charge, and following the Buyer’s renovation of the building for approximately $1 million per annum subject to certain termination rights of each party. According to the petition, special provisions are established to protect telecommunications equipment and cable facilities in the building from any potential adverse effects from TIP’s ownership. These include waterproofing and sprinkler installation on the floor directly above Verizon’s low rise floors,

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CASE 07-C-0992 independent heating and cooling systems for, and restriction of access to, the Verizon floors, limitations on TIP’s right to sell the property during initial building renovations, right of first offer, and, under certain circumstances, right of first refusal if TIP seeks to sell its interest. Verizon states that the sale of the property is clearly in the public interest. It notes that the sale of its interest in the building assists the company in carrying out its long standing consolidation program to combine its work locations and make optimum use of its real estate holdings. It also states that its retention of the sale proceeds would assist in achieving greater efficiencies through relocation of its employees, reducing costs associated with ownership and operation of the building (approximately $19 million per year), and allowing the company to improve service quality, network reliability, and security. Verizon asserts that the sale will have no adverse affect on its operations or the provision of service to its customers; it will improve the overall efficiency of its operations; and, its retention of the intrastate gain will help the company to continue investing in New York State. The petition states that the sales price is reasonable because it resulted from a competitive bidding process conducted by an established real estate firm and involved a large pool of potential purchasers. This process, according to Verizon, resulted in the best price available for the property interest. Verizon proposes that it record the gain associated from the sale of the buildings and the building fixtures as net salvage in Account 3100, Accumulated Depreciation, and that it treat proceeds from the land as a gain charged to Account 7150, Gains and Losses from the Disposition of Land and Artworks. Verizon estimates that the sale will result in a total company, pretax gain of $72.54 million ($67.78 million for the land and $4.76 for the building). It allocates the net proceeds of the sale between the

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CASE 07-C-0992 land and the building, based upon the results of an independent appraisal conducted by Pearson Realty Services, Inc. (Pearson). Verizon requests permission to record the intrastate pre-tax gain of approximately $43.17 million allocated to the land portion as current income to Account 7150 Gains and Losses from the Disposition of Land and Artworks. Verizon states this accounting is reasonable because it will provide Verizon a small measure of relief from the serious shortfall in New York intrastate earnings. Verizon also states that retention of the gain would increase its ability to survive and compete in an increasingly competitive market, where it has already lost millions of access lines and experienced significant declines in revenues. Verizon notes that recording the pretax gain allocated to the land portion of the properties in Account 7150 is consistent with Generally Accepted Accounting Principles. Verizon states that its retention of the gain from this sale is consistent with Commission determinations, including numerous orders approving transfers of real property and allowing the company to retain the gain from the transactions in light of the significantly competitive telecommunications market. Further, the company notes that in its Competition III Order, the Commission stated that it expected to allow utilities facing significant competitive pressures to retain refunds and gains on the sale of assets so long as cost-of-service based regulation is no longer relevant.2 The Pearson appraisal, dated May 1, 2007, estimated the total market value of the land and building to be $264 million, based upon sale and use of the building in an “as is” condition. As Verizon retained 9.5% of the property, the appraised value of

2 Case 05-C-0616, Transition to Intermodal Competition in the Provision of Telecommunications Services, Statement of Policy on Further Steps Toward Competition in the Intermodal Telecommunications market and Order Allowing Rate Filings (issued April 11, 2006) (Competition III Order).

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CASE 07-C-0992 the property interest sold was $238.9 million, in excess of the $172.5 million purchase price.3 In response to inquiries from the Department of Public Service Staff (Staff), Verizon explained that, in accepting the bid, it concluded that $172.5 million was deemed the best offer received, considering the costs the buyer would need to incur to cut new windows in the façade, clear and renovate the space, and remove some asbestos to convert it to the intended final configuration. The plan for developing the space as office space was initiated after the appraisal was conducted.

ENVIRONMENTAL QUALITY REVIEW Under the State Environmental Quality Review Act (SEQRA), Article 8 of the Environmental Conservation Law, and its implementing regulations (6 NYCRR Part 617 and 16 NYCRR Part 7), all state agencies must determine whether the actions they are requested to approve may have a significant impact on the environment. Other than our approval of the action proposed here, no additional state or local permits or approvals for the sale of the building are required, and so a coordinated review under SEQRA is not needed. We will assume Lead Agency Status under SEQRA and conduct an environmental assessment. SEQRA regulations (6 NYCRR §617.6(a)(3)) require applicants to submit a completed environmental assessment form (EAF) describing and disclosing the likely impacts of the proposed actions. Petitioner submitted a full Part I EAF long-form and an addendum describing additional work to be undertaken by the buyer upon the building sale. Staff made two visits to review the property in question. The building houses three floors of central office equipment

3 In the eight other property transfer petitions that Verizon filed in recent years, the appraised values and actual net proceeds received were fairly close, with four petitions indicating that proceeds received were greater than the appraised value.

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CASE 07-C-0992 operated by 20-30 Verizon personnel and office space occupied by approximately 1500 Verizon personnel with a variety of clerical and other office duties. The property is zoned C 6 4, a high-density commercial central business district where retail, service, residential, and commercial uses are allowed. On one side of the building is the Bergtraum High School. With the exception of Pearl Street and the entrances to the and the High School, the streets are blocked and controlled by the Police Department for security purposes. One Police Plaza, Police Department Headquarters, is adjacent to the High School. After the sale, the central office equipment and operating personnel will remain. The additional 1500 Verizon personnel will be relocated to various other Verizon offices in New York City and Westchester County. Three emergency electrical generators will be part of the sale and a new generator will be installed by Verizon as a backup energy supply for the central office equipment. The building has few windows and asbestos may be found in the floor tile. The new owners intend to re-clad the exterior façade, gut the floors, cut new windows into the façade, remediate the asbestos, install new interior walls and new infrastructure (including wiring and communications), and eventually lease the property for commercial office space. There are no plans to expand the footprint of the building. It is our understanding that building permits for this work will be required, and those permits would include requirements for measures to mitigate environmental impacts resulting from the construction. The proposed action is the approval of the sale of a portion of Verizon’s interest in the property at 375 Pearl Street, New York, New York. The proposed action does not meet the definition of either Type 1 or Type 2 actions that are contained in 6 NYCRR §§617.4 and 617.5 and 16 NYCRR §7.2, so it is classified as an “unlisted” action requiring SEQRA review. After review of the

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EAF and the petition, we conclude, based upon the criteria for determining significance listed in 6 NYCRR §617.7(c), that there will be no changes due to the sale of the property interests that will result in significant adverse environmental impacts. Any environmental impacts from subsequent construction by the purchaser will be mitigated pursuant to the requirements of other local permits. Staff completed Part 2 of the EAF long-form. As lead agency, we determine that the action proposed in the petition will not have a significant impact on the environment and adopt a negative declaration pursuant to SEQRA. Because no adverse environmental impacts relating to the proposed action were found, no Public Notice Requesting Comments is required or will be issued. A Notice of Determination of Non-Significance for this unlisted action is attached. The completed EAF will be retained in our files.

DISCUSSION The sale of approximately 90% of the Verizon office building located at 375 Pearl Street in Manhattan is in the public interest. The company no longer has a need for the property; and, expenses, including taxes, maintenance, and customer liability on the property (approximately $19 million per year) will be eliminated. The sale of the property will not jeopardize Verizon's ability to provide service to its customers because, under the Contract for Sale, Verizon retains the space required for its equipment and facilities; and, security protections are established for the safe operation of the equipment necessary to provide service. The company also retains the right of first offer and, under certain circumstances, right of first refusal, if TIP seeks to sell its interest. The sale, conducted as an arms length transaction, will assist the company in carrying out its consolidation plans to achieve more efficient use of its real estate properties.

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CASE 07-C-0992

Although there is a substantial difference between sales price and the independent appraisal submitted by Verizon, the sales price, according to Verizon, takes into account the substantial costs associated with renovation, fenestration, and potential asbestos removal. On the other hand, the appraisal was based upon evaluation of the building “as is,” without consideration of the considerable renovation costs. Further, the competitive bidding process was thorough and extensive and established a market value for the property through an independent market valuation process. Thus, as pointed out by Verizon, the process resulted in the best sales price available in the market for the property for purchase by the most responsible bidder. Accordingly, we determine that the competitive bidding process established a market value for the property and that the price is reasonable. In approving property transfers, we must properly apportion any gains by balancing the interests of the company's customers and shareholders. As we explained in other orders authorizing Verizon to transfer property,4 Verizon is subject to significant competition and our regulatory decisions should reflect that reality. In competitive markets, there is less need for economic regulation, such as specific regulatory accounting, and the treatment of the gain in rates will be controlled by the market. Thus, it is reasonable, consistent with our analysis in

4 Cases 05-C-0091, et al., Verizon New York Inc. - Approval of the Transfer of Three Parcels of Property in Manhattan for the Sum of Dollars $120 Million, Order Approving Transfers (issued May 20, 2005); Case 05-C-0510, et al., Verizon New York Inc. - Approval to Sell a Portion of an Office Building, Order Approving Transfer (issued June 15, 2005); Case 05-C-1089, et al., Verizon New York Inc. - Approval to Sell 555 W. 34th Street and 5030 , New York, New York, Order Approving Transfer (issued December 13, 2005); Case 06-C-0971, et al., Verizon New York Inc. - Approval to Sell 770 Eleventh Avenue, New York, New York, Order Approving Transfer (issued November 1, 2006); Case 07-C-0330, et al., Verizon New York Inc. - Approval to Sell Three Buildings as Part of a Large Multi-State Real Estate Transaction, Order Approving Transfer (issued June 27, 2007).

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other orders, to allow the company to retain the proceeds of this sale for its continuing operations. Accordingly, we approve the accounting and ratemaking treatment proposed by the company. To maintain an appropriate balance, we reserve the right, in the event circumstances change, to use the gains from the proposed property transfer to offset rate base, or to take whatever other appropriate action is necessary. This requirement is consistent with the conditions established in our other orders approving Verizon property transfers.5 In accordance with statements in Verizon’s petition, we expect that Verizon will use a significant portion of the proceeds from this property transfer to continue to support its service quality and carry out obligations to upgrade and maintain its physical plant. The Commission orders: 1. The petition of Verizon New York Inc. for sale and transfer of the land and 90% of an office building located at 375 Pearl Street, New York, New York is approved pursuant to Public Service Law §99(2), subject to the conditions established in this Order. 2. Within 60 days of the consummation of the transaction described herein, the Company shall notify the Secretary to the Commission in writing. If such transaction is not consummated within one year of the issuance of this Order, the Commission may rescind its approval. 3. This proceeding is continued, pending compliance with ordering clause 2, following which it shall be closed. By the Commission,

(SIGNED) JACLYN A. BRILLING Secretary

5 See Case 06-C-0971, et al., Verizon New York Inc. - Approval to Sell 770 Eleventh Avenue, New York, New York, Order Approving Transfer (issued November 1, 2006), p. 5.

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STATE OF NEW YORK PUBLIC SERVICE COMMISSION

CASE 07-C-0992 - Petition of Verizon New York Inc. Pursuant to Section 99 of the Public Service Law for Approval to Sell a Portion of an Office Building.

NOTICE OF DETERMINATION OF NON-SIGNIFICANCE

NOTICE is hereby given that an Environmental Impact Statement will not be prepared in connection with the approval by the Public Service Commission of the petition by Verizon New York Inc. for approval of the sale and transfer of land and a portion of an office building located at 375 Pearl Street, New York, New York. This decision is based on our determination, in accordance with the State Environmental Quality Review Act (Environmental Conservation Law Article 8) and implementing regulations (6 NYCRR Part 617) that such action will not have a significant adverse effect on the environment. The sale and transfer of the property will not have any significant environmental impacts. Modification of the property by the new owner will be subject to other applicable law. The address of the Public Service Commission, the lead agency for the purposes of the Environmental Quality Review of this sale and transfer, is Three Empire State Plaza, Albany, New York 12223-1350. For further information, contact Richard H. Powell at (518)486-2885 or the address above.

JACLYN A. BRILLING Secretary