The Time Warner Center: Mixed-Use Development
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N9-208-081 JANUA RY 30, 2008 A. EUGENE KOHN FRANK MONTERIS I J O S H K U N T Z The Time Warner Center: Mixed-Use Development When our office was at the corner of Madison Avenue and 59th Street, I used to look out the window and stare at the empty Coliseum on Columbus Circle. All distances from New York are measured from the statue at the center of that circle. I figure that if New York is the center of international business and culture, and this site is the center of New York, then I believe we are building at the center of the world. — Stephen M. Ross, The Related Companies, founder and CEO On February 4, 2004, Related Companies CEO Stephen Ross stood outside the lavish grand opening party for the Time Warner Center, New York City’s, and Related’s, newest and most controversial mixed-use development. Located on Columbus Circle at the southwestern corner of Central Park, this 2.8 million square foot (sf), $1.7 billion “Gateway to the West Side” was a long time in the making. From conception to finish, the Time Warner Center’s development spanned three New York City mayoral administrations, three grueling request for proposal (RFP) processes, one failed developer-financier partnership, avid and concerted community opposition, the 9/11 terrorist attacks, two fatal construction accidents, and a large fire only months before the scheduled opening (see Exhibit 1 for a timeline of key events). While Ross had successfully marketed nearly all of the Center’s space, questions remained over the long-term viability of the project. Mixed used development on such a scale posed a particularly large risk in Manhattan, where almost all properties were dedicated to a single use, or at best had ground level retail. Fifth Avenue’s Trump Tower combined above-ground retail with office and residential space in a prestigious retail location, but over the two decades since its 1983 opening had seen retail performance falter.1 Upper floor retail in mixed use development had succeeded in Chicago’s WaterTower Place, but the several other successful urban mixed use developments— Boston’s Copley Place and Toronto’s Eaton Centre, for example—had but one or two upper floors of shops, not the seven of WaterTower Place. The Center had already benefited from an upturn in the residential property market, but the situation could have easily differed. The real question was whether retail rents would hold up longer term. This issue was doubly important given that Ross had sold Time Warner a substantial amount of the Center’s office space at cost in order to assure an important commercial client. Doing so meant the residential, hotel, and retail space would be responsible for much more of the Center’s profitability. ________________________________________________________________________________________________________________ Lecturer A. Eugene Kohn, Frank Monterisi, Josh Kuntz, and Global Research Group Senior Researcher David Lane prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 208-081 The Time Warner Center: Mixed-Use Development Related Companies2 Ross founded the Related Housing Companies in 1972 with a business plan that built uniquely on his training as a tax lawyer and his experience as a financial executive. He envisioned an affordable- housing company that would both build apartments and handle tax-credit financing. The finance side business would generate a steady income stream, he explained, but “the big picture was in development.” Throughout the 1970s, Related focused on developing quality, government-assisted, multifamily housing developments. Simultaneously, the firm established its finance business to profit from tax incentive programs created by the federal government to promote affordable housing. The financial side of Related’s operations bundled tax credits from developers and sold them to investors looking to offset their own tax bills. In 1997, Related spun out most of this business as the separate company, CharterMac. Throughout the 1980s and 1990s, Ross and his team gradually broadened their focus from affordable housing into a wider range of mixed-use, office, and luxury developments. The cash flow from the affordable housing and finance businesses allowed Related to carry the cost of large project teams through the ups and downs of the real estate cycle, a distinct advantage over real estate developers attempting risky, large-scale projects without a similarly reliable source of funds. To manage growth, Ross organized Related into three divisions—Development, Management, and Financial Services. The result was a fully integrated company focused on mixed-use and multifamily development with a property portfolio worth billions. As described on its website, Related’s strategy was to “find value-added opportunities in markets with high barriers to entry.” When he unveiled his ambitious plans for what became the Time Warner Center in the early 1990s, Ross put this strategy to the ultimate test. The Process The Site3 Columbus Circle, Manhattan’s only traffic circle, was located at the southwest corner of Central Park, at the intersection of 59th Street and Central Park West (see Exhibit 2 for a map). All distances from New York were measured from the statue of Christopher Columbus, which stood prominently at the Circle’s center. In 1954, the New York Coliseum was built on the Time Warner Center site, and served as New York’s convention center for 30 years until the opening of the Jacob Javits Center at 34th Street and 11th Avenue. The Coliseum’s loss was an opportunity for the Metropolitan Transit Authority (MTA), the municipal transportation agency that controlled the vacant building and the valuable ground beneath. Saddled at the time with ongoing financial difficulties, the MTA was eager to sell the site and allocate the proceeds to capital improvement projects. The location was spectacular. At the convergence of several subway lines, a popular tourist destination, and the meeting point of Manhattan’s West Side and Midtown, the Coliseum site was a developer’s dream. 2 The Time Warner Center: Mixed-Use Development 208-081 The First Request for Proposal In 1985, the MTA agreed to a $455 million development plan submitted by Boston Properties with the financial backing of Salomon Brothers. The futuristic Moshe Safdie design towered 925 feet in the air, however, drawing the ire of the influential Upper West Side Community Board, which was led by Joseph Rose—a member of an influential Manhattan real estate family who in 1994 was named chairman of the City Planning Commission—and publicly supported by luminaries including Jacqueline Onassis. The board brought lawsuits contending that the building would cast depressing shadows on Central Park. In response to community opposition, Boston Properties returned in 1988 and again in 1989 with scaled down designs from David Childs of Skidmore, Owings, Merrill. Despite the improved reception to revised building design, the developers’ partnership began to fall apart. Real estate prices tumbled, and Salomon Brothers pulled out in 1989. In the depressed market, the MTA and Boston Properties began exploring interim uses for the Coliseum, including a retail center anchored by Kmart. With nothing finalized by 1994, Boston Properties withdrew its proposal. Over the following two years, the City Planning Commission (now headed by Joseph Rose) worked with the MTA on design guidelines that would be acceptable to all parties. Rudy Giuliani, the new mayor, also re-energized the process in an effort to bring much needed tax revenue to the city. (Any proceeds from the property sale would accrue to the state-funded MTA, but the city would be entitled to future property tax revenue.) While Giuliani did not have formal veto power over New York City development, his powers of appointment and inherent status as the primary spokesman for the city’s interests gave his voice considerable influence. Building a New Team The whole time, Stephen Ross watched out his office window as nothing happened on the Coliseum site. With the real estate market beginning to rebound, he sensed an opportunity to compete in the next round of bidding. However, with a project of this magnitude, he would need to assemble a powerful team. For equity financing, Ross turned first to Bill Mack, founder and senior partner at Apollo Real Estate Advisors, a leading real estate financier. Mack had long seen potential in the site; his father, a contractor, had demolished the site to make way for the Coliseum in 1952.4 Apollo signed on to provide $255 million in equity. For retail expertise, Ross approached Ken Himmel, renowned in the industry for his success in developing multi-level “vertical retail” at Chicago’s Water Tower Place and Boston’s Copley Place. His expertise was valuable—up to this point in time, multi-floor retail had failed miserably in New York City. Himmel agreed to partner with Related, and eventually joined the firm on a full-time basis. For the design, Ross scored a coup by recruiting David Childs as the team’s architect. Given their track record and experience with the Columbus Circle site, Childs and his team from Skidmore, Owings, Merrill were a natural fit. In addition, Himmel brought in Howard Elkins of Elkus/Manfredi to design the Center’s retail element.