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.
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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.
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The Second RFP
In 1996, the MTA initiated a second RFP with more specific guidelines around public access and integration with the local community. “We never were trying to design the building for the architects,” explained Rose. “We were trying to incorporate values into the project.” Nine companies responded to the RFP, and by spring 1997 officials winnowed this group down to five finalists: Forest City Ratner, Millennium, Related, Tishman Speyer, and Trump.5
In July, word leaked out that the MTA would recommend Millennium’s proposal, ostensibly for financial rather than aesthetic or architectural grounds. Anxious to cash out and avoid another decade-long struggle, state officials were reportedly attracted to Millennium’s agreement to pay over $300 million at signing (as opposed to waiting until any litigation was resolved).6 Sensing that such short-term focus was not in the city’s best interests, Giuliani called a press conference where he lashed out at the agency, claiming, “The MTA has really no concern for the future of the city. All they are concerned about is how much they make.” Giuliani announced that he would veto the deal.7
The mayor used the moment to flex his political muscle. Giuliani insisted that a 100,000 sf cultural and theater space be included in the development—free of charge, with no tax credit or increase in buildable FAR in return. Deputy Mayor Randy Levine elaborated, “We told them that it was never about money, that this was about a series of things, price being only one. The most important things is the way the project enhances the neighborhood, because New York City has to live with this for the next 50 or 100 years.”8
The Third RFP
As the third RFP process began in mid 1997, Ross considered the conflicting interests of the state (the MTA) and the city (Giuliani), which shared authority over the site. “Each of these parties puts an emphasis and a priority on somewhat different things,” explained Carl Weisbrod, former president of the city’s Economic Development Corporation.9
The MTA wanted two things: to maximize the price a developer would pay for the project, and to choose a proposal that would pass public, city, and state scrutiny. “In the end,” Ross remarked, “The MTA wanted certainty. They wanted to avoid being shot down by Giuliani, and they wanted to avoid the court battles they had endured in the failed Boston Properties deal.”
Giuliani had a different set of interests. On one hand, he wanted to create an enduring landmark and appease the powerful community groups. On the other, Ross believed that Giuliani wanted to use this development opportunity to assert his power as mayor. In March 1998, the third RFP included detailed requirements for a theater to house Jazz at Lincoln Center, a non-profit arts organization.
Ross figured that he could improve his bid by embracing the theater space as a central element in his design. Most other bidders, he figured, would stick the theater in the least valuable space in order to minimize its financial drag on the project as a whole. To do otherwise may not have been the economically rational decision, but Ross argued that the site was about more than just dollars and cents: “I always thought that this was one of the last sites that had truly grand potential. . . . This would be one of the buildings that would define New York City.” Ross elaborated, “You have to be an optimist to take on a massive job like this. Putting this development together, we had to not only understand how much of each property type to plan for now, but how much the market would accept in five years time.”
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Time Warner: The Last Piece of the Puzzle?
At this point, Ross still believed that he was at a disadvantage relative to the competition. Millennium remained the frontrunner given the aggressive financial concessions its management had made. The Ratner bid had also garnered attention—designed by Cesar Pelli, it featured a Sears department store that would generate new jobs and tax revenue for the city.10 Ross did not want to lose the site, but worried that overbidding might easily bankrupt his company.
Ross gambled that he could improve his position by pre-selling office space in the project to a large company. Doing so would bolster the project’s credit rating while also assuring a significant tenant. “This was a major turning point,” Apollo’s Bill Mack said. “One thing that won the day was the foresight to see that this would work as office space without at tax abatement at a time when no new office buildings were being built in New York.” Given its prominent Midtown location, the Related team decided to target major media and entertainment companies, whose headquarters clustered in the area.
When Ross met with Time Warner CEO Dick Parsons, he knew that the company was not looking for new space. In fact, Time Warner still had several decades left on its existing lease. But as Ross explained to Parsons, “This isn’t just about renting space. It is about showcasing your company as a unique, cutting edge media company and creating an icon for New York City.” The meeting lasted only 15 minutes. Parsons sat through the pitch in silence. At then end, Ross recalled, he looked up and said, “Let’s do it. I will have board approval within 60 days.”
The basic terms of the deal called for Related to sell office space to Time Warner at cost plus a modest development fee. Time Warner agreed to issue a letter of credit for the office space, thereby effectively providing financial backing for the development in case it ran into financial distress. Time Warner’s equity commitment totaled $56 million.
Ross explained the merits of the deal: “Time Warner got office space at cost that later they could easily sell at a premium. We pre-sold the office space and lined up a development partner that no one would flinch at. We placed Jazz in a prominent location and worked very hard to sell our design to all the constituents. Now the MTA and the city knew that our development plan was a serious one.” With these elements in place, Related bid $345 million for the land and an additional $17.25 million to start demolition seven months early. With a final bid of $362.25 million and a commitment to pay the cost to build Jazz at Lincoln Center, Related received word that it was the winning bidder on July 28, 1998.
The Project
The Design
Childs imagined the development as an integral part of the city, reclaiming an underutilized piece of Manhattan. He split the building into two towers, visually extending 59th Street in deference to the existing grid of city blocks. The design also accentuated the curvature of Columbus Circle and followed the direction of Broadway as it cut through the city. To accomplish these goals, the team moved the south tower forward and designed the two towers as parallelograms, maximizing Central Park exposure (see Exhibit 2).
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With 2.1 million sf of buildable FAR, the site represented more usable space than the Empire State Building. The complex plan called for four property types—hotel, office, residential, and retail—plus the theater. To determine a viable mix of property types, the Related team set out to understand the state of the current market. In 1997, New York real estate was again showing life after a long stagnancy (see Exhibit 3). Manhattan rents were trending up as vacancy rates declined, and there had been no major office construction for years (see Exhibit 4). Related settled on the following allocation for the towers (see Table A and Exhibit 5).
Table A Allocation of Space in the Towers
Tower Zone Square Footage Gross Square Footage Mandarin Oriental North 218,000 275,000 Related/Apollo Both 510,000 591,000 Time Warner South 712,000 866,000
Source: Company documents.
The fact that the Center was designed as a single unit, in which all of its components came on line simultaneously, created additional challenges for the mixed use complex. As Himmel described it:
The mega-structure model does not allow for phasing and locks you into decisions about planning and design and marketing years in advance. What it means quite simply is that you better have a firm vision for the program and project. You’d better have deep relationships with tenants and users, and you’d better be prepared to create a framework for retail, restaurants, and entertainment that is both innovative and flexible. The changes that will occur over a typical five year development process will be very frustrating, but necessary to get to the best solutions and end product.
The Vertical Retail Challenge
Designing what became known as the “Palladium” retail area at the base of the building was a major source of debate. It incorporated 338,000 net rentable sf (369,000 gross sf) of retail space and 101,000 zone sf of theater space (175,000 gross sf). According to Ross, “It was a natural convergence point. With so much human traffic around the site, we knew that the engine to development would be retail.” From an economic standpoint, Related was counting on high rents from retail tenants to provide returns after the residential condominium apartments had been sold. The shops, restaurants, and public areas would be the Center’s face to the surrounding community, generating most of the foot traffic.
It was Ken Himmel’s job to make vertical retail viable in Manhattan, but as he put it: “Taking on the daunting challenge of vertical retail in Manhattan in the year 2000 was nothing short of insanity according to most development veterans here in the city. After all, the likes of Trump, Vornado, and Tishman Speyer had all dabbled with this in the past and had met great resistance to it.” Street level space always commanded a high price, but securing high rents for retail on upper floors would be problematic. Himmel estimated that the second, third, and fourth floors would rent for a discount of 40% to 50% relative to space on the ground level. In response the team generated an innovative strategy: they would locate very high-end restaurants, such as Thomas Keller’s Per Se, on the third
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and fourth floors. As “destination” restaurants with world-renowned chefs, Himmel figured that a street level location was less important (and the privacy and views perhaps more important). For the other floors, Himmel focused on premium retailers he hoped would draw shoppers but also fit the desired image of the building.
The cultural center was another design challenge. Childs controlled the project’s master plan, but Lincoln Center hired its own architect, Rafael Vinoly, for the Jazz space. Emboldened by the mayor’s support, the team from Jazz insisted on placing the theater at a prominent ground level location. After considerable debate, the parties reached a compromise that gave ground floor signage to Jazz @ Lincoln Center while placing the actual theater in the front of the fifth floor, looking out at Columbus Circle. The Related team hoped that theater traffic would be drawn to the upper retail floors, enhancing the Center’s value for all its tenants (see Exhibit 6).
Financing
Related estimated the development budget at $1.72 billion. The land cost alone totaled $485 million, including payment to the MTA, the cost of Jazz @ Lincoln Center, and transaction costs. Constructing the building was estimated at an additional $853 million over three years. Total soft costs, including marketing and consultant fees, were expected to run to an additional $402 million.
A 50/50 joint venture with Apollo provided the bulk of the equity financing. Related agreed to manage the development process and contribute 10% of the equity. Apollo would provide the other 90% of the capital and receive a preferred return of 9.5% on the first $166 million, and a 20% preferred return on the balance of the equity. Any profit over that amount would be shared equally.
The equity was carved into pieces. Time Warner contributed $56 million for the space it would own. Mandarin Oriental and Related/Apollo contributed $49 million each to build the hotel space. Related/Apollo provided $283 million for the rest of the building. Finally, Lincoln Center became owner of the theater space for the bargain price of $10. (Exhibit 7 details the development budget and Exhibit 8 details the capital structure.)
In addition to the equity, GMAC provided $1.3 billion in debt financing, the largest construction loan in history at the time. This included a $1.1 billion construction loan at 8.5% interest and a $200 million mezzanine loan at 18.0% interest.
Marketing
Selling the Residences
With the major partners in place and Himmel working on the retail component, Related hired Susan DeFranca to oversee the sale of 198 apartments comprising 450,000 sf within the Center. Most of the apartments were located above Time Warner in the south tower, with the remaining 65 above the Mandarin Oriental in the north tower. At the time, Related expected the costs of these ultra- luxury units to total an average $1,000 per sf. Offering prices would start at $1,500 per sf, in hopes of raising a gross total of over $900 million.
Given the risk inherent in leasing the Center’s retail space and the fact that a significant portion of its office space had been sold at cost, residential pre-sales would spearhead the overall financial
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returns of the project. In part this was because DeFranca needed to begin marketing the residences before Related could publicly announce any of its retail or hotel clients. Her job was also complicated by the need to assure prospective residential purchasers that their privacy would not be threatened by the activities and associated traffic brought by the Center’s hotel, offices, and shops.
DeFranca positioned the building as “Five-Star Living” based on (1) an ideal location, (2) unparalleled Central Park views, (3) inspired architecture, (4) award-winning amenities, and (5) sophisticated technology. The sales effort got underway in August 2001, selling $250 million worth of units in the first few weeks. Momentum stalled after the terrorist attacks of September 11.
Newspapers across the globe ran stories on the same theme: Who now would want to spend millions of dollars on an apartment in a high profile Manhattan building that featured a North and a South Tower? DeFranca was also faced with fears on the part of prospective buyers that North Tower views would be obscured by the adjacent Trump Tower.
Pricing Prospects
In the face of these challenges, the marketing team debated approaching Mandarin with a proposal to rebrand the North Tower apartments as the “Residences at the Mandarin Oriental.” The tagline would be, “Become a permanent guest at the Mandarin.” But DeFranca’s team worried that, although the pitch might appeal to worldly ultra-luxury buyers familiar with the Mandarin brand, few in the United States knew anything of the hotelier. As a result, the team was unsure about how much their proposal was actually worth.
In addition to the condominium apartments, the ultimate returns on the Center would depend on market conditions upon completion of construction. Related estimated that the office space in the North Tower other than Time Warner would amount to 211,000 net sf that could rent at $85 per sf. The Mandarin would likely charge an average $700 to $800 a night for the hotel rooms. With 251 rooms, the hotel would generate a stabilized net operating income of $28 million after two years.
Retail totaled 290,032 sf plus an additional 47,935 sf in restaurant space. Related forecasted a blended average of $90 per sf for retail and $85 per sf for the restaurants.
Finally, Jazz @ Lincoln Center would occupy 174,000 sf with a commanding view. A retail tenant might pay $85 to $150 per sf for the space. Hard construction costs on the space were forecasted at over $350 per gross sf.
Synergy or Entropy?
As Ross paused at the threshold of the Time Warner Center entrance to take in the view of Central Park beyond Columbus Circle, he contrasted all the hard work he and his team had already invested in this mixed use project with the returns that Related earned on single use residential projects. In a typical luxury rental building that included an affordable housing component, Related was realizing a 10% annual return on cost. For luxury condominium projects, the return had been rising significantly since the late 1990s. In contrast to initial expectations, the costs of the Time Warner Center residences in reality averaged a total $1,500 per sf, and had been offered for sale at $2,500 per sf. In the Mandarin Oriental and Time Warner, Ross had reliable long-term partners in the Center. The only remaining question was whether the huge structure would prove itself greater than the sum of its parts.
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Exhibit 1 Time Warner Center Timeline of Key Events
1985 Initial MTA/Boston Properties Deal 1994 Boston Properties Deal Collapses 1996 Second RFP Submission Fall 1997 Third RFP submission Spring 1998 Final RFP submission July 1998 Developer selection January 2000 Demolition commencement July 2000 Land closing August 2000 Construction Commencement July 2001 Loan closing February 2002 Steel topping out October 2002 Building topping out August 2003 First residential closing August 2003 Time Warner units conveyed September 2003 Jazz units conveyed October 2003 Mandarin Oriental opening February 2004 Full opening
Source: Related internal documents.
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Exhibit 2 Model of Columbus Circle and Environs with Time Warner Center Mock-up
Source: Related internal documents.
Exhibit 3 Investment Returns by Property Type
Source: National Council of Real Estate Investment Fiduciaries, http://www.ncreif.com, accessed April 2007.
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Exhibit 4 Manhattan Office Data, 1980-1997
Class A/Midtown Average Average Rent New Construction
Vacancy (per sq. ft.) (‘000 sq. ft.)
1980 5.0% $49.83 250 1981 2.5 63.46 1,649 1982 3.4 65.83 4,158 1983 4.8 58.39 6,498 1984 5.6 57.45 3,303 1985 7.2 56.28 6,606 1986 7.0 55.96 5,430 1987 7.1 54.34 7,402 1988 8.4 54.87 2,700 1989 10.5 53.25 7,832 1990 13.3 51.28 4,804 1991 13.0 46.97 170 1992 12.8 41.43 2,254 1993 13.2 38.65 0 1994 10.5 38.39 0 1995 9.4 37.75 0 1996 8.1 37.85 0 1997 6.1 40.91
Source: Cushman and Wakefield, as cited in “Market Supply and Demand Assessment,” Taub Urban Research Center, 2001, http://urban.nyu.edu/g35/market.html, accessed April 2007.
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Exhibit 5 Time Warner Center, Project Area Summary
Rentable
FAR Gross Usable Sellable
AOL Time Warner Podium/North Studio 473,303 378,642 492,235 South Tower 392,348 313,878 408,042 Total 712,419 865,651 692,521 900,277
Palladium (Retail) Public Spaces/Circulation 40,615 59,270 — — Services Areas 26,131 38,134 — — Retailers 259,121 378,139 — 290,032 Restaurants 42,836 62,497 — 47,935 Total (Retail and Office) 368,693 538,040 — 337,967
One Central Park (Residential) North Tower 184,669 208,915 — 161,670 South Tower 324,791 382,517 — 288,358 Health Club (South Tower) — — — — Club Allocation (North Tower) 6,773 8,542 — — Total 516,233 599,974 — 450,028
Mandarin Oriental Hotel Hotel Program 218,112 274,590 — — Club Allocation (North Tower) 6,773 8,52 — — Total 224,885 283,132 — —
Class A Office 175,095 193,258 158,293 211,057 Total 175,095 193,258 158,293 211,057
Jazz at Lincoln Center 101,000 174,603 — — Total 101,000 174,603 — —
Parking 1,676 146,477 — — Total 1,676 146,477
TOTAL 2,100,000 2,801,133
Source: Related internal documents.
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Exhibit 6 Cross-Section of the Time Warner Center facing onto Columbus Circle, Parking to Jazz at Lincoln Center
350,000 leasable square feet
7 levels (Concourse II, Concourse I, Ground, Mezzanine, Second, Third, and Fourth Floors)
300,000 leasable square feet of retail
50,000 leasable square feet of a unique collection of New York’s finest restaurants
55,000 square feet of public space
Source: Related internal documents.
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Exhibit 7 Time Warner Center, Summary Development Budget
Total $GSF Cost
Land Jazz at Lincoln Center (FAR Allocation) $22.19 $ 62,144,570 Site Acquisition (FAR A) 123.16 345,000,000 MTA Additional Parts 6.16 17,250,000 MTA Closing Costs 0.55 1,531,087 Transfer 3.07% 3.74 10,482,567 Financing 2.00% 1.43 4,000,000 Mortgage 2.75% 1.80 5,041,667 Land Loan 8.75% 4.42 12,370,188 Environmental 7.03 19,684,773 Land Legal Fees 0.22 618,839 Brokerage Services 1.43 4,000,000 Other Land Costs 0.68 1,911,620 Title Insurance 0.38 1,078,280 Total Land $173.18 $ 485,113,590 Hard Costs Construction Cost $264.38 $ 740,762,169 Contractor Contingency 7.63 21,361,865 Escalation 0.00% 0.00 — Hard Cost 4.52% 12.26 34,346,202 Force Majeure Insurance 1.34 3,750,000 Tenant Improvements 11.42 31,982,620 Fixtures and Equipment 6.63 18,571,302 Systems 0.92 2,587,402 Total Hard Costs $304.58 $ 853,361,560 Soft Costs Proposal Costs $0.33 $931,906 Preconstruction Costs 1.83 5,112,791 Permit Costs $0.50 0.50 1,400,567 Consultant Fees 19.13 3,594,513 Testing and Inspections 0.88 2,464,183 Developer Overhead 15.60 43,708,463 Leasing/Sales Commissions 9.24 25,872,826 Real Estate Taxes 9.91 27,767,713 Insurance 8.93 25,010,213 Project Legal Fees 5.84 16,356,486 Accounting Fees 1.88 5,269,066 Marketing 10.83 30,326,862 Financing Costs 12.80 35,846,635 Administrative Fees 0.66 1,857,074 Mortgage 10.96 30,708,333 Predevelopment Cost 1.71 4,796,613 Construction Interest 29.17 81,722,674 Mezzanine Interest 0.0 — Operating Deficit 1.61 4,497,684 Soft Cost Contingency 1.76 4,932,792 Total Soft Costs $143.58 $ 402,177,393 Force Majeure Insurance $6.07 $17,000,000 Working Capital 0.00 — Cost Deductions 0.00 — Developer Fees 8.34 23,375,000 DEVELOPMENT COSTS $633.57 $1,718,682,973
Source: Related internal document.
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Exhibit 8 Time Warner Center, Summary Capital Structure, Profits, and IRR
CAPITAL STRUCTURE
Total Cost Debit Debt/Cost Mezzanine Total Equity % on Cost Time Warner Mandarin Apollo Related
AOL Time Warner 521,263,246 465,200,000 89% — 56,063,246 11% 56,063,246 — — — Retail 262,491,245 106,827,154 41 155,664,091 59 — — 140,0997,682 15,566,409 Residential 584,535,743 355,308,955 61 200,000,000 29,226,787 5 — — 26,304,108 2,922,679 Mandarin Oriental 253,913,968 129,000,000 51 30,000,000 94,913,968 37 — 49,394,484 40,967,536 4,551,948 Class A Office 63,233,603 27,878,979 44 35,354,024 56 — — 31,819,162 2,535,462 Parking 33,245,168 15,784,912 47 17,460,256 53 — — 15,714,231 1,746,026 1,718,682,973 1,100,000,000 230,000,000 388,682,973 56,063,246 49,394,484 254,902,719 28,322,524
ASSUMPTIONS
Exit Scenario Date of Opening Date of Sale NOI Cap Rate
Parking 6/1/2003 5/31/2005 4,277,711 8.00% Office 7/1/2003 5/31/2005 12,243,367 8.00 Retail 8/3/2003 5/31/2005 29,124,133 8.00 Hotel 9/1/2003 8/30/2005 27,967,143 9.00
NET PROFITS IRR ANALYSIS
Residential Sq. Ft. Apollo/Related Apollo Related Apollo/Related Apollo Related
$2,011 472,551,429 297,630,382 174,921,048 31.80% 25.59% 63.49%
Source: Related internal document.
Note: Apollo’s Return is higher than Related’s because their deal included a clause in which the original equity investment was returned to the investors during the course of the development. The Jazz at Lincoln Center cost is allocated to each component by square-foot allocation.
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Endnotes
1 For an otherwise positive assessment of the project that cites the “retail boutiques that line most the atrium…” as having had “mixed success,” see Carter B. Horsley, “The Midtown Book: Trump Tower,” The City Review, www.thecityreview.com/trumpt.html, accessed January 22, 2008.
2 This section draws upon material found on the Related Companies website, “Related History,” www.related.com/index.asp?model=relatedHistory&view=1&slideid=1, accessed April 2007; and Alex Frangos, “Dual Track: Affordable-Housing Empire Fuels Developer’s Upscale Aims,” Wall Street Journal, August 22, 2006, via Factiva, accessed March 2007.
3 This section draws on material in David W. Dunlap, “At Columbus Circle, a Circuitous Path to Columbus Centre,” New York Times, September 6, 1998, available from Lexis-Nexis, www.lexisnexis.com, accessed January 23, 2008.
4 David W. Dunlap, “At Columbus Circle, a Circuitous Path to Columbus Centre,” New York Times, September 6, 1998, available from Lexis-Nexis, www.lexisnexis.com, accessed January 23, 2008.
5 Clifford J. Levy, “5 Developers Are Said to Be Finalists for Coliseum Project,” New York Times, April 30, 1997, available from Lexis-Nexis, www.lexisnexis.com, accessed January 23, 2008.
6 Clifford J. Levy, “Coliseum Deal Is Governed by Financing,” New York Times, July 26, 1997, available from Lexis-Nexis, www.lexisnexis.com, accessed January 23, 2008.
7 Clifford J. Levy, “Mayor Vows to Veto Coliseum Sale, Citing Long-term Issues,” New York Times, July 27, 1997, available from Lexis-Nexis, www.lexisnexis.com, accessed January 23, 2008.
8 Clifford J. Levy, “Mayor Vows to Veto Coliseum Sale, Citing Long-term Issues,” New York Times, July 27, 1997, available from Lexis-Nexis, www.lexisnexis.com, accessed January 23, 2008.
9 Clifford J. Levy, “Building on a Shaky Foundation,” New York Times, July 31, 1997, available from Lexis- Nexis, www.lexisnexis.com, accessed January 23, 2008.
10 See Charles V. Bagli, “Time Warner Joins Bidding for Coliseum Development,” The New York Times, April 30, 1998, available from LexisNexis, www.lexisnexis.com, accessed January 30, 2008.
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