December 17, 2003

Article at The New York Sun

Corporate Socialism Returns

Is corporate socialism making a comeback in New York? Are we returning to the bad old days of the 1970s fiscal crisis when city government, then on its knees, threw any incentive it had at developers to get them to build and businesses to stay?

Tax abatements, rental subsidies, below-market financing, even eminent domain - taking property from one private owner and bestowing it on another - filled up the cookie jar of offerings.

Thriving private development is crucial to New York City's future. However, that's not what we're getting in many of the city's biggest projects. Instead, as in the 1970s, even the richest are again asking for government largess. A developer, Douglas Durst, has applied for $700 million in tax-exempt Liberty Bonds to build a 2 million-square-foot building for Bank of America in Midtown.

This certainly is a stretch for the federally funded Liberty program, which was meant to provide tax-exempt financing for major projects to revive Lower Manhattan after the destruction of the September 11 terrorist attacks. Of the $8 billion in Liberty Bonds authorized in 2002, up to $1.6 billion was set aside for residential projects downtown and up to $2 billion for commercial projects outside Lower Manhattan.

The federal idea was that neighborhoods beyond Lower Manhattan that had also been devastated by the attack would be eligible for the financing. However, surely no one was thinking of West 42nd Street and Sixth Avenue, where Mr. Durst hopes to build his tower.

The eminent investment banking firm Goldman Sachs wants to construct a namesake 1.5 million square-foot building on Site 26, across from ground zero. That's good. However, Goldman Sachs wants large subsidies in the form of both tax breaks and tax-free financing. City officials would do well to talk first to Jersey City officials, from whom Goldman Sachs extracted generous subsidies in 2000 to erect the 42-story, $1.3 billion office tower that it cannot now fill.

City Hall wants to see construction and economic activity downtown - and certainly Goldman Sachs is an extremely appropriate candidate for the Liberty Bond financing. However, other tax subsidies as well? Why? Lower Manhattan has no shortage of office space. On the contrary, Downtown has thousands of square feet of space coming on line soon. And neither 7 World Trade Center nor the unbuilt Freedom Tower yet have tenants.

In such a market, tax-free financing may be justified as a means of restoring Lower Manhattan, but additional subsidies are questionable at best. Meanwhile, developer Forest City Ratner has asked for $400 million in Liberty Bonds to build a 52-story tower in Midtown, claiming that it is virtually impossible to get a conventional construction loan under current economic conditions.

These "economic conditions" include a glut of office space in Midtown. Yet Ratner is asking for this new subsidy on top of a whole range of munificent government subsidies that it and its partner, the New York Times Company, have already received.

Neither partner actually owned the property on which they say they now need further subsidies to build. The 11 soon-to-be-demolished buildings on Eighth Avenue between West 40th and West 41st streets were privately owned by people who didn't want to sell. So the Empire State Development Corporation, a state agency that has the authority to override local zoning ordinances and condemn property, stepped in to acquire the site forcibly from the unwilling sellers.

Both Ratner and the Times are supposed to pay for the property, but no one can know now precisely how much that will be since the sellers are continuing to litigate - even as their property has been condemned. To protect Ratner and the Times from any unpleasant downside, the state agreed that they will pay no more than $85.6 million - no matter how much the property costs in the end. Taxpayers will make up any difference. And there almost surely will be a difference.

The Milsteins, among Manhattan's shrewdest developers, bought a parcel last year up a block on Eighth Avenue that's about half the Forest City-Times site. The Milsteins paid $111 million at auction, suggesting that Ratner and the Times got the bargain of the year from the state. Nor will the partners pay full taxes once the building is occupied.

Instead, the Times, which alone received a little over $26 million in tax breaks from the state and the city, will make a $14 million payment in lieu of taxes - which is at least 20% lower than the taxes would be.

Now the principal of Forest City Ratner, Bruce Ratner, is proposing a $2.5 billion sports arena and mixed residential-office project in Downtown Brooklyn. The arena, which Mr. Ratner hopes will house the New Jersey Nets, is to be designed by Frank Gehry of Bilbao fame, among many other projects. As a hub for nine subway lines and the Long Island Rail Road, the arena's site is well served by public transportation. How real is the plan?

At $275 million, Mr. Ratner holds the current high bid for the Nets, though the bidding is far from over. In a press conference, Mr. Ratner said that the project would be "almost exclusively private financed," though he said some tax revenues would have to be "diverted" to pay for some of it. He also suggested that the Metropolitan Transportation Authority transfer some of its land to the project, and that the state - his old friend from the Times project - condemn the rest.

The Ratner plans may well be good for Brooklyn, though neighborhood activists from nearby Park Slope have already been out in force protesting it. The problem is that the only sure test we have for hotly contested projects is the market. You may not like a huge new tower in your neighborhood, but if it fills up with tax-paying residents and workers, you can see the benefits. However, when the market is undermined by government subsidies - some obvious, some hidden - the justification for a project is no longer economic demand but political favoritism. And that's no way to build a city.