Tuesday, May 20, 2008
New Pact for NYC Rail Yards
A joint venture between New York developer Related Cos. and investment bank Goldman Sachs Group Inc. signed a $1 billion deal to acquire the largest undeveloped parcel of land in Manhattan, the latest move in one of New York's longest-running real-estate chess games.
Some of the city's biggest-name developers have lusted for years after the 26-acre Hudson Yards site atop an active rail yard on Manhattan's far West Side.
In a deal announced Monday, the venture agreed in principle to pay $1 billion to New York's Metropolitan Transportation Authority, the property's owner, for a 99-year lease, officials said. It plans to construct 13 buildings on the site, including offices, apartments, hotels, shops and parking space. The building space would total 12 million square feet, one million more than is planned for the rebuilt World Trade Center.
The deal comes amid a rapid slowdown in real-estate development around the country as the sluggish economy and the credit crisis restrict developers' ability to finance new construction. Related has slowed two of its largest projects, one in Arizona and one in Los Angeles.
The Hudson Yards deal is clearly structured with an adverse real-estate market in mind. It gives Related and Goldman the option to delay lease payments for as many as five years if they decide the market isn't strong enough to start construction.
Related doesn't have a tenant lined up for the site. "We are obviously aware of the markets. Getting a tenant today would be very difficult," said Jeff Blau, Related's president.
Last year, News Corp., owner of Wall Street Journal publisher Dow Jones & Co., had tentatively agreed to be a tenant in Related's plans. But News Corp. backed out, and Related's proposal withered.
Still, the pact is a coup for Related and its founder, Stephen M. Ross, who could end up presiding over a project that will take more than a decade to build and could generate substantial long-term profits for him and his investors, which include the investment arm of Abu Dhabi and Olayan Group, a Saudi Arabian company.
The project faces big hurdles. To support the buildings, Related will have to spend nearly $2 billion to build a platform over the rail yard, which the MTA uses to store commuter rail cars. Because it will take several years to construct the platform, and then the buildings, profits are far off. Mr. Blau said it is going to require "a lot of equity" to build the platform. Construction wouldn't begin until 2009, and the first buildings wouldn't be finished until four or five years later, Related said. Mr. Blau estimates it will take 10 to 15 years to build out the entire project and estimates the total cost at $15 billion.
Projects considered for the site over the years have included a new stadium for the New York Jets. Related had made a bid for the project last fall but ended up losing out to rival Tishman Speyer Properties. But talks between Tishman Speyer and the MTA broke down last week. Related then stepped into Tishman Speyer's shoes, agreeing to the lease terms, which include a provision that allows Related to delay construction of individual buildings -- and ground lease payment to the MTA -- for as many as five years.
Related is a prominent developers of big city projects. Mr. Ross got his start in government subsidized affordable housing in the 1970s. He later turned to luxury projects such as the Time Warner Center in New York. He is currently planning a $3 billion project in downtown Los Angeles called The Grand with architect Frank Gehry. Related recently delayed that project,, citing trouble securing construction financing. Related was compelled to inject fresh money into the project when an equity partner, MacFarlane Partners, pulled out.
The MTA board will meet on Thursday to vote on whether to officially designate the Related/Goldman venture as the Hudson Yards developer. Related would pay an $11 million deposit if the board approves the deal, as expected. It could take several more months for a final contract to be signed.
Write to Alex Frangos at alex.frangos@wsj.com
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