The condominium-offering documents provided to potential buyers of Southtown's condominiums provide some, but not all, details of the agreement between RIOC and the developers, The Hudson Companies and The Related Companies.  While RIOC has never released all the facts about the arrangements, it's interesting to note the benefits both RIOC and the developers will receive – and to consider the likely impacts on the Island.

Benefits to RIOC

Here's a summary of benefits to RIOC as disclosed in the offering materials:

• A Share in Resale Profits:  When a unit is resold, RIOC will collect at least $3,000.  But RIOC's take will be larger if a unit has appreciated more than 20%.  For the first five years, RIOC's share of any "excess appreciation" will be 10%.  A unit purchased now at $500,000 can thus appreciate by up to 20% to a future selling price of $600,000 without RIOC sharing in any of the profit, but thereafter RIOC takes 10% of any appreciation. Thus, if a unit sells for $700,000, the excess appreciation is $100,000 with RIOC taking 10% of that or $10,000.  After five years, RIOC's share drops to 5%, then 3% after ten years.  This arrangement applies to all resales – not just the first.  RIOC thus stands to gain at least $3,000 on every resale of each of the 141 units now up for sale, but potentially much more.  (There are 230 units in all, but the super will occupy one, and 88 have been sold to Cornell for students and medical staff.)
• Additional Rent:  RIOC can impose additional charges on the condominium and its unit owners for "Island services" such as the Tram, the "AVAC" garbage collection system, minibus, landscaping, and increases in public safety costs.  RIOC may also collect additional rent for certain "impositions" such as tenant rent and occupancy taxes, water and sewer charges, and personal property taxes.  However, all these charges will apply only if they are also imposed on all other Island residential buildings.
• Compliance with General Development Plan (GDP):  Each unit owner will be asked to submit information about his or her family's income to RIOC on a confidential basis. This will help RIOC determine compliance with the GDP, which contains limits and parameters on the income levels permitted in Southtown (see comments below about the future of Southtown and its prospects for further development).  RIOC acknowledges it and any developers of Southtown must comply with those limits and parameters or else seek further amendments to change them.
• Other Payments:  RIOC will get a one-time payment of 1.5% of the gross proceeds of the condominium offering – over $1 million if all 141 units are sold.  Other one-time payments include a $500,000 fee to cover the mortgage-recording tax on the construction loan, which the developers would otherwise have to pay to the State, and $100,000 for project-management assistance.  On a continuing basis, RIOC will receive 5% of any profit the condominium earns from providing Internet, cable, and other telecommunication services to unit owners.
• Lump Sum Pre-Payment of Ground Rent:  Instead of collecting ground rent of about $12 million at a rate of $200,000 per year for the six decades of the lease term subject to annual increases for inflation, the developers will make one lump-sum payment for ground rent, discounted to its present value.  The amount is not disclosed in the offering plan, but it could amount to only a few million dollars.

Developers' Benefits

The offering plan discloses these benefits to the developers:

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• 20-Year Real-Estate Tax Exemption:  The developers and condo unit owners get an exemption from New York City real-estate taxes for the first 20 years of the lease term.  After that, the taxes or their equivalents (called "payments in lieu of taxes," or PILOTs) will be phased in 20% per year for five years.  Full real-estate taxes will not begin until 2030. This represents a substantial saving in the monthly common charges for unit owners for the next 25 years.
• No Future Ground Rent Payments:  Beyond the lump sum payment described above, the developers pay nothing for ground rent for the 62-year balance of the lease term.
• Infrastructure Costs Partly Paid for by RIOC:  RIOC has already paid an estimated $4.5 million of the cost of extending infrastructure to Southtown – roads, sewers, natural gas, electricity, and the AVAC garbage-collection system.
• Future Development Credits:  If the developers rent up to 25% of the units to low-income tenants, they will earn "development credits." Those credits can be applied to other new buildings the developers may construct on the Island or within a half-mile radius.  This will allow the developers to build a higher and bulkier building as a result of a higher "floor/area ratio."
• Mixed Population of Owners, Tenants, and Others:  The developers have the option to have a "mixed" population of owners, tenants, and temporary occupants, not just condo owners.  Floors 6-9 will contain mostly studio apartments for the medical staff and students of Cornell University, which is buying 88 units.  Other units may be sold to companies for temporary housing for visiting personnel. Even "timeshares" may be sold. In addition, unit owners can sublet. Thus, the building will not be 100% occupied by owners, but could have a substantial number of transient residents.

Impact on Roosevelt Island

How will the new condominium building affect the rest of the Island and its residents?

• The Island's population will increase by 500-600, including about 200 students. This will result in more rush-hour congestion at the Tram and subway.
• In negotiating ground-lease extensions for Island House, Westview, and Rivercross, RIOC will no doubt seek to levy the same "impositions" and added charges for "Island services," and might require a share in the resale profits of any private coop apartments in those buildings.  Although their leases run another 22 years, this is a near-term consideration because all three buildings need ground-lease extensions if they are to become private coops.
• It should be noted that, while Related and Hudson are the designated developers of Southtown, they are under no obligation to continue to build the rest of the plan that was approved by RIOC in 1999.  That plan calls for nine buildings and 2,000 housing units.  Hudson and Related have already built and sold 465 and 475 Main Street, one to Memorial/Sloan Kettering Cancer Center and the other to Cornell Medical College, at prices that have not been disclosed. They could decide not to proceed with building any more of Southtown beyond the current condominium building.
• One possible restraint on the developers may be that the GDP requires that at least 40% of Southtown's housing units (or about 800 units) be for low-, moderate-, and middle-income tenants with a maximum of 60% allocated for market-rate units. Additional benefits may have to be given to the developers to induce them to complete the nine buildings and 2,000 housing units originally envisioned for Southtown. Alternatively, the GDP might have to be amended to change the 60/40 ratio to allow more market-rate units to be rented or sold.

Base prices for the condominiums have been increased approximately seven times (click for related report) since sales started; they are now significantly above the original offering.  This may signify greater demand than had been expected, a marketing strategy to create excitement, or hopeful thinking by the developers.  As of two weeks ago, sales personnel were saying that over half the available units had been sold, suggesting the developers have met the 20% sale requirement for declaring the condo offering effective.  Even so, the developers have reserved the right to withdraw the condominium plan and make the building all-rental.  As for completion of the construction, the building should be ready for occupancy in early 2006.n

Incidentally, the developers have given Southtown a new name, ”Riverwalk.”