Southtown Deal Sets Up Trust for Island’s Future
by Dick Lutz

Members of the Board of Directors of the Roosevelt Island Operating Corporation (RIOC) voted on May 18 to accept a deal for the construction of buildings 5-9 in Southtown. Only one Director, resident Mark Ponton, voted against acceptance of the terms brought to the Board by its real-estate committee and presented by real-estate consultant Paul Mas.

Terms of the deal, as explained by Mas:

• There will be 1,160 apartments in buildings 5-9.

• Housing will be 60/40 – 60% market rate and 40% "affordable."

• Hudson-Related will pay $150 per buildable square foot (bsf) for the market-rate housing, and $50 per bsf for the affordable portion, for buildings 5-9. The "blend" works out to $110 per bsf for the leased property, as a whole. (Mas compared this with Southtown buildings 1-4 where, he said, the average bsf cost was $65; with building #4, the condo building currently under construction, at $100.) The land valuation works out to $110 million.

• In addition, RIOC will receive transaction fees ($8/bsf) and a tax-equivalency payment (TEP), plus escalations (valued at $36/bsf), for a total value of $260-270/bsf).

"The nominal value of this transaction," Mas said, "is $1.9 billion."

Resident Board member David Kraut characterized the deal as a "vast improvement over anything we’ve had before." He said that, "with perfect 20-20 hindsight," the deal for the first four Southtown buildings was "not as good as it should have been."

Kraut asked if the 5-9 deal provides for an opportunity to "adjust upwards in case values go up beyond our ability to imagine." Mas responded, "There are certain protections built in which allow RIOC to benefit from increases in prices – primarily transaction fees on the initial sales of condominiums, and then fees for the duration of the lease on resales of condominiums." He added, "So, if everything goes well and the Island is well-managed and it becomes an even more desirable place to be, RIOC will see an increase in value, as will others on the Island, and will continue to benefit."

Noting that RIOC is bound to Hudson-Related for the remainder of the Southtown buildings, non-resident Board member John Mannix asked whether an "open market" deal might have produced better numbers for RIOC. Mas responded, "Our nature is always to try to get more, and we think we can do better if it’s unencumbered. [But] we set up a process here to get independent valuation opinions. We’ve exceeded what the fair-market value of the land is, based on other real-estate transactions in the City." A "fairness opinion" from the firm of Grubb and Ellis "supports the terms of the deal," he said.

In support of that view, resident Board member Deborah Beck, who chairs the RIOC Board’s real-estate committee, read from the Grubb and Ellis report: "We find that all of the terms... are fair to RIOC." She added, "We want to be absolutely certain that we have squeezed every possible benefit out of this deal for Roosevelt Island and for its future operations... I’d like to thank Paul."

Mannix, who serves on the real-estate committee, added, "What we tried to do in the real-estate committee is establish a protocol for real-estate negotiations that would flow across all the assets... to do everything we can do mitigate us making a bad deal – having outside consultants like Paul, professional negotiators, and then having fairness opinions – all of which are industry standards. I think we’ve put in place a protocol that should, at least, mitigate, if not eliminate, any future risk to the corporation, assuming the protocol is followed by successors to our committee and our Board members, that will shut down the notion that we are selling land at discount prices."

click to see larger image Southtown Layout: Building 4 is now under construction. Those shown in black are complete. Buildings 5-9 include two just north of the Tram station, and three east of Main Street. Underlined numbers indicate the number of stories in each building or section of a building. Dotted lines indicate the underground position of the subway tunnel. The “gazebo” shown over the tunnel in Riverwalk Commons may no longer be part of the plans.

Resident Board member Patrick Stewart asked Mas to explain the "affordable" housing in the deal. Mas said that a quarter of the affordable housing (10% of the total housing) will be at 80% of Area Median Income (AMI), and the remainder (30% of the total housing) at 148% of AMI." He explained, "For a family of three, 80% of AMI is just over $50,000 [income], and based on 30% of income toward rent, that equates to a rent of about $18.50 a [square] foot [per year]. The other, at 148%, would be at about $34 per square foot."

These numbers mean that (for example) an 825-square-foot two-bedroom affordable apartment will rent to a qualifying tenant family at 825 x $18.50, or $15,263 per year ($1272/month). Under the terms of the deal, there will be 116 apartments of various sizes in this category. Another 348 apartments will rent at $34 per square foot. For an 825-square-foot two-bedroom apartment, a family qualifying in this income tier would pay $28,050 per year ($2338/month).

Of the $110 million in land lease costs, Hudson-Related is to pay RIOC some $54 million in a series of trust funds that Beck called "very creative." The trusts will be self-liquidating, providing an annual ground-rent income stream to RIOC through the 2068 expiration of the lease under which New York State is developing Roosevelt Island, which is owned by New York City.

(In the past, RIOC had received prepayments on some property development, using the funds for immediate needs rather than setting them aside to produce an annual income stream.)

Buildings 5-9 are to be completed by 2012. On the schedule envisioned in the deal approved May 18, this would mean RIOC could expect income of about $10 million a year by 2014.

Kraut responded to that: "I suppose I’m supposed to be impressed with that number. The reason I’m not is that, until ten years ago, the State was giving us $6 million [subsidy] a year, so that $10 million is less than we were getting from the State ten years ago. When [the Governor] Mario Cuomo appointed me to this Board twelve years ago yesterday [May 16, 1994], we were getting a lot of money from the State and [under Governor George Pataki] that money just went away, and I’ve been in a 12-year fight trying to figure out how we’re going to replace it."

Kraut added, "People have been asking when we are going to stop building, and it’s not a rhetorical question. The answer is, when we have a comparable amount of money to what we had before, and I’m hoping this will just about do it."

Mas described the income stream. "In 2007 [this deal] should bring in $3.3 million. You’ll have two [buildings built] in 2007, and then one every year thereafter with, perhaps, some slippage based on market conditions, because you don’t want to flood the market. Basically, you’ll get up pretty fast to the $8-9 million range, stay stable for about six years, and then you’re going to start hitting the $10 million and then the $14 million range."

• RIOC plans to establish a new Island-wide income-reporting process for affordable rentals.

• David Kramer of the Hudson Companies reported that the first two buildings of Southtown are 70% to 80% occupied by tenants who meet the qualifications for affordable housing, subsidized by either Cornell-Weill or Memorial Sloan-Kettering, thereby satisfying or nearly satisfying the developers’ obligation for affordable housing in the first four Southtown buildings.

• The developers have put forward a 14-point "green-building" program, Mas reported.