The collapse of a $1 billion deal between New York's Metropolitan Transportation Authority and real estate developer Tishman Speyer to develop the last remaining large tract of undeveloped land in Manhattan has raised questions over the MTA's budget and what the delay means to future development.
The uncertainty in the real estate market also has some investors monitoring the billions of dollars in bonds issued to help finance the transformation of the West Side's Hudson Yards from an underutilized patchwork of industrial sites and railroad yards to a transit-oriented mixed-use district.
"The problem with the Hudson Yards uncertainty is it's a big hole in the ground that people were counting on to be filled, somehow, at least over a period of time," said Steven Spinola, president of the Real Estate Board of New York, a trade organization representing the real estate industry. "I'm not convinced there won't be a deal on the Hudson Yards site."
Thus far developers aren't spooked, he said. More important than the individual pieces of the picture was the rezoning of the whole area in 2005. And New York City so far has been collecting more revenue than originally anticipated for debt service on the bonds.
"Fundamental to what's happened here on the West Side was the rezoning, which was done for a huge parcel of land beyond the Hudson Rail Yards," Spinola said. "As a result of that, a lot of my members are already in the ground. They've purchased, they've planned, and there's a number of residential buildings going up. There's a hotel going up."
MTA spokesman Jeremy Soffin said that the authority is now talking again to three developers - Extell, the Related Cos., and a partnership between the Durst Organization and Vornado Realty Trust - about their earlier bids to develop the yards, which had been rejected in favor of the Tishman proposal.
The sale of development rights and lease of the land was supposed to help support the MTA's capital plan. A five-year capital plan released this year showed a $9 billion gap in a $29 billion program, before the New York Legislature nixed a congestion pricing plan that was to allow the authority to sell $4.5 billion of bonds.
While criticizing the Legislature for failing to pass a congestion pricing bill at an awards dinner earlier this month put on by the Citizens Budget Commission, New York City Mayor Michael Bloomberg said the MTA's capital program was in peril.
"Their budget at this point is just a joke," Bloomberg said. "Any budget without funding is just a wish list, and we need in the city a lot more than wishes. We need to actually do some things, and how we work ourselves out of this I don't know."
After the collapse of the Tishman deal the MTA is widely expected to get less from other developers than the winning $1 billion in net-present-value bid.
Standard & Poor's analyst Laura MacDonald said it's too early to tell whether or not a delay at the Hudson Rail Yards or lower dollar figure for the deal would have any ratings impact on the MTA.
"That money was supposed to go for the capital program and in the scheme of it was sort of small amount relative to the size of the capital program," MacDonald said. "In terms of addressing their funding gap, they've indicated to us that they are not going to cover that gap with additional debt, so they would be looking to cut from their capital plan or get some additional source of revenue."
The development of the Hudson Rail Yards, two 13-acre parcels of land that part the larger Hudson Yards Financing District, has been seen as crucial to the development in the area. It is vital to the various revenue streams in the area that are backing bonds sold to build an extension of the No. 7 subway line, which would connect the area to major transit hubs on 42nd Street. But analysts said last week that the uncertainty of the Hudson Rail Yards as well as the stalled Moynihan Station project and the Javits Convention Center expansion haven't had an impact on ratings for those bonds.
"Our rating was never tied to one development," Standard & Poor's senior director Robin Prunty said. "What we cited over and over again was the infrastructure improvements - those projects are going to over a 40-year time horizon." Delays in the construction of the subway extension, now slated to be completed in 2013, would be a credit concern, Prunty said.
Gov. David Paterson is currently reviewing the Javits expansion, a project that was killed by former Gov. Eliot Spitzer. That expansion would promote hotel construction. Paterson is in favor of the Port Authority of New York and New Jersey taking over the Moynihan Station project, which would build a new Pennsylvania Station at the Farley Post Office. The Moynihan project's future was thrown into doubt after the owners of Madison Square Garden backed off of a plan to build a new sports arena in the station.
In 2006, the Hudson Yards Infrastructure Corp. sold $2 billion of 40-year term bonds under an authorization to sell $3.5 billion to finance the $2.1 billion subway expansion and other infrastructure improvements. It plans to sell another $1 billion of bonds in 2011.
The HYIC bonds are backed by several recurring and non-recurring revenue streams in the Hudson Yards Financing District, an irregularly shaped, 45-square-block area roughly south of 42nd Street, north of 31st Street, and west of 8th Avenue. Those streams include tax equivalency payments on new residential and commercial property, payments in lieu of taxes on new office developments as well as non-recurring development fees, the sale of development rights, and payments in lieu of mortgage recording taxes.
The official statement cites as potential positives development at the Western Rail Yards, a second subway station on the No. 7 line, the development of Moynihan Station and the potential development at the current site of Madison Square Garden. But because of the unpredictable nature of development in the area, the deal was designed to factor such risks into its structure. It put principal payments out to 2020 or later, depending on the rate of development. And subject to appropriation, the city is on the hook for up to $3 billion to repay HYIC debt.
One source of revenue would come from new commercial office space. A study by Cushman & Wakefield that was used to prepare the official statement for HYIC's bonds projects 26.5 million square feet of office space would be built in the Hudson Yards district through 2035 under a base scenario, or 24.6 million square feet under a cyclical scenario that takes into account potential ups and downs in the economy.
Those assumptions project that new office space in the Eastern Rail Yards would be between 3.6 million square feet and 5.4 million square feet. The proposals by the three developers still in the running call for office space on the eastern site of between 2.7 million square feet and 4.1 million square feet.
But the project area is so large and diverse that a single factor isn't enough.
"That leaves them room on the front end of the project to deal with some of these project related risks," said Douglas Offerman, analyst at Fitch Ratings. "They basically created a structure for a project involving a tremendous amount of risk."
The bonds were sold as fixed rate in three tranches: $500 million insured by MBIA Insurance Corp., $700 million insured by Financial Guaranty Insurance Co.,and $800 million that was uninsured.
The uninsured tranche yielded 4.28% when originally priced. The bonds are now trading with higher yields. On Friday, the bonds yielded 5.059% in one $100,000 interdealer trade and 5.039% in a $1 million trade on Thursday, according to trades reported to the Municipal Securities Rulemaking Board.
"The bottom line is at this point you have a couple of clouds over the project but you don't have the ultimate deal breaker in place because you continue to have dialogue among the various parties involved," said Joe Darcy, senior portfolio manager at Dreyfus Corp. "Is there a reason for concern or a tension to the credit? Yes. And I think what the municipal market has learned over the last couple of quarters is that the attention to credit and the credit of debt instruments had been underemphasized for a while and needed to be reintroduced to the equation."
Darcy said that the New York fund he manages has reduced its holdings in HYIC debt.
"There is the possibility of enhanced risk association and for that we don't feel the current valuation in the market are necessarily adequate for it to be a major participant in the secondary market," he said.
Bloomberg's executive budget set aside $29.2 million of debt service to be paid to HYIC bondholders in the event that it was needed. But as of last August, the HYIC had already collected more revenue from the sale of development rights and investment income than the $112.1 million that was needed for debt service in the current fiscal year.
Bloomberg's executive budget for fiscal 2009 calls for setting aside $40.1 million for HYIC debt service, if necessary. That includes $27 million budgeted for interest support payments from the city and $13 million of tax equivalency payments.
At the end of fiscal 2007, the HYIC had received $59 million of development fees. To date in fiscal 2008, HYIC has received $5.3 million, according to HYIC president Alan Anders. He said the figure didn't necessarily indicate a decline because last year most of the fee revenues came in at the end of the fiscal year which is June 30.
