Thursday, December 10, 2009

"Subsidy" Misconceptions Regarding the Armory Deal

Our post yesterday regarding the arrival of a new Fairway supermarket up in Pelham Manor (just north of the Bronx) sparked quite a few comments.

One of the comments from BD reader Jay Shuffield is worth highlighting, as it provides a valuable insight into the subsidies that Related is receiving from the City should the 'Shops at the Armory' deal move forward. The debate surrounding the redevelopment of the Armory is quite passionate, and rightfully so. Unfortunately, too often quite a bit of rhetoric gets in the way of understanding complex financial issues that surround a massive development deal such as this (I'll be the first to admit that my stance on the Armory is based on pretty general stuff, such as the fact that I'm sick of going to Westchester to shop, and I firmly believe that job creation at any economic level is a good thing).

I found Jay Shuffield's comment to be quite helpful in getting to the root of what the City, as well as Bronxites and citywide taxpayers alike, stand to gain from Related's plan. Here's what he had to say:
I think there is a lot of misconception about the notion of "subsidies" for the Armory.

First, any supermarket moving into the Armory would see zero subsidy. The developer would charge a market rate rental, so the concessions made to the developer do not translate into any competitive advantage for a new supermarket at all.

Then there is the issue of the "subsidies" for the developer.
This is a complex financial negotiation for an encumbered site. The City is trying to sell a landmark that is in rough shape and needs a lot of renovations to bring it up to the standards required by the Landmarks Preservation Commission. This is actually not too different from the way a typical person would sell their house.

For example, if you were selling a house that had old appliances that needed to be replaced, holes in the walls that needed to be repaired, and old electric wiring that needed to be entirely replaced, the buyer would either ask you to make the improvements or make a financial concession. That wouldn't typically be called a "subsidy," it's just a typical part of a real estate negotiation.

It is also worth considering that the City currently incurs costs for the ongoing maintenance of the building. There would be immediate savings to the taxpayers simply by relieving the City of the need to keep the building from deteriorating even more. (Or conversely, if it were allowed to deteriorates more, its value for any potential deal would be even lower, requiring more concessions later...)

Then there is the investment aspect of the City's concessions. By making it possible for new retail to open sooner, the City brings in more money through taxes. Currently, New York City loses a significant amount of potential sales taxes to Westchester County because so many Bronx residents leave the borough for their shopping needs. The sooner the City can open competitive retail, the sooner it expects to begin collecting taxes to support the public benefits provided by municipal services.

So - it's complicated. I don't know how well the City is negotiating. Perhaps they are giving away too much without getting enough in return. I can't really say. But the casual use of the word "subsidy" obscures the real issues.

Since I went ahead and stepped into this, I might as well finish the story...

If you assume the City is negotiating for a good return for the City, the real question is how equitably the benefits are distributed.

There is a strong argument for this neighborhood to receive specific local benefits, rather than dumping it all into the General Fund. This neighborhood will deal with the impacts of construction, and it has not historically enjoyed the same quality of City services as other areas. The benefits really shouldn't consist primarily of sales taxes deposited into the General Fund, where they will likely be spent in more politically-connected parts of the city.

It is important to recognize that providing the benefits for the local community is for the City to take less in revenue for the General Fund. This reduction in payments into the General Fund is not a "subsidy," but rather a different way of structuring the deal.
Jay, thanks for such an enlightening comment.




It was interesting to read Jay Shuffield's comments about the Armory negotiations. I think, however, that we suffer under fewer misconceptions about this than he might imagine.

Everyone involved recognizes that a potential tenant will not get a direct subsidy. However, Related is getting a sweet price for the building ($5 million for a building on which the city installed a new $25 million roof), and is receiving approximately $65 million in tax benefits.

As Shuffield correctly mentions, all the conditions of a real estate deal are part of a negotiation. The kitchen needs to be replaced, so I pay you less for the house. You are demanding that I pay higher wages than I am accustomed to paying, so what other benefit are you providing me? Lower rent? use of your pool? Muffins for breakfast? We are pushing Related to figure that out. They have actually done this on a recent project in LA, where they were required to do it by law. The debate over the Armory has created a lot of conversation on the City Council about requiring that projects that receive city money be required to pay a living wage, so even if we get nothing on this project (which looks more and more likely to me), we've started a conversation that will lead to something good.

And I can't help but add -- the City's "considerable cost" for the maintenance of the building" does assume that they are doing much to "maintain" it -- I've toured it a few times, and pass it frequently, and I'd say the expenditures would be close to zero.

Well, down to City Hall to see what's up today!

Guywithacause said...

Margaret, I agree with you that, during a negotiation, it is a give and take. And during any negotiation, there is one side that wants the deal to close more than the other, and thats the side that makes MORE concessions. My question is this: During these negotiations, which party has the MOST to gain (wants the deal to close) by having the Armory a full functioning building with retail and amenities to service the community, Related or The city/community?

Related is already a very wealthy company, with several similar developments across the city, including the new Gateway Center. They will certainly stand to benefit from this deal monetarily, otherwise they would not be interested at all. HOWEVER, I believe the city/community has far more to gain, both directly and indirectly from this deal. How exactly?

Well for one thing, they won't have a gigantic eyesore of a building vacant and abandoned for another 20 years. Secondly, there will be a significant number of jobs that will work as a stabilizing force in the community, and a fuel for an economic engine. Thirdly, it will provide MANY sorely needed amenities for a severely underserved community. And lastly, the city will reap significant direct/indirect benefit in the form of new business/tax receipts..instead of money going out to maintain an abandoned structure, there is money coming in via the sale of the property, the construction/redevelopment, and the susbsequent increase in tax revenue from residents shopping locally.

If Related walks away from this project, they will simply move on to another project, possibly outside of the city border, that will potentially be as lucrative, or moreso. The end. However, if the city loses this redevelopment, it could be easily another 20 years before anyone is interested in the Armory again, leaving an abandoned structure, no services/retail options for the community, no jobs, and no income for the city.

It is the city/community that stands to benefit the most from the Armory redevelopment, and that is why the city is making MORE concessions. They want the deal to close more badly than Related...nothing more.

Guywithacause said...

And I'd also like to address this "living wage" nonsense. I have no problem with the concept of a "living wage" , however I do have a problem with politicians using the concept for their own political gain, and at the expense of the community they purport to represent.

Those Politicians gunning for a "living wage" requirement are selling this as something that will "lift people out of poverty" and the lack of "living wage" pay is the root cause of the neighborhood's, and the Bronx's, persistent, generational poverty.

What is the reality? $7.15 per hour (current minimum wage) or $11 an hour (or whatever number the "living wage" is) does NOTHING to change the poverty issue in the Bronx, nor does it "lift people" out of anything. What these politicians are doing is simply taking the attention off their own incompetence/self-interests, and focusing the poor's anger on an outside entity.

It isn't politically popular to tell your constituents: If you want a higher wage, and higher paying jobs to enter the community, you need to STAY IN SCHOOL and acquire the skills/degress in fields that pay higher wages. ONLY THEN will hgiher paying jobs want to relocate to the community, because that is where the talent pool is. ONLY THEN will the persistent poverty be broken. And as an elected Politician, it is my job to ensure you have all the resources and abilities to achieve these goals, and to ensure that these high paying jobs are incentivized to open here.

Guywithacause said...

But instead, these politicians choose to play the blame game, to keep you focused away from them, and to focus your anger on outside entities. Their sole interest is to remain in power, and as such, to keep you as poor, uneducated, and as victimzed as possible, because that ensures a Democractic victory, year after year. The Bronx, and the residents suffer, but the Democrats stay in power, so long as the welfare checks, food stamps, section 8 vouchers, and other such handouts keep flowing that is.

So as this debate over a "living wage" continues, remember that it DOES NOTHING to help anyone out of poverty, and DOES NOTHING to move the community forward in any way. But what it does do is make the politicians LOOK GOOD, and shifts anger to a faceless, "evil" corporation (a "white" one of course). So you get fooled into believing this "living wage" is the solution, when the reality is, it is just another handout by the politicians to stay in power.

Anonymous said...

Margaret either doesn't get it, or isn't being truthful.

She's still calling big amoutns on one side of the deal subsidies. She doesn't even acknowledge the costs on the other side of the deal?

$$MILLIONS$$ sound like lots as long as you dont put them in context.

This might be good campaigning. Not good debate about whats' good fo our community.

TRUTH is the administration offered more money for the workers. What did KARA do? Just repeat the same lies about subsidies. Nothing will ever be enough!

What I dont understand? How is it better for government to pay welfare to support people with no wages, instead of paying welfare to help people with low paying jobs?

Just more taxpayer money with no benefit to society...

GAX in the Bronx said...

i think jay shuffield's are worthless and is just the sort of intellectual condescension that distracts from the basic story. we don't need long explanations of definitions. we need an understanding of basic concepts. in this case the concept is that the public has given financial support - call it what you want - for related to get the armory to develop at a cut rate. in return it is not unfair to ask that those who will benefit from this support to make sure that the jobs they are boasting about give people a better chance to feed their families. period.

as for guy, i don't know what his cause it, but it ain't building up the bronx! if related walks away... it'll take 20 years? no way. secondly minimum wage jobs, a stabilizing force in the community and a fuel for an economic engine? puh-leese, where does he come up with this stuff?

as far as his comments about "living wage"... another useless semantics debate. call it whatever you want, but $10/hour is better than $7/hour. and $11 is better than $10. and $15 is better than $11, for that matter. and a "living wage for me might not be a living wage for someone else. but the bottom line is that there needs to be some support for helping bronx people who will be sacrificing for and supporting big business' opportunity to make a profit. and that can be done by making sure that the highest possible negotiated wage can be paid to the people who work at the project that the public has paid for in many ways.

so let's get away from semantics and stay with the basic concepts. they're easy to follow.

GAX in the Bronx said...

furthermore, the deal on the table that the difference in the "living wage" will be paid through a publicly financed fund (whether from the related real estate deal or making the public sacrifice the community space it's been promised) is outrageously stupid. we don't need a new form of welfare here. we need good old fashioned jobs paid for by the people who have the opportunity to make money in our community. and, as above, those jobs need to be paid at the best rate they can get. again, it's not that complicated.

as for the politicians, i don't disagree with guy conceptually about their motives and modus operandi. but what the borough president has done... for the first time in many years... is insisted that we have some sense of standard on behalf of bronx people for those to seek to do business here.... and that's a good thing. i only hope he and his colleagues in government stick to their guns right down to the wire.

GAX in the Bronx said...

and the last thing i want to say is what i have said in many forums previously. this entire problem could have been avoided if the CBA and living wage issue was settled BEFORE the tax breaks were given to related. had that been done, related would have had no leverage and if they didn't like it, then there were alternatives right on the spot. but this way, it's a mess, and the risks are great.

in fact, the legislation proposed by palma and koppell (NOW? where the f**k have they been?) to insist on this living wage in future projects is borne right out of this notion... again, something i have been saying publicly for years.

Anonymous said...

@ Gax...
well then (according to your reasoning) wouldn't $7.50/hour be better than no jobs/$0 per hour?

bxjon said...

Glad to see more pro-worker voices weighing in. First - want to direct folks to a very well informed piece written by folks who have negotiated community benefits agreements around the country, including one signed by Related in LA in 2007 that agreed to living wage jobs for all tenants:

I want to focus on a particular point made there: "In fact, if slight upward pressure on the wages for the very lowest-paid employees would jeopardize the Kingsbridge project's profitability, the city should be asking whether the project as a whole is financially viable."

Seriously folks- if Related's claims are true, and this project is only financially viable with minimum wage work, is this a project that the city should be supporting at all? If thats the case, this sounds like an extremely risky project, just as much of a risk of this place failing than failing to find another developer and it staying vacant. Or is it just grandstanding by Related because the city has never had the economic interests of workers on their priorities?

And second point I want to make - the view around the simple give and take of the negotiations ignores the larger context in which this is set. The Bloomberg administration has a strong pro-developer agenda that has little interest in negotiating with the community. Related knows this and know they can push harder and get more here than in other cities, unless we can change that dynamic. My view is the Bronx got sold extremely short by the new Yankee stadium deal - if the richest sports franchise in history can extract massive tax and other benefits, take away a public park! and give very little back in terms of local jobs and economic benefit, why should any developer settle for less? The fact that there was a "deal" in that case that was overwhelming supported by local officials lead me to conclude that they not doing nearly enough...

(and to give Related's deal in LA more context, there was a significant community benefits agreement done in LA for a sports arena years prior)

GAX in the Bronx said...

answer to anonymous... no. because it's not "no jobs". i believe with the right leadership in the right place(s), we can have another proposal to rebuild the armory that will be more custom-made to the needs of THIS community.... especially now that the control might be swung a bit in this direction. and we can't be pressured, yet again, to lower our standards because people are being kept poor and stupid to make them desperate. it's a terrible vicious cycle that we are in position now to break.

GAX in the Bronx said...

as for bxjon... outstanding. you are 100% right on all counts.

Jay Shuffield said...


I found your comment thoughtful and informative. Thank you for the link.

I remain skeptical, though, about the way many people have been drawing comparisons between Downtown L.A. and Kingsbridge Road. Retail rent in Downtown L.A. is among the highest rates in the country. Kingsbridge Road does not command such high rents. That means that the opportunity to structure a viable deal may truly be different.

In L.A., it would be much easier for the developer to make concessions on the fixed rent to offset the additional labor cost for potential tenants who would be required to pay living wages. Kingsbridge Road, on the other hand, may not have enough financial space in the lower rentals to make that type of deal work. If the base market rent is not high enough, you can't discount the rent enough to offset the higher wages.

(Also note that the rent concessions the developer would anticipate making would be a point of negotiation with the municipality, which would reduce the revenue to the City.)

I absolutely agree we need to find ways to structure deals that give the community and its workers a fair deal. Equitable outcomes are something I care deeply about. By the same token, I don't believe we can accomplish much positive change if we cannot effectively structure deals that actually work.

My concern is that the rhetoric and antagonism that have escalated on this issue has been getting out of hand, and may make it impossible to reach any deal, no matter how good it might be.

That's why I appreciate productive comments like the one you posted. It helps focus on the issues and possible obstacles.

GAX in the Bronx said...

jay, let's get the moral underpinnings squared away and the objectives clear. then anything is attainable. but top down decisions while the affected community can only stand by and shout is not going to get this done. and you can say, can't this, and low rents that, but until you say, this HAS to benefit the people who would be most affected then we're not going to get anywhere. again, it's not that complicated. put the decision-making power where it belongs... and voila! you'll have a facility that benefits everyone.


In planning for a meeting with Councilman Koppell the other day, I looked up the value of the minimum wage. In 1979, when the minimum wage was $2.90, full-time year-round minimum wage work was enough to bring a family of THREE above the poverty level. Today, full-time minimum wage work leaves a family of three at 82% of the poverty level.

Obviously individual people should stay in school, develop skills, etc. to make themselves eligible for the best possible jobs they can. But the reality is that someone will continue to hold these retail jobs, and the people who do will be poor, despite their full-time work.

Should the city be subsidizing this low-wage development? I don't think so.


I'm not sure I can make sense of all of what anonymous is saying (Why not give yourself a name, so at least we can connect your comments one to the other?), but let me attempt to respond to part of it.

The deal the City is currently talking about is terrible. Instead of giving store owners an incentive to pay a living wage (as we have been discussing, by offering rent concessions or other concessions), the City is proposing giving Related another $1 million discount o the sale price, and using the $4 million Related will pay to create a fund to top up people's wages. So you, store owner, pay minimum wage and if you ask us, we will give you the money to pay a higher wage. Since that is totally voluntary, there will also be a charity fund to which workers can apply for help paying their rent, child care, etc, bills, if their employer doesn't pay them a living wage. The other source of $$ for this fund will be the rent on the community space in the building (something like 45,000).

This, if anything, discourages businesses from paying a living wage. I think the Bronx delegation should vote it down tomorrow.

Guywithacause said...

My cause is quite simple: To be fair and reasonable, and my interest and allegiance lies with the Bronx and the people.

However, what we have been seeing is NOT the voice of the people, it is the voice of Morton Williams and other "local" businesses who are the ones orchestrating faux protests to kill this deal. The redevelopment has always been driven by the people/community, and it was only when the "local" businesses felt threatened that this became such a hot issue.

If you believe a "living wage" is that important, and in fact makes a difference, then I say it should apply to ALL of the "local" businesses. But that won't happen..why not? Because these "local" businesses won't be able to afford to stay in business, as they have stated many times! So you are simply, arbitrarily applying a higher standard to 1 business, which at the end of the day only serves to kill the redevelopment. This is not only counterproductive, it is illogical and hypocritical.

The community WANTS this redevelopment and have been driving this for almost 2 decades. If you believe the community is willing to kill this deal unless they get a $11 per hour wage (or whatever it may be) then you are gravely mistaken and do not live in the community.

If you believe that another business will just swoop in and give you everything you want, you are greatly misinformed. There is in fact NOBODY on the horizon, and there will never be anyone on the horizon, so long as the "living wage" stipulation is required. The same reason EVERY OTHER "local" business in the community doesn't pay a "living wage" is the same reason Related cannot gurantee the living wage; No business will accept it because it is unprofitable/drive them out of business.

So at the end of the day, the "win" for the Bronx will look like this: A vacant and abandoned Armory for another 2 decades, NO jobs for anyone, no retail for the community, no amenities/community space for anyone, no revenue for the community/city/state.

But who benefits? That's right...Morton Williams and the other "local" businesses just secured their profits for 20 more expect LESS selection and higher prices (that's what happens with NO competition). Congratulations Ruben Diaz for siding with corporate profits at the expense of the community.

Guywithacause said...

And to address some specific issues:

1-Minimum wage jobs ARE a stabilizing force and economic engine for a community when THERE ARE NO JOBS, and in a lower-skill/lower-education community.

2-$11 is better than $7, but $7 is better than zero, and that is exactly what is happening now that they are voting NO. How is this a win for the community? We do need to get the best pay we can, but why not let the market dictate this wage? Should we be paying janitors and cashiers $20 per hour? If so, then what should we pay everyone else?

3-LA and NYC are not comparable, and to use that comparison is dumb on the surface, and idiotic when actually using your brain. Hey did you know that everyone in LA drives for everything, so NYC should dismantle their public transportation system right. Oh that's right dismantling the public transportation network would not work in NYC because THEY ARE NOT COMPARABLE.

4-This project, and most businesses, are only feasible/sustainable with LOW wages, because consumers expect CHEAP prices. Period. Which is why Wal-Mart is so successful. This is nothing new or unique to this project, which is why the "living wage" requirement is sheer nonsense pushed by "local" businesses in the community who know it will kill the project.

-Bloomberg is NOT pro-developer, he is pro-INVESTMENT in the 5 boroughs so that we, as a city, can move forward, instead of just the premiere districts in Manhattan. He is putting his money where his mouth is and someone is FINALLY paying the Bronx attention, and including it in the greater plan for NYC. This includes investments in parks, public transit, housing, community needs, and business. This Armory is just one part of his commitment and investment in the Bronx.