Committee Staff:
Alex Paulenoff, Counsel
THE COUNCIL OF THE CITY OF NEW YORK
BRIEFING PAPER OF THE INFRASTRUCTURE DIVISION
Matt Gewolb, Legislative Director
COMMITTEE ON ECONOMIC DEVELOPMENT
Hon. Daniel Garodnick, Chair
October 2, 2014
Oversight: Evaluating the Effectiveness of Tax Incentives Offered by the New York City
Economic Development Corporation
INTRODUCTION
On October 2, 2014, the Committee on Economic Development, chaired by Council
Member Daniel Garodnick, will hold an oversight hearing entitled: Evaluating the Effectiveness
of Tax Incentives Offered by the New York City Economic Development Corporation. Those
invited to testify include representatives from the New York City Economic Development
Corporation; the New York City Industrial Development Agency; the Mayor’s Office for
Economic Development; the New York City Planning Commission; the Center for an Urban
Future; the Presidents of each borough chamber of commerce; Directors of various Business
Improvement Districts; housing advocates; property owners; and other interested parties.
BACKGROUND
The New York City Economic Development Corporation (“NYCEDC”) is a not-forprofit corporation that contracts with the City of New York to oversee and administer a variety of
city-sponsored economic development programs. NYCEDC is comprised of 27 board members
appointed directly by the Mayor, or appointed by the Mayor upon nomination by Borough
Presidents, the Speaker of the City Council, or by the Chair of NYCEDC (also appointed by the
Mayor) from a list of nominees approved by the Mayor.1
NYCEDC also administers the New York City Industrial Development Agency
(“NYCIDA”), a public benefit corporation that assists companies “locating or relocating within
1
NEW YORK CITY ECONOMIC DEVELOPMENT CORPORATION, NEW YORK CITY ECONOMIC DEVELOPMENT
CORPORATION BOARD STRUCTURE (2014) available at
http://www.nycedc.com/sites/default/files/filemanager/Compliance/EDC/New_York_City_Economic_Development
_Corporation_Board_Structure_.pdf.
Page 2 of 20
New York City to expand their operations in the City.”2 NYCEDC is responsible for the
“management, reporting and oversight”3 of NYCIDA’s “tax breaks, tax-exempt bond sales, and
other benefits for companies”4 who either agree to keep jobs within the City, create a specific
number of new jobs within the City, or some combination of the two.
Many of the various economic development programs offered by NYCEDC and
NYCIDA offer tax incentives to private companies for taking specific actions that confer an
overall benefit to the City. These tax incentives range from structured tax abatement programs to
complete tax exemption programs, often lasting ten years or more. Since many of these benefits
are long-term, the City experiences compounding lost tax revenues as new economic
development programs arise. These incentive programs are typically issued under contract
between NYCEDC or NYCIDA and third parties with the expectation that they will result in
particular deliverable goals, such as the creation of new jobs, the expansion of affordable
housing, the improvement of the quality of the City’s neighborhoods, and the refurbishing of
sites of cultural or historical significance, among others.
As the City’s chief source for distributing funds for City-sponsored economic
development programs, NYCEDC has a tremendous responsibility to taxpayers to ensure the
companies with which it contracts meet their job creation or other agreed-upon economic
development obligations with the City. However, the Council is concerned about allegations that
NYCEDC has failed to ensure that those companies fulfill those obligations. For example, in
Fiscal Year 2009, the City Comptroller’s office reported that 334 (out of 576) companies
receiving tax benefits from NYCIDA (operating under the management and oversight of
2
NEW YORK CITY ECONOMIC DEVELOPMENT CORPORATION, NYCIDA FAQS, http://www.nycedc.com/nycida/faq
(last visited Oct. 1, 2014).
3
Press Release, New York City Comptroller John Liu, Liu: EDC Subsidizes Empty Job Promises (Mar. 12, 2012),
available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUTLFmoxKRAw.
4
Id.
Page 3 of 20
NYCEDC) failed to fulfill their contractual obligations to NYCIDA, and 16 defaulted outright
without NYCIDA seeking recovery.5 These companies received $318 million of the $497
million in tax benefits awarded by NYCIDA in Fiscal Year 2009.6
The case studies discussed below offer a glimpse into NYCEDC’s monitoring of its
economic development contracts with third parties and may be indicative of NYCEDC’s overall
management policies. The purpose of this hearing is to consider ways to improve NYCEDC’s
monitoring of the third parties with which it contracts, expand reporting from public incentives
for economic development, and discuss the inclusion of standard recovery options or clawback
provisions to discourage third party noncompliance with economic development agreements.
CASE STUDY 1: BRONX PARKING DEVELOPMENT COMPANY
In late 2007, NYCIDA reached an agreement with the New York Yankees to expand
parking access to Yankee Stadium by using City-owned parkland to construct six open parking
lots and five parking garages,7 increasing parking availability near the stadium by 2,184 parking
spaces,8 and creating twenty full-time and seventy part-time parking garage jobs.9 The agreement
was partially funded by a $237,635,000 tax-exempt municipal bond agreement10 issued to the
Bronx Parking Development Company, LLC (“BPDC”) – a limited liability company created to
increase access to parking at Yankee Stadium and managed by a five-member board consisting
5
See id. (“EDC surrendered its right to recapture $14 million in tax and energy benefits from Bear Stearns and its
successor company, JPMorgan Chase & Co. in Manhattan . . . The EDC waived its right to collect $1.16 million
from Baldor Specialty Foods in the Bronx . . . EDC failed to retake more than $520,000 in Mortgage Recording Tax
benefits given to Wartburg Nursing Home in Brooklyn after the facility had been sold.”).
6
See id.
7
See ROOSEVELT & CROSS, INC., OFFICIAL STATEMENT, $237,635,000 NEW YORK CITY INDUSTRIAL DEVELOPMENT
AGENCY CIVIC FACILITY REVENUE BONDS (BRONX PARKING DEVELOPMENT COMPANY, LLC PROJECT), SERIES 2007
1 (2007) available at http://emma.msrb.org/MS266667-MS241975-MD472350.pdf.
8
See TINA KIM, AUDIT REPORT ON THE NEW YORK CITY INDUSTRIAL DEVELOPMENT AGENCY’S PROJECT
FINANCING, EVALUATION AND MONITORING PROCESS 13 (2012) available at http://comptroller.nyc.gov/wpcontent/uploads/documents/FN11_054A.pdf.
9
See id. at 14
10
See Roosevelt & Cross, supra note 7.
Page 4 of 20
of representatives from the NYCEDC, the New York City Department of Parks and Recreation
and the Bronx Overall Economic Development Corporation.11 NYCEDC contributed a further
$39,162,852 to the project, along with $70,000,000 from the Empire State Development
Corporation. The project was completed in 2009.
An audit by the City Comptroller’s office in 2010 revealed that by the end of that year,
BPDC owed the City $17,775,808 in outstanding principal and interest on rent and payments in
lieu of taxes, in addition to the full $237,635,000 (together with $3,448,689 in interest) it owed
its bondholders.12 Additionally, it was unclear if the project had created the twenty full-time and
seventy part-time parking garage jobs anticipated in the original agreement.13
The Comptroller’s office attributed the failure of the project to improperly conducted
economic feasibility studies by NYCIDA in advance of its agreement with the Yankees.14
According to the Comptroller, the success of the project hinged on the financial viability of the
parking garages, which should have taken into account the expected game attendance, average
competitive parking rates in the area, and the reduction in demand for parking created by new
mass transit options available.15 The audit revealed that the NYCIDA feasibility studies
considered the attendance capacity for the original, larger Yankee Stadium (approximately
57,000 people), rather than the new Yankee Stadium (approximately 50,000 people), misjudged
11
See DOM SHALLO ET AL., BRONX PARKING DEVELOPMENT COMPANY, LLC AUDIT REPORT AND FINANCIAL
STATEMENTS 8 (2010) available at http://emma.msrb.org/EA462186-EA358136-EA754124.pdf.
12
See Tina Kim, supra note 8 at 14.
13
See id.
14
See id.
15
See id at 13.
Page 5 of 20
competitive pricing rates for parking during games,16 and did not account for the decreased need
for parking due to the new Metro-North train station near Yankee Stadium that opened in 2009.17
By 2012, the occupancy rate of the new parking facilities reached only 43% on days
when the Yankees played and had an average of just 12% of spaces filled the rest of the year.18
The BPDC facilities were operating severely under capacity, and by October 2012 the BPDC
defaulted on its $237,650,000 bond obligations19 while continuing to owe the City over
$25,500,000 in rent and payments in lieu of taxes.20 Shortly thereafter, the BPDC issued a
request for proposals to sublease and redevelop two lots it had leased from the City. 21 While
some of the firms interested in redeveloping the land can be found on the NYCEDC website,22
the proposals were ultimately reviewed privately by BPDC and NYCEDC and, according to
press reports, the outcome of that request for proposals was not communicated to the City.23
Furthermore, because of the way the deal between NYCIDA and BPDC was structured, any
16
See id. at 14 (“Bronx Parking was at risk of losing its competitiveness, both to other surrounding parking
facilities, which charged only $23 for 2011 [where BPDC was charging $35], and to the free on-street parking in the
community, the congestion of which the new proposed parking was meant to alleviate.”).
17
See Fernanda Santos, Metro-North Station Opens at Yankee Stadium, N.Y. TIMES, May 21, 2009 available at
http://cityroom.blogs.nytimes.com/2009/05/21/metro-north-station-opens-at-yankee-stadium.
18
See SP PLUS GAMEDAY, YANKEE STADIUM PARKING FACILITIES ACTIVITY AVERAGES 1 (2012) available at
http://emma.msrb.org/ER621481-ER481912-ER884829.pdf.
19
See U.S. BANK, NOTICE OF EVENT OF DEFAULT, $237,635,000 NEW YORK CITY INDUSTRIAL DEVELOPMENT
AGENCY CIVIC FACILITY REVENUE BONDS (BRONX PARKING DEVELOPMENT COMPANY, LLC PROJECT), SERIES 2007
1 available at http://emma.msrb.org/ER614801-ER477269-.pdf.
20
See Ken Belson, Unfilled Lots Put Parking Company in Peril, N.Y. TIMES, Oct. 21, 2012 available at
http://www.nytimes.com/2012/10/22/nyregion/unfilled-lots-by-yankee-stadium-put-bronx-parking-company-inperil.html.
21
See Doug Turetsky, Operator of Yankee Stadium Parking System Strikes Out, INDEPENDENT BUDGET OFFICE, Jul.
11, 2013 available at http://ibo.nyc.ny.us/cgi-park/?p=707.
22
See NEW YORK CITY ECONOMIC DEVELOPMENT CORPORATION, Procurement Opportunity: Request for Proposals
for Development of Two Lots in the Yankee Stadium Area, available at
http://www.nycedc.com/opportunity/request-for-proposals-for-development-of-two-lots-in-the-yankee-stadiumarea-/interested-subcontractors-suppliers/4951.
23
See Denis Slattery, Beleaguered firm begins reviewing proposals to sublease empty parking lots near Yankee
Stadium, DAILY NEWS, Jul. 12 2013 available at http://www.nydailynews.com/new-york/bronx/lots-resolve-yankeestadium-article-1.1397621.
Page 6 of 20
revenue received by BPDC as part of a sublease agreement arising out of the request for
proposals would need to be paid to the bondholders before being paid to the City.24
In August 2013 the Yankees made an offer to BPDC to demolish one of the five parking
garages and build a soccer stadium in its place to host the New York City Football Club
(“NYCFC”), an expansion Major League Soccer team co-owned by the Yankees and the
Manchester City Football Club in the United Kingdom.25 The cost of the soccer stadium was
estimated to be roughly $350 million – of which the Yankees requested $250 - $300 million in
tax-exempt municipal bonds – but the Yankees would only offer $25 million to sublease the land
from BPDC and potentially leave the City with the remaining debt. 26 The press has reported that,
as of September 2014, negotiations between NYCEDC and the City for the NYCFC stadium
project appeared to have stalled,27 and the BPDC continued to owe the City over $50 million in
rent and payments in lieu of taxes in addition to its bond obligations.28
24
See Daniel Geiger, In soccer stadium, city seeks to close books on dud of a deal, CRAIN’S NEW YORK BUSINESS,
Dec. 15, 2013 available at http://www.crainsnewyork.com/article/20131215/ECONOMY/312159959/in-soccerstadium-city-seeks-to-close-books-on-dud-of-a-deal#.
25
See Charles V. Bagli, Soccer Club’s Latest Stadium Proposal Would Give the Yankees a New Neighbor, N.Y.
TIMES, Aug. 29, 2013 available at http://www.nytimes.com/2013/08/30/nyregion/soccer-clubs-latest-stadiumproposal-would-give-the-yankees-a-new-neighbor.html.
26
See Charles V. Bagli, Deal for Bronx Soccer Stadium in Works as Clock Ticks, N.Y. TIMES, Dec. 11, 2013
available at http://www.nytimes.com/2013/12/12/nyregion/deal-for-bronx-soccer-stadium-in-works-as-clockticks.html?_r=0.
27
See Gloria Pazmino, Soccer Club Considers Acqueduct for Stadium Site, CAPITAL NEW YORK, Sep. 15, 2014
available at http://www.capitalnewyork.com/article/city-hall/2014/09/8552602/soccer-club-considers-aqueductstadium-site.
28
See Juan Gonzalez, Yankee Stadium Garage Company to Get $200M in Subsidies if City Oks Soccer Stadium,
DAILY NEWS, Jan. 6, 2014 available at http://www.nydailynews.com/new-york/gonzalez-yankees-soccer-stadiumdeal-200m-sheikdown-article-1.1567123.
Page 7 of 20
CASE STUDY 2: TURNER CONSTRUCTION COMPANY
In February 2011, the City Comptroller’s office released a financial audit of the facility
and construction contracts between NYCEDC and Turner Construction Company (“Turner”).29
Turner was engaged by NYCEDC in July 2008 to provide a number of specific construction and
rehabilitation projects, including the Bush Terminal, the Essex Street Market Building C
Rehabilitation, the Harlem River Bulkhead and Esplanade Rehabilitation, and other capital
improvement projects.30 Under the contracts, Turner was required to provide three types of
services: 1) General Services, including site evaluation, maintenance and emergency services; 2)
Administrative Services, including preparation and distribution of reports, and administration
and oversight of subcontractors; and 3) Construction Management Services, including
procurement, inspection and approval of construction work, and preparation of schedules and
budgets.31 The initial contract between NYCEDC and Turner was for $7,500,000 to provide the
aforementioned facility management and construction management services.32 During the course
of the audit, the Comptroller’s office found that between July 2008 and July 2011, Turner’s
contract with NYCEDC was amended 21 times and increased to $73,578,706.33
As part of its audit, the Comptroller’s office reviewed the financing for ten out of 47
separate projects performed by or in contract with Turner under its contracts with NYCEDC. 34
The audit considered whether the work being performed by Turner was being done at the
direction of NYCEDC; how NYCEDC reviewed, authorized and approved change orders;
whether Turner’s contractually-required deliverables (overall progress schedule, overall project
29
See H. TINA KIM, AUDIT REPORT ON THE ECONOMIC DEVELOPMENT CORPORATION’S OVERSIGHT OF TURNER
CONSTRUCTION COMPANY’S CONTRACT FOR FACILITY AND CONSTRUCTION MANAGEMENT SERVICES (2012)
available at http://comptroller.nyc.gov/wp-content/uploads/documents/FR10_075A.pdf.
30
See id. at 1.
31
See id.
32
See id. at 4.
33
See id.
34
See id. at 2.
Page 8 of 20
budget, and minutes from meetings) were “accurate, complete, and promptly submitted;”
whether the work by Turner was satisfactory; and whether payments to Turner were reasonable
and for work actually verified by NYCEDC.35
The audit ultimately determined that NYCEDC “[d]elegat[ed] many direct oversight
functions to Turner without maintaining appropriate involvement,” and did so “without adhering
to adequate procedures to safeguard the City’s financial interests,”36 potentially “jeopardiz[ing]
public safety and plac[ing] the City at financial risk.”37 Payments to Turner under the contract
revisions “did not fully comply” with the contractual provisions and resulted in “inappropriate
and questionable payments to Turner totaling $3,344,961.”38 These included questionable or
unsubstantiated payments in the amount of $1,796,107, funds lost as a result of poor oversight in
the amount of $1,491,805, and overpayments in the amount of $57,049.39
The Comptroller’s office interviewed a number of NYCEDC officials during the course
of the audit and determined that, as a matter of practice, NYCEDC policies do not effectively
ensure that work is completed in accordance with third-party contracts.40 The audit attributed
this failure on the part of NYCEDC to monitor compliance with its contracts to “the lack of
written policies that spell out the administrative and oversight responsibilities of [NYCEDC],”41
including “no evidence (such as log books or reports) to indicate that [NYCEDC] project
managers conducted sufficient and appropriate inspections of project work and were cognizant of
work scopes,”42 a “lack of work schedules . . . to monitor commencement, milestones and
35
Id. at 6-7.
Id. at 8.
37
Id. at 33.
38
Id. at 10.
39
See id. at 11.
40
See id. at 12.
41
Id.
42
Id. at 18.
36
Page 9 of 20
completion dates,”43 and “no documentation to justify the excessive costs for construction
management.”44 The audit further found that though Turner may have incorrectly reported its
costs or expenses, NYCEDC is “ultimately responsible for ensuring that work is performed
appropriately and payments are substantiated.”45 The Comptroller’s recommendation was that
NYCEDC “must strengthen its own management system to provide appropriate oversight.”46
The audit also found that NYCEDC may have “jeopardized public safety” by not
promptly addressing hazardous conditions at Turner construction or rehabilitation sites.47 Pier 1
at the Brooklyn Army Terminal partially collapsed in June 2001, and the Army Corps of
Engineers directed NYCEDC to remove the collapsed pier sections from the waterway.48
NYCEDC did not begin reconstruction of the Pier for nearly seven years – until March 2008 –
during which time the Pier likely posed a hazard to the public according to the Comptroller’s
audit.49 Similarly, in May 2006 Turner cautioned NYCEDC that falling debris was common
from the façade of the Bush Terminal, but NYCEDC did not authorize emergency repairs until
May 2007.50 The auditors found that NYCEDC allowed “lengthy amounts of time”51 to pass
between identifying hazards and repairing them, during which time public safety could have
been jeopardized.52
NYCEDC disagreed with many of the Comptroller’s findings, responding that it did not
wish to “duplicate efforts,”53 that NYCEDC has a “multi-layered process” of “established
43
Id. at 21.
Id. at 27.
45
Id. at 12.
46
Id.
47
Id.at 33.
48
See id.
49
See id.
50
See id.
51
See id. at 34
52
Id.
53
Id.
44
Page 10 of 20
procedures”54 to ensure that anticipated work scopes in response to vendor proposals are the
same that are purchased; and that it did not jeopardize public safety since NYCEDC has a “track
record and recognition as a leader in providing proactive management of its assets to ensure
public safety.”55
The Comptroller’s office reiterated that NYCEDC has a responsibility to the City for
“millions of dollars of development projects on the public’s behalf,” and that while NYCEDC
may disagree with many of the Comptroller’s findings, since “major documentation pertaining to
each project” is not readily accessible, it is evident that NYCEDC has a “lack of control” over
the administration of its contracts with Turner.56
CASE STUDY 3: MDO DEVELOPMENT CORPORATION
In February 2011, the City Comptroller’s office released a financial audit of the lease
agreements between the MDO Development Corporation (“MDO”) and the Department of Small
Business Services (“DSBS”), the terms of which are administered by NYCEDC.57 MDO entered
into a 25-year lease agreement with the City in 1979 to construct and operate a restaurant along
the East River between 30th and 32nd Streets in Manhattan.58 The lease was renewed in 2001 and
amended to require MDO to pay the City the greater of an annual fixed rent or a percentage rent
based on the value of the gross receipts of the restaurant it operates on the site.59
In 2009, the annual fixed rent for MDO was $495,000, and the percentage rent was 6
percent of gross receipts up to $10,500,000, plus 7 percent of gross receipts in excess of
54
Id.
Id.
56
Id.
57
See TINA KIM, AUDIT REPORT ON THE COMPLIANCE OF MDO DEVELOPMENT CORPORATION WITH ITS LEASE
AGREEMENT 1 (2011) available at http://comptroller.nyc.gov/wp-content/uploads/documents/FM10_126A.pdf.
58
See id.
59
See id.
55
Page 11 of 20
$10,500,000.60 MDO reported $6,190,181 in gross receipts in 2009 and opted to pay the
$495,000 fixed rent.
In the course of the audit, the Comptroller’s office made six separate “unannounced
observations”61 at the restaurant and determined that MDO staff “circumvented its procedures by
entering an excessive number of ‘No-Sale’ transactions and by cancelling orders entered into
their point-of-sale system.”62 The Comptroller audit revealed that during its unannounced
observations, “[f]or every four guest checks processed . . . MDO processed one No-Sale
transaction.”63 Furthermore, the Comptroller’s review of MDO’s employee financial reports
found that the bartenders at MDO’s restaurant used the “No-Sale” function 6,445 times but
generated only 10,243 guest checks; meaning that there was one No-Sale transaction roughly for
every one and a half guest checks generated.64 This indicated with a “high probability” that a
significant amount of MDO’s overall revenue was not being reported,65 and that the amount of
rent it owed the City likely could have been in excess of the $450,000 annual fixed rent.
The auditors found that NYCEDC needed “stronger internal controls” and closer
monitoring of MDO’s records to address the deficiencies cited in the report,66 and suggested that
NYCEDC immediately inform DSBS if MDO refused to implement proper controls so DSBS
could “consider terminating its lease agreement.”67 NYCEDC only “partially agree[d]” with the
60
See id.
Id. at 9.
62
Id.
63
Id. at 10.
64
See id. at 10.
65
Id.
66
Id. at 17
67
Id. at 18.
61
Page 12 of 20
auditor’s suggestions,68 despite the audit’s “expos[ing] the continuing problem of lax oversight
by the City over its concessionaires.”69
CASE STUDY 4: MARRIOTT MARQUIS
In February 2013 the City Comptroller’s office released a financial audit of the lease
agreements between the Times Square Marriott Marquis hotel (“Marriott Marquis”), the Empire
State Development Corporation (“ESDC”), and the City as a third-party beneficiary to the lease.
The parties entered into the 75-year lease agreement in 1982 which permitted the Marriott
Marquis to: 1) “purchase the land and immediately convey title to the City;” 2) “develop a firstclass hotel on the land;” and 3) “pay the City rent for each year of the 75-year lease term.”70
The lease was amended in 1998 upon recommendation from NYCEDC, which required
the Marriott Marquis to pay an annual base rent payment plus an additional payment based on
the hotel’s annual gross operating revenues from October 1998 through December 2007, and
“real estate tax-based payments thereafter,”71 since the Marriott could exercise a purchase option
at that point.72
The Comptroller’s audit determined that the Marriott Marquis “failed to maintain books
and records to substantiate the Gross Operating Revenue [sic] due the City,”73 which the hotel
was required to do under the amended lease agreement in order to “enable the City to confirm
reported revenue” and ensure that the City received all of the rent it was due.74 The Marriott
68
Id.
Id. at 1
70
See TINA KIM, AUDIT REPORT ON THE COMPLIANCE OF THE MARRIOTT MARQUIS WITH ITS CITY LEASE
AGREEMENT 1 (2013) available at http://comptroller.nyc.gov/wp-content/uploads/documents/FK12_065A.pdf.
71
Id. at 4
72
See id.
73
Id at 8.
74
Id.
69
Page 13 of 20
Marquis’s records only go back to January 2008 – precisely when the rent payments due to the
City were no longer based on the hotel’s gross operating revenue. 75 As a result, the auditors
were not able to verify whether all the revenue-based payments made by the Marriott Marquis
from 1998-2007 were accurate, and found that “the Marriott Marquis disregarded the records
retention provision of its lease,” leaving the City unable to determine the accuracy of the
payments it received.76
Furthermore, at the time of the amended lease agreement, the City’s Department of
Finance conducted an assessment of the fair market value of the land on which the Marriott
Marquis resided, and determined the value to be $100 million.77 However, the amended lease
provided for a purchase price of the land to be between $19.9 million and $25 million, depending
on the discounted base rent payments already paid to the City. 78 When NYCEDC advised the
City to amend the lease with Marriott Marquis, it failed to account for the significant land sale
revenue available to the City in the amended lease, which would have been, at a minimum, $75
million in 1998 ($100 million minus $25 million).79
The Comptroller’s office challenged NYCEDC’s decision-making in the audit, arguing
that NYCEDC “advised the City to execute a lease amendment that was not in the City’s best
interests,” that NYCEDC did not “perform appropriate quantitative analyses comparing
purchase, rent, and interest revenue under the original and amended lease terms,” and that
NYCEDC failed to “disclose to the City that . . . it would lose land sale and rent revenue as well
as significant interest revenue.”80
75
See id.
Id.
77
See id. at 14
78
See id. at 14
79
See id.
80
Id. at 8.
76
Page 14 of 20
Though NYCEDC contended in its response to the audit that “it would be difficult for
any organization to identify and locate all requested and related documents”81 and that
NYCEDC’s performance should be evaluated on “community and economic development, relief
and reduction of unemployment, growth in employment and the development and retention of
business,”82 the Comptroller’s response that advising the City to enter into an amended lease
with the Marriott Marquis that afforded it “far more generous rent, interest and purchase terms”83
in 1998 once Times Square had become a “successfully redeveloped, burgeoning real estate
market,”84 served to reiterate NYCEDC’s “fundamental problem with its leasing practices.”85
CASE STUDY 5: HOWARD HUGHES CORPORATION
In July 2013, the City Comptroller’s office released a financial audit of the lease
agreements between NYCEDC and the Howard Hughes Corporation (“HHC”), a business that
has leased designated areas of the South Street Seaport Marketplace since 1981, and the Seaport
Theatre since 1983.86 Under the terms of the lease, HHC is required to 1) “maintain and operate
[the South Street Seaport] Marketplace premises as a first-class specialty retail marketplace,” and
2) to maintain and operate the Theatre as either “a theater, a venue for other customary theater
activities, or a first-class, specialty retail marketplace.”87 In exchange for using the Seaport
Marketplace and Theatre, HHC is required to pay the greater of a minimum base rent of $3.50
81
Id. at 17
Id. at 18
83
Id.
84
Id.
85
Id.
86
See TINA KIM, AUDIT REPORT OF THE HOWARD HUGHES CORPORATION’S COMPLIANCE CITY LEASES FOR THE
SOUTH STREET SEAPORT MARKETPLACE AND THEATRE 1 (2013) available at http://comptroller.nyc.gov/wpcontent/uploads/documents/FK12_070A.pdf.
87
Id.
82
Page 15 of 20
times the square footage of the leasable base area, or 15 percent of each property’s gross
receipts.88
The audit determined that HHC “improperly calculated” its rent for both properties
because it “understated the square footage upon which the rents were based,” 89 “did not generate
or report income, improperly calculated imputed reimbursement rates . . . overstated expenses
and understated square footage . . . deducted from Gross Receipts [sic] direct reimbursements
that were not supported by Subleases [sic] and Subtenant [sic] invoices, and deducted duplicative
explicit and imputed reimbursements.”90 Since NYCEDC failed to commission an independent
engineering study of the square footage of the properties HHC leased from the City, the exact
square footage could not be determined by the auditors. The Comptroller found that NYCEDC
failed to “adequately monitor HHC to ensure its compliance with [the] lease terms,”91 and as a
result, HHC was permitted to improperly calculate its rent obligations to the City from January
2007 to December 2012.92
Additionally, the lease agreement required HHC to “use reasonable efforts” to ensure that
a wholesale fish market operate at the street level of the Seaport marketplace in order to preserve
the “historic and cultural importance of the South Street Seaport Historic District”93 While the
Fulton Street Fish Market operated in the space until 2005, HHC has not ensured that a fish
market occupy the space in the years since.
The Comptroller’s office estimated that HHC’s improper calculations over the course of
that five year period may have amounted to as much as $1,625,902 in unpaid rents and interest
88
See id.
Id.
90
Id. at 2
91
Id.
92
See id. at 9.
93
Id. at 24.
89
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due to the City.94 The audit also found that NYCEDC failed in its historic and cultural
preservation capacity by not ensuring that HHC retain a wholesale fish market on the South
Street Seaport property. The audit concluded that NYCEDC was ineffective in its oversight
responsibility function, as it should have ensured that HHC was in compliance with its financial
reporting and rental terms.95
While NYCEDC “strongly disagreed” with many of the Comptroller’s findings, much of
the documentation provided to the auditors indicated that NYCEDC’s lax oversight of HHC’s
leases allowed HHC to improperly report its rent obligations and neglect a cultural heritage site –
both of which “proved not to be in the City’s best interest.”96
MANAGEMENT TREND
The Council is concerned that these five case studies, taken together, demonstrate a trend
within NYCEDC of ineffective evaluation and decision making with respect to the projects it
selects as well as lax monitoring of deliverables and few clearly articulated goals for NYCEDCsponsored initiatives. While these five instances may be the most egregious recent cases of
NYCEDC management failures, Comptroller audits have raised additional examples, including:
forgiving $14 million owed to the City by Bear Stearns and its successor, JPMorgan Chase &
Co.;97 waiving the right to collect $1.16 million from Baldor Specialty Foods;98 failing to recover
of over $520,000 in mortgage recording tax benefits given to Wartburg Nursing Home after its
sale;99 over-crediting Con Edison customers almost $340,000 who participated in the Energy
94
See id. at 10
See id. at 2.
96
Id. at 24.
97
Press Release, New York City Comptroller John Liu, Liu: EDC Subsidizes Empty Job Promises (Mar. 12, 2012),
available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUTLFmoxKRAw.
98
Id.
99
Id.
95
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Cost Savings Program;100 subsidizing two jobs for $300,000 instead of the ten promised by the
Hollow Metal Factory Outlet Corporation;101 among others.102
CURRENT PROJECT: FRESH DIRECT
In February 2012, NYCEDC and NYCIDA, along with the Empire State Development
Corporation, the New York State Energy Research and Development Authority (“NYSERDA”),
the Bronx Overall Economic Development Corporation and the Bronx Borough President’s
Office offered an incentive package of roughly $128 million (including almost $90 million from
NYCEDC and NYCIDA)103 to the delivery grocer FreshDirect to construct its headquarters in
the Bronx along the Harlem River. As part of its agreement with the public agencies, FreshDirect
would contribute another $112.6 million to build its headquarters and operations facility, with
the goal of keeping nearly 2,000 FreshDirect jobs in the City, and creating another 1,000 jobs.104
In March 2013 a citizen’s group known as South Bronx Unite filed a lawsuit to prevent
FreshDirect from building its headquarters in the Bronx.
South Bronx Unite alleged that
FreshDirect had not properly conducted an environmental impact study, did not take into account
the residential nature of the neighborhood where the headquarters would be located, and that
FreshDirect was permitted to lease state-owned land that had been intended for light rail traffic
100
Press Release, New York City Comptroller John Liu, Audit: EDC Hoards $125 Million of Taxpayer Monies
(Apr. 28, 2010), available at http://comptroller.nyc.gov/wp-content/uploads/2013/07/PR10-04-046.pdf.
101
See Liu, supra note 95.
102
See Liu, supra note 98 (The City Comptroller’s office has also criticized NYCEDC over a number of broad
issues, including: inconsistency with respect to the sale of City assets; incomplete or minimum revenue collection on
behalf of the City; improper reporting of loan disbursements for small businesses; failure to enforce employment
and construction compliance requirements; and problems with administering capital construction contracts.).
103
Press Release, New York City Economic Development Corporation, Mayor Bloomberg, Governor Cuomo and
Borough President Diaz Announce Fresh Direct to Open New Headquarters in the Bronx Creating Nearly 1,000
New Jobs (Feb. 07, 2012), available at http://www.nycedc.com/press-release/mayor-bloomberg-governor-cuomoand-borough-president-diaz-announce-fresh-direct-open
104
See id.
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in order to reduce truck congestion in the City.105 The case was dismissed and later affirmed on
appeal in March 2014 on the grounds that the City had properly considered FreshDirect’s
environmental impact assessment for the proposed site.106
Nonetheless, the policy decision to fund the FreshDirect site continues to be criticized by
elected officials and government agencies, who believe that NYCEDC “has not justified why this
much money should be used to subsidize [FreshDirect].”107 According to former City
Comptroller John Liu, the amount of City funds being spent on the FreshDirect project “could
give 4,385 students full, four-year scholarships to CUNY or hire 1,458 new teachers or pay for
350,000 G.E.D. test-prep programs or launch a microlending program for minority and women
entrepreneurs.”108 Community board members have argued that the new jobs may not go to local
residents, that the increased truck traffic will cause significant air pollution in a residential area,
and that the residents likely will not benefit from FreshDirect’s services, since they do not
deliver to the South Bronx neighborhood where the headquarters will be located.109
Despite the opposition, the FreshDirect project was approved in July 2013 by the City
Planning Commission and is expected to open in 2016.110 However, as a matter of policy,
NYCEDC should justify its expenditure of nearly $90 million of City funds to subsidize the
FreshDirect project, affirm that it has clawback provisions in place for non-compliance with the
105
See Winnie Hu, Residents Sue FreshDirect Over Move to the Bronx, N.Y. TIMES, Mar. 4, 2013 available at
http://www.nytimes.com/2013/03/05/nyregion/residents-sue-freshdirect-over-move-to-the-bronx.html.
106
See Linda Chiem, NY Appeals Court Backs FreshDirect’s Bronx Move Subsidies, LAW360, Mar. 27, 2014
available at http://www.law360.com/articles/522577/ny-appeals-court-backs-freshdirect-s-bronx-move-subsidies
107
Charles V. Bagli, Criticism of FreshDirect Deal is Off Base, City Officials Say, N.Y. TIMES, Feb.1 4, 2012
available at http://www.nytimes.com/2012/02/15/nyregion/critics-of-freshdirect-deal-are-off-base-citysays.html?_r=0.
108
Id.
109
See id.
110
See FreshDirect, FreshDirect Receives Final City Approval for Incentives to Bring Thousands of Jobs to the
South Bronx, FRESHDIRECT FACTS, Jul. 23,2013, available at http://freshdirectfacts.com/freshdirect-receives-finalcity-approval-for-incentives-to-bring-thousands-of-jobs-to-the-south-bronx.
Page 19 of 20
contract, and conduct effective monitoring of the FreshDirect facility once it is completed to
ensure compliance with the terms of the agreement.
CONCLUSION
As the not-for-profit corporation that contracts with the city of New York to oversee and
administer a variety of city-sponsored economic development programs, NYCEDC has a
tremendous amount of responsibility over the management of public funds. However, NYCEDC
needs to be more accountable for the management and use of those funds to ensure they are spent
effectively and not wasted. NYCEDC should, at the very least, “stimulate the City’s economy to
a degree commensurate with the public subsidies it receives.”111 The Council is concerned that
NYCEDC may not be effectively enforcing its contracts through consistent monitoring and
clawback provisions, and that the case studies discussed above may be indicative of a relaxed
attitude towards oversight within NYCEDC. The Committee looks forward to hearing testimony
from representatives from NYCEDC and NYCIDA that will address these concerns and consider
opportunities for improvement.
111
Press Release, New York City Comptroller John Liu, Liu Peels Back the Curtain on EDC’s Finances (Dec. 11,
2012), available at http://comptroller.nyc.gov/wp-content/uploads/2013/07/PR12-12-132.pdf.
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