GUEST COMMENTARY: Hudson Yards – Setting the Record Straight (or Don’t Doubt its Success)

Sandy Hornick. Image Credit: Sandy Hornick/Hornick Consulting, Inc.

I was motivated to respond to an article by Robert Kuttner on The American Prospect website that in general argued that a tax-subsidized project was facing impending collapse which could provide an opportunity for affordable housing. I have no problem with the author disliking Hudson Yards and he wouldn’t be the first or only one to do so. I believe, however, that the American Prospect piece contains misinformation on the Hudson Yards project. This article is an attempt to put Hudson Yards into context and explain how this public/private venture is currently working.

To be fair, Kuttner appears to have relied on a New School study used by the NY Times for at least one piece of information. Unfortunately, the information is wrong so for that reason and others the conclusions in the article are also wrong. Just for the record, I also rely here on third parties for some of the following information.

For starters, Hudson Yards did not involve any subsidy of $6 billion. It did not even involve a public outlay of $6 billion. The Hudson Yards Infrastructure Corporation (HYIC) floated about $3.1 billion dollars in bonds to finance the subway extension, park and boulevard and other infrastructure such as sewers. This is stuff that the City builds in all neighborhoods. New York City could not exist without these investments. Unlike the City’s General Obligation bonds, the $3.1 billion principal of the Hudson Yards bonds was not backed by the City, though the City did make a commitment to make up any interest payment shortfalls in the early years. It is backed by the revenue streams set up which include things like payments-in-lieu-of-taxes (PILOTs) and the revenues from zoning bonuses. Should those revenues fall short, the bond holders do not have an option to go after the City to recoup their investment. However, development that has been completed so far or is in construction is likely to throw off well more revenues than will be needed to amortize the bonds.

The Bloomberg administration’s original idea to finance the project was to borrow an additional billion dollars up front and use that to pay the interest on the bonds until the revenue streams generated sufficient funds to pay the interest. The City Council believed, probably correctly, that the bonds would get a better rate if the City only borrowed the money it needed to finance the infrastructure (not the extra billion) and the City guaranteed the payment of interest on the bonds. That’s what was adopted and that’s what the City is on the hook for. All included, the City provided approximately $359 million in interest support until the revenue streams generated sufficient revenue to cover the interest payments consistently until 2017. However, during this time, HYIC was also earning money. For example, the first $2 billion was borrowed in 2006 in the first bond offering and then spent down as the project progressed, and the second about $1 billion was borrowed in 2011 to complete the project.  During this time, the unspent funds earned interest. There was also revenue from zoning bonuses and other one-time payments that equaled about $620 million. The actual cash outlay from the City to support the HYIC structure was thus only about $359 million over ten years. This is not nothing, but it is a far cry from the fictional $6 billion some folks are tossing around.

Since 2017, when the City was no longer required to make any interest support payments, HYIC has made a total of about $663 million in payments to the City’s general fund to support the ongoing cost of City government, and the HYIC bonds were refinanced in 2018 to a lower interest rate and converted to level debt service. The bond offering documents for the refinance demonstrated, and investors who purchased the bonds agreed, that there is likely to be sufficient project revenues to pay off the bonds without further City support. The current City’s five-year financial plan projects that in each year HYIC will pay $100 million to the City’s general fund, a conservative budgeting projection that is likely to be exceeded. I’m also told that the MTA refinanced leases with Related for its railyards and took out a billion dollars so this was a financial success for both the city and MTA.

It should be noted that the name “Hudson Yards” applies both to the project that the City of New York undertook through HYIC and, at the same time, the project developed by the Related Companies above the MTA railyards.  The Related project may be the marquee project but it is not predominant in terms of square footage or project revenue. The Related project is a totally separate financial undertaking from the HYIC project- financed and managed by a private investor/developer- but it does contribute revenues in the form of PILOTs and other payments to the HYIC project.  The Related Hudson Yards project currently consists of about 11 million square feet of buildings (office, retail, hotel, residential), out of the about 34 million square feet that has been built or is in construction across the entire Hudson Yards district that contribute revenues to HYIC. As discussed above, the HYIC financing structure is successful, as demonstrated by the fact that its bonds were refinanced in 2018 and that it is paying surplus revenues to the City regularly. I’m not in a position to evaluate the financial health of the Related project, however, an imminent collapse is also seems unlikely. The majority of the 11 million square feet constructed by Related consists of office buildings that are fully leased to some of the most credit worthy tenants in the nation, including Tapestry (formerly Coach), L’Oreal, Warner Media, Facebook, BlackRock, KKR, and a number of prominent law firms and hedge funds. Reporting and industry sources indicate that Class A tenants of this caliber typically paid near 100% of their contractual rent through the COVID-19 crisis, and they are likely to continue to do so. The two residential condominium buildings may have somewhat slow sales but they are likely to sell out eventually, possibly requiring reduced prices that will lower Related’s profit, but there has been no reporting of financial distress at these properties as is typical in advance of a condo developer default. The retail mall – about 1.1 MSF out of Realted’s 11 MSF total – is certainly experiencing headwinds, but even a default there would not precipitate a project-wide failure, not least because each component of the project is financed separately.

You can dislike the esthetics of Related’s Hudson Yards, but even post-pandemic, if you visit the plaza at Hudson Yards you will see dozens, hundreds and even thousands (depending on the time and weather) of New Yorkers and tourists, pouring on and off the High Line, taking selfies, partaking of varied arts and entertainment events, and enjoying the Hudson River Views. The largest of the HYIC investments, the extension of the No. 7 Line to the area, is incontrovertibly a success (in the top third of subway stations by number of entrances/exits), making the area accessible to users of the Javits Center, High Line, Hudson River Park, thousands of new apartments in the area, and yes, the Related and other Hudson Yards developments. Likewise, the new Bella Abzug park is well used, and maintained and operated at no cost to the City of New York by a business improvement district made up of owners of buildings in the area.

Kuttner’s conclusion about the risk that the Related Hudson Yards project will go belly up is based on something other than objective fact.  It is certainly true that the pandemic has upended the real estate market and, from all reports, there are increased vacancies in both commercial and residential properties. There will likely be some, and perhaps many, properties that will not have sufficient funds to carry their debt and are likely to be foreclosed by the lenders.  Nevertheless, the lenders are unlikely to stop paying their taxes or, in the case of Hudson Yards, their payments-in-lieu-of-taxes. If they do not make these payments, the City typically acquires the property which would wipe out their investments. In the unlikely situation if the Related project’s finances were to become so dire as to default, it is likely that, rather than allowing the City to take the properties for back taxes, the lenders would foreclose, write down the debt, and sell the properties to other investors who would put in place a repositioning strategy.

To be sure, sometimes properties are acquired by the City for lack of payment of real estate taxes. In the 1960s and 1970s, the City acquired huge swaths of property mostly in economically depressed neighborhoods where neither property owners nor lenders (if there were lenders) saw sufficient economic return to justify holding onto many of the properties.  For Hudson Yards to be similarly afflicted would require the value of much of Manhattan’s real estate to sink to very low levels. This strikes me as highly unlikely if the City is even reasonably well-governed.

It is certainly not anything I can imagine one “hoping” for. It is true that housing was cheaper in the 1970s (and it permitted me to buy a house I could not afford today). I and many of the folks reading this lived through this in the 1970s. “Cheap housing” may have benefited some but it meant that in huge parts of neighborhoods, particularly in Brooklyn, the Bronx and parts of Manhattan, housing had so little value that it was abandoned. Howard Cosell famously reported during the 1977 World Series that, “The Bronx is Burning.” The City did not have adequate revenues to support its fiscal plant or provide services and would have gone bankrupt were it not for a federal bailout. In fairness, decades of municipal overspending played a significant role in the 1970s debacle but a key reason for that overspending was the unfounded belief that the City’s economy would grow to support the growing deficit when, in fact, the economy contracted.

Alas, while it is impossible to say how many people will be working in Hudson Yards post-pandemic, that number will certainly be in the many, many thousands. Although criticism of market-rate housing is common, the Hudson Yards market-rate housing development not only houses New Yorkers competing in the city’s normally tight housing market but also resulted in the construction of at least 3,000 permanently affordable units through 2019, and likely more since then.

By: Sandy Hornick (Sandy Hornick is the Principal of Hornick Consulting, Inc. and the former Deputy Executive Director of Strategic Planning for the Department of City Planning/Zoning Director)