City may have to service Hudson Yards bonds for longer than originally anticipated
With development delayed in Hudson Yards, city will have to fund debt service on bonds for infrastructure in the meantime
The city will likely have to pay more debt service than originally anticipated for the $2 billion of Hudson Yards bonds that were issued in 2007 to finance the extension of the No. 7 subway line and other infrastructure projects on the far West Side.
According to documents released at the time of that bond offering by the Hudson Yards Infrastructure Corporation, the agency that manages the funds, the city calculated that deferred tax payments and other charges tied to projected development on the West Side would be enough to pay the roughly $100 million of yearly debt service on the bonds by 2014.
But with the economy in the midst of a serious recession, that development could take substantially longer to materialize than the city’s 2014 timeline appears to anticipate.
Last week, for instance, the Related Companies, a Manhattan based real estate firm, negotiated a yearlong extension with the Metropolitan Transportation Authority on having to place a roughly $43 million payment to secure development rights for the West Side rail yards, where Related has planned to eventually build a $15 billion complex of office, residential and retail buildings. In a release issued to announce the extension, the MTA cited the economic downturn and the “collapse of traditional commercial lending” as reasons for the delay.
But the rail yards isn’t the only super-project that has come under a cloud of increased uncertainty within the Hudson Yards district, a swath of land in the West 30s and 40s that city planners have envisioned transforming into an extension of midtown. The development of Moynihan Station, which would expand and revamp Penn Station while creating opportunities for large office towers and retail development in the direct vicinity of the transit complex, has stalled for lack of funds and issues surrounding its complexity.
In the face of economic headwinds and without the two large developments buttressing the area’s revitalization, smaller scale development such as residential construction that had begun to take off in the district during the real estate boom has also appeared to falter more recently.
According to Nick Samuels, a vice president at Moody’s Investors Service, which maintains ratings for the Hudson Yards bonds, proceeds from tax revenues and one-time charges in 2008 were $1.6 million and $6.9 million respectively. That’s a precipitous decline from 2007, when the city netted nearly $60 million in such payments, most of which appear to have been one-time charges because of the paltry payments in lieu of taxes in 2008, which, once established, become perennial payments.
Led by Mayor Michael Bloomberg’s championing of the area’s potential as vital expansion room during the prosperous years before the current crisis, city planners devised a plan to defer tax payments and the proceeds from the sale of additional development rights to fund an extension of the No. 7 Subway from its current terminus at Times Square to 34th Street and Eleventh Avenue.
The extension, along with other infrastructure improvements such as a long, tree lined boulevard stretching diagonally between Eleventh and Tenth Avenues, have been viewed as pivotal to attracting residents, tenants and new development to the area.
The city anticipated that it could take years for the area’s makeover to get started and so agreed to fund whatever portion of the bonds’ debt service was left unpaid in the event the area’s development proceeds proved insufficient. Despite the risks, the city’s method appeared to be an innovative way of harnessing the economic potential of the far West Side to fund its own transformation rather than burdening the city’s general budget with having to make the large capital outlays.
But if the economic downturn pushes development in the district years behind original projections and the city has to pick up the tab for the $97 million in yearly interest to service the bonds for an extended period, it could begin to lend credibility to early questions over the wisdom over the city’s decision to use the complex financing plan over a more conventional structure.
One issue is that the Hudson Yards bonds receive a higher interest rate than if the city had issued the bonds directly because the Hudson Yards Infrastructure Corporation, even though it is backed by the city, has a slightly lower credit rating.
Another critique has focused on the city’s decision to discount tax payments in the Hudson Yards in order to spur development there, an incentive that some fiscal experts say will do little to encourage building in the area and only hamper the city’s efforts to generate enough cash flow when development does occur.
“I thought it was illusory that this was paying for itself,” said James Parrot, an economist for the fiscal watchdog group the Fiscal Policy Institute. “We criticized it on the grounds that the financing mechanism was making it harder to pay off the debt than if the city just put it in its capital plan and charged full property taxes.”