Daily News from New York, New York on September 11, 1979 · 512
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Daily News from New York, New York · 512

New York, New York
Issue Date:
Tuesday, September 11, 1979
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34 DAILY NEWS, TUESDAY, SEPTEMBER 11, 1979 The queen of the sweetheart deals - , : IE RECENTLY, A WALL STREET magazine, Barron's, characterized the deal made by the city with Donald Trump for rebuilding the Commodore Hotel as "the most generous package of tax abatements in state history." Donald Trump, the politically connected, Brooklyn-based promoter, has as his partner in this deal Jay Pritzker, who was Saul Steinberg's partner in the bus-shelter affair. If Barron's had waited a few weeks, it might have written about another New York hotel deal which, some believe, makes the Commodore scheme seem like political petty larceny. After all, the Commodore was boarded up and owed $10 million in back taxes. A knowledgeable real-estate lawyer has estimated the direct tax contribution of the city to the owners of the new hotel at not less than $100 million. The new scheme is the one concocted for the proposed Portman Hotel to be located on the west side of Broadway between 45th and 46th Sts. Its cost has been estimated at $241 million, without provision for overruns, the highest-cost hotel anywhere, ever. The hotel is named for John Portman, an Atlanta architect famous for designing fanciful, marketable buildings. A city official estimated the Portman group will receive not less than $7.5 million for its services. The project is being channeled through the New York State Urban Development Corp., which, following its collapse as a housing agency, has been retreaded as an economic development agency. It serves as a convenient conduit for tax subsidies and other preferment. According to the Board of Estimate resolution, written m lawyers' gibberish, with one sentence 221 words leng, the City of New York proposes to grant exemption from real-estate taxes to the Atlanta-based hotel design and promotion group. Also, there is deferral of all rent for the first seven years and, thereafter, it is to be paid only after deducting all operating expenses, including fees. A nominal payment of $900,000 per year to the city comes before mortgage, interest and amortization are paid. (This has not yet been agreed to by a mortgage lender.) There is no provision for control of operating expenses, or fees or commissions paid to lawyers, architects, management groups, directors and insiders, mortgage brokers and others during and after construction. Such uncontrolled costs may, in fact, be capitalized as part of the equity investment, on which a minimum return of 12 is provided. It appears from a reading of the tortuous Board of Estimate document that the promoters will pay nothing to the city for at least the first several years. After 15 years, if the hotel is sensationally profitable, it will pay rent equal to what its normal tax would have been. Unlike taxes.the full rent will not be payable in years when there is not enough profit to reward the equity owners first In addition, there is a provision which allows Portman to sublease all or any portion of the hotel, without consent of the city, to help obtain financing. Nothing is said about controlling the terms of such sublease, or the profits to be made on it by the sub-tenant, or who might be eligible. To one informed real-estate operator, "This is like a license to drive a fish truck into the Chase Manhattan vault" There are additional provisions for not paying sales tax on materials used in construction and for paying the expenses of UDC before the city is entitled to payment The above points are taken from the Board of Estimate resolution which reflects "verbal understand--ings." The actual lease has not been drawn. However, a person who attended a negotiating session between Glenn Isaacson, representing the Portman interests, and the group of second-level city employes who dealt with him declared it an uneven match. "It would have been reasonable," he said, to grant Portman the same shorter-term, descending-scale tax advantages granted to Harry Helmsley for his two new hotels, the Harley and the Palace . It might also have been reasonable to seek a one-time federal grant But the representatives of Deputy Mayor Peter Solomon's office, the Economic Development office, the office of Midtown Planning, the UDC and the city's lawyers and consultants were so eager to make the deal that they would have given away the keys to the mayor's- private lavatory.' ' - The Board of Estimate resolution provides that the I.D.RODDEVS designee approves it in writing. The mayor is being alerted to the pitfalls. Allen Schwartz, the city's corporation counsel who has not himself been involved in these proceedings, has told us that if the actual lease is drafted, he will personally "dot every t and cross every t." Mayor Koch is in a political alliance of convenience and necessity with Gov. Carey but still, the mayor shouldn't want to be mouse-trapped by UDC deals that can make a lot of people very rich and raise questions about how and why he let it happen. Meanwhile, the city and UDC officials are racing a deadline Sept 15, next Saturday the last day when the federal Department of Housing and Urban Development will consider a request for a Community Action Grant of $15 million designed to sweeten the deal for a mortgage lender. Morgan-Stanley & Co., through its mortgage brokerage affiliate, Brooks, Harvey, Inc., is seeking to find a mortgage lender. If it is successful, it will get a fee estimated at $1.5 million. The favorite lending target is the New York State Teachers Retirement Fund which, strangely, financed Portman's Atlanta fashion center, designed to entice the garment industry out of New York. Others being pursued are Metropolitan Life and Equitable Assurance Society. As part of the same effort to perfect the deal, the Board of Estimate last month granted a variance to permit the hotel to project 13 feet over Broadway, above an enclosed sidewalk cafe. All of the details are being shepherded past political and bureaucratic obstacles by Sandy Lindenbaum, son of Bunny Lindenbaum, the Brooklyn lawyer and political fund collector. Sandy is a partner in the law firm of Rosenman, Colin, Freund, Lewis and Cohen, whose partners managed to collect from both sides in the bus-shelter controversy and have just employed the political public relations operator, Howard Rubenstein, to re-polish the firm's reputation. Now, according to Bernard Zimmerman, senior planner of the city's Midtown Planning Office, "In order to satisfy HUD, we have everything ready except the demolition permit and the building permit The sale of the land is being negotiated." Some tough acquisition problems, whether by purchase andor condemnation, are still involved in the Portman deal. Bankers Trust controls the major part of the site as trustee for the Bell System employes pension 'A strange way to clean up vice... You get rid of prostitutes with cops, not with hotels9 fund and is under pressure to re-invest in the new hotel, but other owners must also be taken care of. Included within the site and to be demolished are four popular theaters, the Helen Hayes, Morosco, Bijou, 46th Street and a movie house, the Victoria. Although it has been the city's policy tor protect the theater district for its essential cultural value and as a visitors' attraction, the negotiators for the city have agreed that the Portman hotel may contain only one theater, a 1,500-seater suitable for musicals, but not drama. And, because it will inlcude a theater, the hotel has been exempted, from the size restrictions of the zoning code! Nawj illustration by Joe Popin ' The first is the one ascribed to Portman. After an' economic setback which caused him to lose interest, the Manhattan hotel business and the tourist trade have expanded to where it again makes sense to build another big middle-class hotel. We shouldn't blame Portman if, once the decision was made, it was in his interest to drive as hard a bargain as possible. One of New York's leading brokers and land assemblers commented that the change in the market was precisely what happened in the deal with Trump-Pritzker for the Commodore. "By the time the city made the deal, anyone could have made it The city gave away too much. Brokers, were standing in line with customers, but no one thought he had the clout to beat out Trump. Why bother when the deal is in the bag?" "Still," he added, "Broadway is not Grand Central, and there must have been another angle." The second version of what happened has many adherents. It assumes that Portman believes casino gambling is coming and that Times Square will be a Manhattan version of the Las Vegas strip. An enlarged 42d St will continue as a vice district and be accepted for what it is, an appurtenance to casino gambling. The exchange rate will be favorable for foreign tourists and even if top dollar can't be obtained from tourist groups, a sure profit can be made from people who lose at the gambling tables. As Atlantic City has shown, the profits to concessionaires would dwarf any profits from the hotel business. As sub-tenants, the gamblers would not be accountable to the city. When we sought to get the names of the private, equity investors, the Portman organization did not return our calls to its Atlanta headquarters. Though Peter Solomon said the city has been promised it would be given the names before the lease was signed, no city official presently seemed to know. "With the prospect of huge gambling profits on top of an early-years tax shelter, equity investors should not be hard to come by. Portman has some of the nation's wealthiest people as his tax-shelter partners in previous deals. Some of them . have also controlled investments in casinos. In short form, and layman's language, the Portman-Hotel deal is as follows: 1. Portman Associates, or UDC acting as agents for Portman, will acquire the property by purchase or -condemnation. 2. Portman, In order to obtain tax exemption, will convey the property to UDC, which is tax exempt, in return for a favorable 75-year lease. " 3. Portman will pay UDC out of earnings- if any, only after payment of ail operating expenses, fees and debt service. 4. UDC will deduct its costs, including fees to lawyers and consultants, before paying anything to the city, which will. never, under the most, favorable conditions, collect more than the amount of ordinary real-estate taxes. - 5. If for any reason (perhaps gambling profits) the Portman group elects to buy out the UDC-city interest, it can do so by agreeing to pay normal taxes. One day before he left with his wife for a holiday in China, Deputy Mayor Solomon took time out to explain his theory and justif iation for the Portman deal. "As I see it" he said, "it's a question of the critical mass, At a certain point, I believe we so improve the Times Square area as to drive away porono shops, prostitution and other low-grade enterprises which can't thrive in a better environment Our contribution to the hotel must be considered as support for this belief." When it was pointed out that porno shops and other sex joints had become neighbors of the new Citicorp Building on the most valuable real estate in New York, he said it was still a matter of his best judgment Offhand, it seems a strange way to clean up vice in midtown. After all, you get rid of prostitutes with cops. 6. Portman is seeking to borrow as much as possible, hopefully $180 million, from mortgage lenders. After $15 million from Washington, plus advances from sub-lessees and co-venturers, $45 million will be required from equity investors, including those who might put up a part of their fees in return for a partnership interest . , The Portman hotel program raises many question's. Among them: . 1. Although the hotel is being promoted as a way to clean up the Times SquareA2d St. area, is there any' evidence that it will do so? Or might it consolidate undesirable activities? 2. Would not an administration more dedicated to " getting rid of porn and vice find better ways to do it? What would LaGuardia have done to pimps, etc.?. Is there a better way to use city and state tax exemption and condemnation powers to promote economic development? , 4. Would the program have got to first base if it had not had powerful political support? .'DC will not execute a lease uhtH the. jot. his, , , jtup four years ago, not with hotels. ., ,v. -- 5 Wul th$ .city twiaicei a xreai effort to. close .thel C j Two other versions are offered for Portman's re- loopholes m the qealZIftlw jokers, aren't still tnt, will newed interest in a Times' Square area hotel after giving Portman,. thet yiQrtgage.es end. theL investors still be interested : , .

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