Thinking Big and Executing Big: Q&A with Lynne Sagalyn, Professor Emerita of Real Estate
Professor Emerita of Real Estate, Columbia Business School
Lynne Sagalyn, a native New Yorker, is a professor emerita of real estate at Columbia Business School. She specializes in real estate finance and development, and her research and writings have focused on redevelopment public policy. She is the author of Times Square Roulette: Remaking the City Icon, the definitive book on the 42nd Street Redevelopment Project.
Can you provide some historical context for 42nd Street?
Times Square, West 42nd Street was known as an entertainment district in the 19th century. There were about 30 years of real activity, when theaters started to populate West 42nd Street, between 1890 and the late 1920s. It was a place of cabarets—what they called rooftop nightclubs—as well as live theater and other kinds of entertainment. The glory days hit hard times during Prohibition when you couldn't sell liquor, and the character of the street changed. Many of the people going to the midnight cabarets and the rooftop restaurants decided it wasn’t as much fun without liquor to juice things up. When Prohibition finally ended in 1933, the country was in the depths of the Depression, and that was a huge, historic aborting of all economic activity. Then after the Depression came World War II.
Also, this was during the advent of palatial movie palaces. Movies—speaking movies, not silent movies—were making their mark, and they were attracting a significant part of the entertainment dollar. On 42nd Street, the theaters began showing action movies, burlesque, and all sorts of lower-level activity, which brought in a different cast of characters. It was a kind of interregnum between the heyday of the 1920s and the subsequent redevelopment of the street some fifty years later. The decline really started in the '30s and '40s, and in the 1950s, when Middle America was moving to the suburbs, New York City had even more kinds of what we used to call “deviant uses” populating West 42nd Street, and this lasted through the '50s, '60s, '70s, and into the '80s.
What led to the redevelopment project in the mid- to late ’70s?
It didn't start with the City, even though it became a City project. Fred Papert, who had been involved in creating Theater Row, a collection of off-Broadway theaters on further west on 42nd Street, organized a group of citizens who were very concerned about the decline of 42nd Street and the perception of rampant crime, vagrancy, and loitering. They got together and developed a plan called “The City at 42nd Street.” They wanted Ferris wheels and all sorts of entertainment to grace the street.
It started with redeveloping the New Amsterdam Theatre. The City at 42nd Street approached the Ford Foundation, which agreed to support their efforts up to about $600,000. The plan included a lot of things that are like what ultimately happened on the street. They wanted to preserve the theaters. They wanted to put offices on the eastern part of the site. They wanted to put a merchandise mart on the western edge of 42nd Street and Eighth Avenue.
To turn around West 42nd Street, they believed all the property needed to be acquired simultaneously, which is very difficult to do without the powers of eminent domain, so they needed the City’s cooperation. When they presented the plan to Mayor Ed Koch, his response was, “I don't want orange juice. I want seltzer.” And he wanted control. He wanted the City to take on this project. He also wanted more than one developer involved. He took the project in-house, so to speak.
How did Mayor Koch proceed?
When Koch decided that he wanted to take on the project, the City really didn't have the capacity to do the planning and real estate deal-making that it subsequently developed. Instead, it joined forces with the New York State entity then called the Urban Development Corporation (now Empire State Development). UDC had extraordinary powers. It had powers to bypass local zoning. It had the ability to transact and negotiate custom tax deals, which the City did not have in areas below 96th Street. And it had faster environmental review procedures. The coalition between the City and State became a very powerful resource both politically and financially.
What were the components of the City’s first plan, presented in the early 1980s?
The initial plan for the redevelopment of West 42nd Street was a really ambitious plan. It combined 13 acres of 42nd Street from Seventh Avenue to Eighth Avenue, the south side of the street and the north side of the street.
The key aspect of the plan was to create four high-density office towers at the intersection of 42nd Street and Seventh and Broadway. On the western end of 42nd Street, there was going to be a merchandise mart on the southern side of the street and a hotel on the northern side. The hotel would service the merchandise mart.
In between they were going to have theaters and retail. The essence of the plan was to anchor both ends of the street with big commercial developments and preserve the midblock for theater and entertainment. The theaters were important for the plan because of the City’s desire to maintain the character of the street. It was a very ambitious plan, because the City and State wanted to do it all at once. They wanted to do simultaneous redevelopment, which is extraordinarily difficult to implement and finance.
How did the financing strategy work?
The City was broke. It was still in the process of recovering from its near-brush with bankruptcy, and in order to acquire all the property on 42nd Street, it needed money, lots of it. And for the City to allocate any money from its capital budget for that kind of acquisition would have been politically treacherous. Also, the City had never used condemnation powers for commercial redevelopment, and it would have been both financially and politically risky to do that.
The City devised this ingenious strategy of asking developers to fund the cost of acquiring the necessary properties on 42nd Street. They would pay back those loans through a seemingly simple but quite complicated arrangement whereby the State would acquire the properties then lease the land to developers. The developers would then make payments in lieu of taxes to the City, and these funds would be used to pay back the acquisition loans.
When a public agency, be it the City or the State, owns land, they're not responsible for property taxes the way a private owner is. But the City still needs those taxes. One arrangement in public-private projects is a payment structure called payment in lieu of taxes. It's not quite property taxes, but it is a payment to support the services that the City provides to that site, just the way property taxes provide revenues for services that the City provides. The payment in lieu of taxes for the sites on West 42nd Street involved what would have been property taxes, and they also involved ground lease payments. These payments weren't separate, and they were below market—so they were attractive to developers.
The high density that the City wanted to create on those four office sites is what made the arrangement attractive to developers. There were 8.2 million square feet of development rights for this portion of West 42nd Street, and the city pushed 50 percent of them, 4 million square feet, over to the office sites.
The financing plan was incredibly novel because it reversed the typical way of doing things for an urban renewal project. In the typical arrangement, the public sector would pay for the acquisition of property, which it would then sell at a below-market cost to developers. Here you had developers extending millions of dollars in loans to the government entity to acquire property that they would then lease back.
How did this strategy play out?
Surprising well. As part of the package for funding the acquisition of the office sites, the real estate developers chosen to develop the towers also funded the acquisition of most of the midblock theaters. The plan to preserve the theaters involved creating enough commercial office space so that the developers could help fund their preservation.
Prudential Insurance Company, the money partner, aligned with Park Tower Realty, and plopped a $241 million letter of credit into an escrow account, which allowed the condemnation proceedings for about two-thirds of the street to go forward. Prudential's role and its capacity to write that check for $241 million—which was an incredible amount of money in 1990—was critical to move forward with the project. Prudential believed that controlling all four office sites at this critical junction in Midtown Manhattan would give it some pricing power when it came to leasing the office space, so the insurance giant had an incentive to become a partner in this high-profile project. Without Prudential’s financial commitment, the project probably would have collapsed. And it's really hard to rebuild the momentum for a project like this once it collapses.
Why did the project stall?
Lawsuits. There were 47 by the time the project actually moved forward. There were lawsuits against the taking of the property. There were First Amendment lawsuits about the right to have pornography on the street. There were lawsuits over the environmental impact statement. There were lawsuits over the financing arrangements and whether they were in conformance with the condemnation statutes that required “sure and certain compensation.” There were lawsuits by community groups. You can't move forward with condemnation action, certainly not condemnation action that is being funded by private developers, when you have lawsuits outstanding.
Additionally, the initial development plan called for a set of office towers that were as sterile as sterile could be. They were postmodernist in design, and, they kind of looked like buildings that had been built in Dallas. The design of these corporate towers evoked tremendous opposition because it ran counter to the symbolic significance of the area. One of the lessons from this whole project was you may redevelop a street, but you can't wipe out its history. And that first design threatened to wipe out this special place in the history of the city. The plan also involved demolishing the Times Tower, that triangular building from which the ball falls every New Year's Eve. That came from the idea that these pristine new office towers should in no way be compromised by anything old or historic.
How were the design concerns raised?
When the Municipal Arts Society saw the plans, its members galvanized into action because they viewed themselves as a protector of the city's architectural history. They believed in the redevelopment, but they didn't want to eradicate the physical presence of the past. And they were, at that point, a pretty potent civic force. The redevelopment plan did not have to be approved by the City’s then-ruling body, the Board of Estimate, but the mayor decided he should bring the plan to the Board for approval because it would enhance the political consensus for the project. The Municipal Arts Society was threatening, through its opposition, to throw a kink in that approval process. And they were backed by lots of other theater advocates who did not want the character of the area changed and turned into a second Sixth Avenue, which was the opposing image. So, basically, the Municipal Arts Society spoke with the Commissioner of City Planning, and they worked out a deal where the Municipal Arts Society would not oppose the approval of the project if the Department of City Planning completed a review of all the regulations affecting land uses and signage in Times Square with the intent of preserving the character of the area. And that was a very successful deal because it did lead to the signage regulations to preserve the character of Times Square, and it got the City its approval without opposition. And it ultimately changed the kind of office buildings that we see there today.
What led to the market collapse, and how did that affect the project?
The City had passed a rezoning of Midtown Manhattan in 1982 that lasted for five years, significantly upzoning many blocks in West Midtown. And as the lawsuits were winding their way through the courts, the New York real estate market was hot. Office towers were being built, some would argue, ahead of demand. By about 1987 or ’88, the office market collapsed. We had much more supply than demand. We had “see-through buildings,” that is, a lot of empty buildings, particularly in Times Square, because the Midtown rezoning created significant incentives for developers to move westward. That created a problem for the 42nd Street Redevelopment Project, which was supposed to be the catalyst for redeveloping Times Square. Trying to redevelop 42nd Street when you had all this vacant space in Times Square was obviously going to be difficult.
It turns out that those vacant office buildings became an incredible catalyst for the redevelopment of 42nd Street because when the vacant buildings went into bankruptcy and were sold, they became corporate headquarters for Bertelsmann and Morgan Stanley. The entrance of these global corporations and, in particular, the blue-chip investment bank validated the redevelopment of Times Square. Instead of the 42nd Street Redevelopment Project becoming the catalyst for the redevelopment of Times Square, the redevelopment of Times Square became the catalyst for the 42nd Street Redevelopment Project. It was a fortuitous reversal.
How did the redevelopment proceed?
The redevelopment of the office sites really took off in the mid '90s. Douglas Durst and his family company acquired a parcel from Prudential, to which they added parcels they already owned adjacent to that site, and that validated the private sector's investment in the redevelopment of 42nd Street. Durst quickly brought in Condé Nast as an anchor tenant to what is now Four Times Square, and that was a very significant decision that prompted others to acquire the remaining office sites from Prudential.
The next site was acquired by Rudin Management Company, and they brought Reuters in as a tenant. After that acquisition and development plan, Boston Properties bought the remaining two development sites from Prudential. This completed the transition from plan to reality. Now there were three well-capitalized, experienced developers who would be building office towers with anchor tenants to fill those towers. It was no longer a purely speculative project.
What contributed to the project’s success?
Opposition that became a productive force! Opposition got rid of a wrong-headed plan and pushed for a visual idea and program of entertainment that was in keeping with the historic significance of the place.
Second, you had this alignment of City and State political power that was formative in managing and jumping over the many hurdles that beset the project
You had deep-pocketed partners in the private sector who funded the acquisition that made comprehensive redevelopment of West 42nd Street possible.
You had leadership. People sometimes underestimate how important leadership is in making things happen. You had a governor, Mario Cuomo, in place for three terms. You had Carl Weisbrod, Rebecca Robertson, Wendy Leventer. These were all people who worked with each other over the years. You had a cast of players in the public sector who knew each other—that kind of continuity makes things happen.
“Opposition got rid of a wrong-headed plan and put in place a visual idea and program of entertainment that was in keeping with the historic significance of the place.”
How did the project impact the city and the future developments?
The redevelopment of 42nd Street was the first big project the City took on after the failure of a project called Westway. After that failure people lost faith that New York City could do anything big again. But the ultimate success of the 42nd Street Redevelopment Project proved that the City could think big again and, along with the State, execute big. The significance of the City's role, NYCEDC's role, as a partner to the State, was that it taught the City how to do big projects. So, after a period, the City has not needed the State to do these large-scale redevelopment projects. It has the capacity in NYCEDC today.
What’s one word you would use to describe 42nd Street?
I would say it’s wonderfully chaotic. It attracts lots and lots of people who are having a good time, and that's what it should do.
Editor’s note: Q&A has been edited for length and readability.