Does Retail Need To Become A Loss Leader / Is Hudson Yards On Shakey Ground?

David Goldsmith

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For quite a while retail rents skyrocketed and became the driving force behind many building purchases. In the last few years the pretty clearly overshot the mark, resulting in many vacancies and eventually a sharp correction in rents. Under the current dual crises of covid-19 and protests/looting we have extreme further pressures on retail businesses. But especially in NYC without first fixing retail how can we convince people that the downsides of living here are worth the costs?
Instead of recognizing the need for retail as a support for residential and office space, it looks like major holders of space might choose to cut and run. My question is what happens to places like Hudson Yards without retail? (And remember that many mall leases give smaller stores the option to cancel their leases if the anchor tenant leaves, and from what I understand Hudson Yards is no different in that aspect).
Related marketing Neiman’s Hudson Yards store as office
Developer shifting to Plan B as anchor works through bankruptcy

With Neiman Marcus in bankruptcy, the Related Companies is marketing the department store’s space at the Hudson Yards mall to office tenants.

Related and co-developer Oxford Properties are marketing Neiman’s 190,000 square feet and other retail space as office use, according to Business Insider. In total, the developers put 380,000 square feet at the top of the mall — or roughly 40 percent of the shopping complex — on the market.

A representative for Related declined to comment to Business Insider and a spokesperson for Oxford did not respond.

The move is a remarkable change in strategy for Related and Oxford, which once considered the retail component to be the most valuable aspect of their $25 billion Hudson Yards megaproject.

The developers spent $80 million building out the store for Neiman, which they used as an anchor to lure other retail tenants. Related and Oxford developed the adjacent office towers and sold some of those spaces off at-cost, figuring they would drive value at the development by filling the office towers with workers who would shop at the mall.

But the city’s retail market had suffered in the years since Related and Oxford hashed out plans for the complex, and the coronavirus shut down has made matters worse.

Neiman filed for bankruptcy earlier last month.
 

David Goldsmith

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Related halts payments to Hudson Yards EB-5 investors
In a letter, developer says the pandemic will impact the value of investments in the megaproject

Related Companies, one of the EB-5 program’s biggest proponents, is halting payments to such investors in Hudson Yards because of volatility caused by the pandemic.
In a letter sent last week, a copy of which was reviewed by The Real Deal, Related told EB-5 investors the project was facing a host of challenges, including delays and increased costs around the platform work at the site, as well as “extremely challenging conditions” in the residential condo market and the bankruptcy of its mall anchor tenant, Neiman Marcus.
As a result, the firm had “decided not to make distributions at this time.”
Related declined to comment on specifics, but a spokesperson said the distributions were optional, and all required payments had been made. The spokesperson blamed the decision on challenges to the wider economy, and said Related maintained a positive outlook about the program going forward.
The announcement illuminates deeper risks in the EB-5 program, which offers green cards to investors who put a certain amount of money into job-creating businesses in the U.S.
Referred to as the “crack cocaine of real estate finance,” the EB-5 program has poured billions of dollars into big developments. But in recent years, it has come under scrutiny for fraud, and some Chinese investors — the program’s biggest participants — have tried to get their investments back thanks to up to 15-year wait times for visas. Now, investors are vulnerable to fallout from the economic downturn.
“We deal with about 80 different projects right now and we are seeing, across the board — people suffering, projects suffering,” said New York–based lawyer Mona Shah, who specializes in EB-5 but is not involved with the Hudson Yards investors. “Anything real-estate related is having a problem.”

Related has been an avid proponent of the program for years, and even spent some $1.4 million in 2017 to lobby Congress against abolishing it.
In June 2017, the company pushed for $380 million in EB-5 money to pay for the platform over the rail yards and its 35 and 55 Hudson Yards buildings. The sum was on top of the $600 million in EB-5 funds it had already raised. Shortly afterward, the developers sought an additional $30 million in funding.
Last year, in an effort to tighten up the program, the government increased the minimum investment from $500,000 in high-unemployment areas — or $1 million everywhere else — to $900,000 in high-unemployment areas, or $1.8 million elsewhere.
In recent months, Hudson Yards has been hit hard by the pandemic, which shuttered retail stores, halted construction and all but wiped out the condo market.
The bankruptcy of Neiman Marcus, announced in May, cast further uncertainty over the future of the mall. Though the retailer has insisted that mass store closures are not part of its bankruptcy plan, Related and development partner Oxford Properties Group have begun marketing Neiman’s 190,000-square-foot premises as office space.
In its letter, Related said that while the investors’ money wasn’t tied up in the retail side of the mall, the effects of the pandemic could impact the value of their investments. The bankruptcy of Neiman Marcus, the letter added, “represents a disappointing statement as to the current state of retail in the United States.”
Shah said the EB-5 program at Hudson Yards had generated a lot of early hype, and many investors considered Related a safe bet.
The latest development, the attorney said, shows that “even the largest real estate projects have a very real risk.”
 

David Goldsmith

All Powerful Moderator
Staff member
I'm going to reiterate that Hudson Yards could become Related Cos Canary Wharf.
 

David Goldsmith

All Powerful Moderator
Staff member

Bankrupt Neiman Marcus to vacate the Hudson Yards mall in New York

KEY POINTS
  • It has hardly been a year since invitees danced the night away and sipped champagne throughout a sprawling new Neiman Marcus department store in Manhattan, with the opening party featuring a special performance by Liza Minnelli.
  • The department store chain, in bankruptcy court, is now set to vacate the glitzy Hudson Yards shopping mall on the West Side in New York City.
It has hardly been a year since lucky invitees danced the night away and sipped champagne throughout a sprawling new Neiman Marcus department store in Manhattan, with the opening party featuring a special performance by Liza Minnelli.
Now in bankruptcy proceedings, the department store chain said in a court filing Thursday it is vacating the glitzy Hudson Yards shopping mall on Manhattan's West Side.
A Neiman Marcus spokesman said the company is closing its Hudson Yards location for good, along with two stores in Florida — Fort Lauderdale and Palm Beach — and in Bellevue, Washington.
"We are always assessing our store footprint to ensure it is optimal to enhance revenues, overall profitability, and our integrated retail strategy," the spokesman said. "These store closures will help ensure the continued long-term success of our business and underscores our unrelenting focus on providing unparalleled luxury experiences and engagement."
"A physical location in Hudson Yards is no longer an ideal space for us given the preponderance of restaurants and future office space in that mall," he added.

Hudson Yards, built by two of the world's largest real estate developers — Related Cos. and Oxford Properties Group — was temporarily forced shutter as part of the lockdowns to curb the spread of coronvairus. It was an especially hard blow considering the mall had just barely opened. It is still not fully reopen, but several tenants are offering curbside pickup.
Dallas-based Neiman Marcus, saddled with debt and hammered by the Covid-19 crisis, filed for Chapter 11 bankruptcy protection on May 7.
Related has been shopping the Neiman Marcus space for office tenants.
"It is unfortunate that Neiman Marcus was unable to achieve the success that other retailers have found at Hudson Yards and we look forward to welcoming the designer brands who drove Neiman Marcus' sales to their own stores in the retail center," a Related spokesman told CNBC in an emailed statement. "This opens up a great opportunity to create incredibly attractive office space with the largest floor plates available in New York City, a private ground floor entrance, and 18 foot high ceilings at 20 Hudson Yards."
 

David Goldsmith

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Staff member
EB-5 investors to Related Companies: Open your books
“Perpetual state of nonpayment” feared after developer stops distributions

A group of Chinese EB-5 investors is pushing Related Companies to open its books after the developer halted payments in June because of the pandemic.
A lawyer representing 30 investors sent a letter July 16 to Related CEO Jeff Blau demanding an on-site inspection of the company’s financial records so investors could see whether Related was able to repay them. In a separate letter, they requested written assurances that their distributions would be paid.

The lawyer, Douglas Litowitz, said his clients were alarmed by news that Related was pausing distributions to EB-5 investors in Hudson Yards, and became even more alarmed when they dug into their contracts and realized that payments were considered discretionary.

“The investors fear that you have tricked them into a perpetual state of nonpayment,” Litowitz wrote in the letter, a copy of which was reviewed by The Real Deal. A lawyer for the developer replied that the investors had no rights to inspection — a point he argued was backed up by both the agreement and a body of prior cases.

Litowitz is calling for arbitration. Related did not respond to requests for comment. In June, a representative for the developer told TRD that the distributions were optional, and all mandatory payments had been made.

The dispute is yet another headache for Related, which is contending with slow condo sales, construction delays and the closure of its Hudson Yards mall on account of the pandemic. Compounding matters, Neiman Marcus last week announced that it was walking away from the site some 16 months after it opened as its anchor tenant. Related is now marketing the mall as an office location.

The EB-5 visa program is a system where foreigners invest money into job-creating businesses in the U.S. in exchange for green cards. Over the years it has been both hugely popular and rife with fraud — triggering a slew of lawsuits and intervention from the federal government.

Chicago-based Litowitz is a vocal critic of the EB-5 program, and specializes in fraud cases on behalf of Chinese investors. He claims his clients were told by an agency representing Related in China that they would be repaid after they got their green cards, and were not notified that payment was at the discretion of the developer.

But Daniel B. Lundy of Klasko Immigration Law Partners, an expert in EB-5 matters who is not involved in the Related dispute, said the United States Citizenship and Immigration Services prohibits agreements from outlining certain specifics about payments, meaning “the timing and amount of distributions to EB-5 investors is generally subject to the discretion of the managers [of the entity].”

“This is not to say that the manager has unfettered discretion,” he added. “It is still bound by the terms of the investment documents and any fiduciary duty it might have to investors.”
Related’s investment offering is unusual in one way: Litowitz said his clients invested through a preferred-equity model. That is less clear cut than the majority of EB-5 investments, which are set up as debt — the investors put money into a fund that makes a loan to a developer, and that money is repaid after the loan matures.

Litowitz said the model was central to his clients’ concern. “Since there is no loan date by which the money must be returned [to the entity], that makes the discretion all the more important,” he said.
“Otherwise it could be a perpetual investment — forever.”
 

David Goldsmith

All Powerful Moderator
Staff member
Dominoes falling at Hudson Yards mall.
Thomas Keller closing TAK Room, Bouchon Bakery at Hudson Yards
Chef says team “could not find an economically viable path to continue operating”

Celebrated chef Thomas Keller has announced that two Hudson Yards eateries, TAK Room restaurant and Bouchon Bakery, will close for good.
In an Instagram post Wednesday, Keller said the decisions were “were not made lightly” and “came after painful deliberations amid a pandemic that has devastated the global economy and caused irreparable damage to our business and our profession.”

“Given the challenges of the last five months, we could not find an economically viable path to continue operating without expected seasonal New York tourism and traffic,” he added.
The announcement is the latest setback for the Hudson Yards mall, which has been shut for several months as a result of the pandemic. In July, luxury department store Neiman Marcus announced it was walking away from the site after filing for bankruptcy protection in May. Brooks Brothers, a retailer on the first floor of the mall, filed for bankruptcy in July, before it was rescued by Authentic Brands and Simon Property Group.

New York City’s indoor shopping centers have not been cleared to reopen, though malls in the rest of the state have been allowed if certain conditions are met.
Asked about the latest closures, a spokesman for Hudson Yards developer Related Companies said in a statement that restaurants “have always been the core of New York City’s vibrant culture, and we remain steadfast in the belief that the industry will continue to thrive at Hudson Yards as it did prior to the pandemic.”

“The changing market conditions have created additional demand for commercial office and we are adapting our space and culinary offerings accordingly,” he said.
With Neiman Marcus gone, Related is now marketing the department store’s former site as office space.

TAK Room, which opened last March, was Keller’s first new restaurant in almost a decade. However in a subsequent review, New York Times critic Pete Wells took a dim view of its high-end offerings, arguing that the restaurant felt “painfully out of step with the city’s mood.”

Keller, now 64, finished his Instagram announcement with words of thanks to his staff, who he credited for their “utmost dedication, talent and professionalism.”
“And to our guests,” he added, “for their unwavering support.”
 

David Goldsmith

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Staff member
Hudson Yards’ EB-5 investors demand arbitration with Related
Investors want clarity on whether they can access developer’s books

A group of Chinese EB-5 investors is demanding arbitration proceedings with Related Companies to determine whether they can inspect the developer’s books.
Douglas Litowitz, a lawyer representing the investors in the Hudson Yards megaproject, emailed a written notice this week to Related CEO Jeff Blau and counsel Andrew Harris of Levitt & Boccio. A messenger also served the documents to the developer’s West 55th Street office.

The dispute dates back to June, when Related informed the EB-5 investors — foreign nationals who collectively poured some $1 billion into Hudson Yards — that it was going to stop paying distributions because of the pandemic.
After hearing the news, a group of 30 investors wrote to Related demanding an on-site inspection of the developer’s financial records. They also sought assurances that they would get paid, claiming they had only just learned, on closer inspection of their contracts, that payments were considered discretionary. “The investors fear that you have tricked them into a perpetual state of nonpayment,” the letter said.

In response, Harris said the investors did not have rights to inspection under their original agreement, according to copies of the correspondence viewed by The Real Deal.
A spokesperson for Related said in an emailed statement Wednesday that returns on investment are a function of the market “and obviously this is a challenging time.”

“We were off to a good start,” the spokesperson added, “but we now need to be patient.”

The EB-5 visa program is a system where foreigners invest money into job-creating businesses in the U.S. in exchange for green cards. Beloved by developers looking for cheap capital, the program has over the years been marred by fraud, litigation and lengthy delays.

The majority of EB-5 investments are structured like loans — the investors put money into a fund that makes a loan to a developer, and that money is repaid after the loan matures. But Litowitz said his clients each invested $500,000 in Hudson Yards through a preferred-equity model, a somewhat less common structure.

It’s not unusual that developers determine their own timelines for repaying EB-5 funds. The United States Citizenship and Immigration Services prohibits agreements from outlining certain specifics about payments. However Litowitz argues that without a loan-maturity date, and with distributions stopped, his clients are stuck in a state of limbo that could be never ending.

Yet recourse for the investors might be an uphill battle. In his formal request for arbitration, Litowitz claims the original agreement waives or severely limits many of their rights, and could make dispute resolution “prohibitively expensive for each investor.” All disputes must be addressed in arbitration, with the loser paying the legal costs of the winner, Litowitz said in the document.

The escalating back-and-forth comes as the developer contends with a series of setbacks at Hudson Yards, including the departure of bankrupt mall tenant Neiman Marcus, and the recent announcement that TAK Room and Bouchon Bakery will also close. The mall has been shut since March under state orders. It’s unclear when it will reopen.

If the proceedings move forward, an arbitrator could determine whether investors can view the developer’s books and records, and whether Related has to give them a timeline for repayment.
 

David Goldsmith

All Powerful Moderator
Staff member

Pandemic Economy Could Turn A Deserted Hudson Yards Into An Even Bigger Taxpayer Money Pit

If pandemic Manhattan is a ghost town, Hudson Yards is its ghost capital.

The million-square-foot mall built into the base of 20 Hudson Yards is open but eerily empty, its assemblage of single-named highest-end stores—Dior, Fendi, Cartier, Rolex—entirely devoid of anyone except the occasional shop staff. The Neiman Marcus outlet that took up the top three of the mall’s seven stories was shuttered in July, in the wake of the company’s bankruptcy. The Little Spain food court in the basement is cordoned off, the Shake Shack upstairs is closed. The shawarma-shaped Vessel is open but virtually deserted; the adjacent park is mostly used these days by idling cement mixers and construction workers on their lunch breaks. Across 11th Avenue to the west, the massive Amtrak rail yards sit untouched, with no sign of construction on the deck that would allow the project’s Phase 2—originally slated to bring eight more residential and office towers by 2024—to be erected on top.

None of this, needless to say, is what Hudson Yards was supposed to look like, a year and a half after its official opening. By now, the bespoke mini-city for the rich was supposed to have remade not just the four square blocks that have already bloomed with skyscrapers, but the entire surrounding neighborhood, the last stretch of Manhattan’s West Side left to be remade from its Hell’s Kitchen industrial waterfront roots.

And all the taxes generated by that development—less about $1.4 billion in tax breaks agreed to by the city’s Industrial Development Agency in 2006—were supposed to start paying off more than $3 billion in debt that the city took on to extend the 7 subway line to 11th Avenue and build new parks and roads, all of which Mayor Michael Bloomberg claimed was needed to jump-start development.

Instead, the city is now facing an economic future that was unthinkable only a few months ago. In particular, demand for Manhattan office space is at historic lows, with a combination of pandemic layoffs and the growing popularity of working from home having cut lease signings in half as companies rethink their future plans.
“For the short term, it is very uncertain,” says Independent Budget Office tax expenditure analyst Elizabeth Brown. “I don’t think there’s an immediate threat” to the project’s solvency. But, she adds, that’s partly because the city can step in to provide more tax revenue from other sources if need be.

New School researcher Bridget Fisher, who has long tracked the bouncing ball of Hudson Yards subsidies, is more worried: “It’s likely that this will be the second time that the city is called on to bail out Hudson Yards because of a lack of revenue.”

The Hudson Yards financing model is a tangled mess of public and private corporations, with enough hidden nooks and crannies that an additional billion dollars in tax breaks could go unnoticed for years. Initially created in 2004 to grease the skids for a New York Jets football stadium that never materialized, the Hudson Yards Infrastructure Corporation sold $3 billion in bonds to fund the extension of the 7 train by a single stop to promote West Side development. (The A/C/E trains just a couple of blocks to the east were thought to be too far a walk for football fans; no one seems to have done the calculus as to how it would play with upscale residents or Fendi shoppers.)

To pay off the bonds—plus another few hundred million for such sundries as those pocket parks and an entire new street—HYIC would cobble together money from property taxes (technically “payments in lieu of” taxes, or PILOTs, since the entire state-owned site is tax-free), air rights payments, and fees for exceeding zoning limits, all siphoned off from their normal path into the city’s general fund.
The total public subsidy for the development, as calculated by Fisher and her coauthor Flávia Leite, has amounted to $5.6 billion, with $3.3 billion of that coming via tax money redirected to pay for the subway extension and new parks and roads, and most of the rest via money that will never be collected thanks to the discounts that Bloomberg gave developers on their tax bills.
If all those tax kickbacks aren’t enough, it’s up to the city to step in to fill the gap. That’s what happened after the 2008 economic crash caused delays in Hudson Yards’ initial construction schedule: New York City provided $359 million in “interest support payments” through 2015 to shore up HYIC’s finances. And though those payments were reduced or eliminated in recent years thanks to better-than-expected Hudson Yards revenues, the city remains on the hook if things take a turn for the worse.

And for the worse is where things seem headed, at least in the short term. Most of the air-rights payments and zoning bonus fees have mostly already been pocketed, leaving the PILOTs (and Tax Equivalency Payments, or TEPs, the residential-building equivalent of PILOTs) to make up the difference as the site is fully built out and rented. If that doesn’t happen because the Manhattan economy has undergone a seismic shift, those subway debt payments could run out of funding.

“The city’s investment in Hudson Yards has always been designed so that the debt for the train was most reliant on the commercial tax payments,” says Fisher. So if mall receipts tank and offices remain vacant, that’s bad news not just for the project’s private developer, The Related Companies, but also for the city’s finances.

The most immediate worry is that Related could attempt to default on its PILOTs—or, more likely, renegotiate its tax bill—if its bottom line takes too big a hit. If Manhattan’s economic woes linger, though, there could be more long-lasting effects. PILOT payments are pegged to the normal city property tax rate—after discounts of as much as 40%—and property tax valuations tend to be reset only slowly, based on the last several years of economic activity. So if rents fall, so should tax assessments, and with them revenues for paying off the city’s Hudson Yards debt.
“I don’t think there’s a world in which that doesn’t happen—rents are going to come down more than they have,” says Steven Soutendijk, executive managing director of retail services for the commercial real estate behemoth Cushman and Wakefield. “You’re going to have tenants that if they couldn’t cut a deal with their landlord, there’s probably a willing landlord right across the street that would open them with open arms.”

That’s potentially great news for any businesses looking for cheap space to expand into. “A lot of people will be able to start new businesses,” says Soutendijk, who notes that WeWork and many fast casual restaurant chains sprung up in the wake of vacancies caused by the 2008-09 recession. “I thought I was going to have to live in Columbus, Ohio, because I can only pay $1,200 a month in rent —well, good news, that two-bedroom in the East Village that used to be four grand is now $2,600.” (Note: Maybe not just yet, and even those apartments where prices have fallen that low are advertising “effective rents,” with a much pricier lease that’s offset by a few months of free rent up front.)

But lower rents, both residential and commercial, also mean lower revenues for landlords—which means lower property valuations, and thus less revenue for the city. And some property may not end up existing at all: Related officially abandoned its 2024 target date for its Phase 2 residential towers last winter, and isn’t likely to speed things up if the hottest part of the Manhattan real estate market has now shifted to Rhinebeck.

Asked about the impact of the pandemic on its properties, a spokesperson for Related provided this statement to Gothamist: “Fortunately for Hudson Yards, our office buildings are fully leased”—actually 93% of currently built office space, according to Related—“and many of those companies are now bringing back their workers which helps lift the entire neighborhood. Hudson Yards has inherent advantages because it was created as a live-work-play neighborhood where people benefit from unified health protocols, state-of-the-art cleaning and air filtration and safety measures.”

If state-of-the-art cleaning isn’t enough to restore Hudson Yards’ shine in a post-COVID Manhattan, how much it will cost the city when the music stops is anyone’s guess. Fisher notes that the Hudson Yards Infrastructure Corporation’s latest budget, approved in May 2020, doesn’t include any accounting for the economic effects of the pandemic that was then in full swing. A person who answered the HYIC phone line but declined to give their name told Gothamist, “The last time we did the budget was probably a few months ago, and there’s really been no change.”

In the grand scheme of things, if Hudson Yards tanks along with a weakening demand for Midtown space, the city will have bigger problems on its hands. City tax losses from falling tax payments across the entire five boroughs could be $14 billion over the years 2020 through 2022, according to an April IBO forecast. And though most of that is due to lower income- and sales-tax receipts during the time when no one is working or spending money, not property taxes, falling property valuations could be the longest-lasting effect.

But even if Hudson Yards losses only add to a deepening sea of red ink for the city, critics of the project say that’s all the more reason to question the logic of spending $3 billion on a bet that what New York City most needed was a new Midtown annex with its own upscale mall.

“The main point here is that the city took on enormous risks in how they decided to structure their Hudson Yards investment, with taxpayers ultimately footing the bill if and when anything goes wrong,” says Fisher. “When the economy was booming, the city came in and paid an additional $2.2 billion to open the project. Now when the economy is in crisis, it’s likely we’re going to have to do so again.”
 

David Goldsmith

All Powerful Moderator
Staff member
Related sues Columbus Circle mall tenants for unpaid rent
Hugo Boss countersued the landlord

Related Companies is taking tenants at one of its Manhattan malls to court.
The developer has sued six of its retail tenants at the Shops at Columbus Circle in the Time Warner Center for nonpayment of rent, PincusCo reported.

The lawsuits, filed Thursday in New York State Supreme Court, seek to recover a total of $7.5 million in unpaid rent and other charges that have accumulated since the start of the pandemic.
Individual suits were filed against Hugo Boss for $4.2 million, the Running Specialty Group for $1.05 million, Cole Haan for $920,813, Michael Kors for $774,880, Tumi Stores for $241,003 and Fairway LLC for $291,438.62.

In some cases, the retailers have not paid rent since March, according to the lawsuits on file.
Hugo Boss countersued the landlord on Friday, urging the court to declare that its $692,000 per month lease should be rescinded as a result of the pandemic and the state executive orders that prohibited the store from operating until last month. In its suit, Huge Boss notes it was closed from March until Sept. 9.

“Nobody can predict if or when Columbus Circle’s millions of annual visitors will return, or when government-mandated social distancing and capacity guidelines will ease, and permit the store to reasonably open at pre-Covid capacity,” Huge Boss’s lawsuit reads.
Other big retail landlords have gone to court in an effort to get unpaid rent: In July, Simon Property Group filed a lawsuit against Eddie Bauer, alleging that the retailer owed as much as $6.2 million in unpaid rent. It filed a similar lawsuit against Brooks Brothers, seeking $8.7 million in missed rent payments.
 
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