Back when the opulent Hudson Yards district on Manhattan’s West Side was still a rail yard, Mayor Michael Bloomberg’s budget director was asked why he thought tax breaks were necessary to start up the project.
Mark Page, keynote speaker at The Bond Buyer’s 4th Annual Conference on Metro Finance in 2006, had a simple answer for his audience of investors and analysts: Tax breaks were expected. “Page said developers in New York were accustomed to receiving tax breaks and felt entitled to them,” The Bond Buyer noted.
Seventeen years later, the property tax breaks are costing New York City substantial sums, at a time of ballooning budget deficits. Hudson Yards alone cost city taxpayers $74 million in the year that ended June 30, and $309 million since 2018.
What’s more, they were probably never necessary. A little-noticed academic study published last year found that the property tax breaks were based on an erroneous projection that lowballed how much rent could be charged to office tenants. Nowadays, the deluxe offices in Hudson Yards are raking in the highest office rents in the city from tenants that include CNN, which relocated from another luxury tower at Time Warner Center.
But the city remains on the hook for the huge, long-term tax breaks created decades ago as part of policies to expand millions of square feet of new luxury office space. While Hudson Yards has become one of the most desirable spaces in the city, the rise of remote and hybrid work has depleted occupancy at Manhattan office buildings in general.
Now the administration of Mayor Eric Adams is preparing to grant more breaks, to help older properties that are struggling to fill offices with tenants.
The cost to taxpayers of custom property tax breaks just in the nine fiscal years from 2014 to 2022 was nearly $1.5 billion, offered up to office towers in the 42nd Street Development Project in Times Square and Hudson Yards, as well as for other Manhattan buildings that include the Bank of America tower at One Bryant Park and NBC headquarters in Rockefeller Center.
For 2022, the last year with data available, the tax relief for these high-end Manhattan offices totaled $171 million, according to city records.
And that’s not the only tax relief city for office development and renovations. Widely available programs provide relief for qualifying new construction and upgrades in targeted areas. All told, the city reported handing out $2.2 billion in property tax breaks for economic development purposes in 2022.
In budget terms, this is a “tax expenditure,” as much an expense for taxpayers as the $8 million the Fire Department currently needs to avoid staffing cuts at 20 engine companies, or the $5 billion Adams claims the city will spend this fiscal year to meet the city’s court-ordered obligation to house homeless migrants.
Even as the Adams administration is seeking to cut billions of dollars from the city budget, it’s raising the tax-break ante. Its “M-CORE” program — short for Manhattan Commercial Revitalization — will grant a new round of 20-year property tax breaks aimed at encouraging “transformative renovations” of 10 million square feet of “aging commercial office buildings” in Manhattan below 59th Street.
While the normal city budget process requires City Council approval and public hearings, the new tax break was created without public review. The board of the agency that issued it, the city Industrial Development Agency, hasn’t voted on it. Few details are publicly available about the program beyond a press release.
In announcing M-CORE in May, Adams portrayed the new tax break as a step to protect the city’s budget and the services it funds. “Every office sitting empty means less funding for everything from schools and affordable housing to emergency food and police officers, and that’s why it’s vital we get workers back into offices,” he said.
City officials say that subsidizing renovation of aging commercial buildings will “attract world-class tenant companies, which are increasingly seeking high-quality, amenity-rich office space.”
But an examination of past property tax breaks for Manhattan office buildings shows that once granted, they can eat away at the city budget for a long time. Successive mayoral administrations, eager to encourage development, gave millions of dollars in tax breaks that were arguably unnecessary, as at Hudson Yards.
City Councilmember Justin Brannan (D-Brooklyn), who chairs the finance committee in charge of budget negotiations with the mayor, said the city can save money by tightening up on the tax relief it grants. “Suffice to say that eliminating, revising, or reducing some of these rusty tax breaks is something we’ve spent a lot of time discussing since I became finance chair and something we’ll have more to say about in the near future,” he wrote in an email.
Brannan noted that a tax break Mayor Rudolph Giuliani created in 1995 to improve occupancy rates in aging Lower Manhattan office buildings was “wasted money,” citing a study the city’s Independent Budget Office did in 2018. The IBO found that the Commercial Revitalization Program “did not decrease vacancy rates and had little, if any, effect on employment,” that many of the property owners would have spent money to upgrade their buildings without a subsidy, and that once buildings were improved, the city failed to capture the value of the upgrades through increased taxes.
“Over the years the city has likely lost potential tax revenue,” the report stated.
Will this history repeat itself?
Jeff Holmes, a spokesperson for the city Economic Development Corporation, said the new M-CORE program differs in significant ways from the Commercial Revitalization Program. Among the differences is that while the Commercial Revitalization Program was granted as of right, the new one judges applicants through a competitive vetting process, he said.
But Greg LeRoy, the executive director of the nonprofit Good Jobs First, which studies tax breaks, said that by locking itself into a new long-term subsidy for Manhattan offices, the city will contribute to the over-supply of space. “The answer to a subsidized glut is not more subsidies,” he said. “It is fewer, shorter, smarter subsidies.”
Times Square a Go-Go
The 42nd Street Development Project is the grandparent to lucrative property-tax breaks for corporate offices in New York City. Under Mayor Edward Koch and Gov. Mario Cuomo, officials set up Times Square tax breaks in 1984 that are still going strong: $884 million for five office towers during the nine years ending in 2022.
The first of the four office sites planned for in 1984 was developed by the Durst organization, a 48-story tower at 4 Times Square on Broadway between 42nd and 43rd streets. It opened in 1999 and was still getting a property tax break worth $15 million in fiscal year 2022 — totaling $221 million since 2014. The three office buildings that followed Durst’s tower — the Thomson Reuters Building at 3 Times Square, and buildings that Boston Properties developed: 7 Times Square, called the Times Square Tower, and 5 Times Square, now in the hands of developer Scott Rechler’s RXR Realty — have similar deals.
With the four office sites in the original plan rising and the Times Square market heating up, the New York Times Co. obtained a similar deal in December 2001, after threatening to move 750 jobs to New Jersey. The Times company partnered in its 52-story tower with Forest City Enterprises, which Brookfield Properties later bought. The New York Times breaks persist: $11 million in 2022, $131 million from 2014 to 2022.
The press releases announcing the four initial Times Square office towers said the property tax breaks would last for 20 years (29 years for the Times building). But under the terms of their complex leases, tax breaks are extending for years beyond that and have far to go. That’s because of a rent credit dubbed “Excess Site Acquisition Cost,” or ESAC.
These ESAC expenses — hundreds of millions of dollars — are still being paid back to the developers by reducing the payments in lieu of taxes, or PILOT.
It works this way: Under the terms of the deal, the city took over property in Times Square through condemnation and leased it to developers for 99 years. Since the city technically owns the land, the developers don’t pay property tax on it. Instead, they make PILOT payments.
Since the city could not afford to buy the land, the developers fronted the money. Developers were entitled to get back the land costs that they laid out, plus interest, and legal and consulting fees, above a certain threshold. This ESAC cost amounted to hundreds of millions of dollars — much higher than city officials would acknowledge as possible when the Times Square deal was designed in the 1980s (a financial gap highlighted by critics). The developers then got a 50% break via their PILOT payments (85% for the Times deal) — essentially a massive, ongoing tax abatement.
Thomson Reuters and the Rudin organization, partners in 3 Times Square, were still owed ESAC tax breaks of $103.6 million as of June 30, 2022, according to records city economic development officials released to THE CITY in response to a Freedom of Information Law (FOIL) request. Owners of three other towers — 4, 5 and 7 Times Square — could look forward to a total of $155 million in further tax breaks, the records show.
In the case of the New York Times Building, the contract called for the Times to pay $85.6 million for the parcel at 620 Eighth Ave., supposedly the cost for the city to acquire the land through condemnation. The real cost, with interest, legal fees and other expenses, was nearly double, at $161.5 million, according to city records.
With interest, the Times company and its partner obtained reductions via their PILOT payments for any land-related expense over $85.6 million — a tax break of $76 million. Under the partners’ deal with the city and state, they have the option to buy the leased land for $10 after 29 years.
These tax breaks are entirely off-budget and for the most part, publicly unknown. In her 2001 book “Times Square Roulette,” Columbia University real estate professor Lynne Sagalyn wrote that “As a financing tool, the ESAC/rent-credit mechanism is distinctive for the way it remains hidden from any standard fiscal document or budget review.” It is treated as repayment of a city loan, although nothing of that appears in city capital budget ledgers, “a non-accountable form of off-budget financing,” she wrote.
As a result, the hundreds of millions of dollars in PILOT savings granted to the Times Square developments don’t show up in the city Economic Development Corporation’s required annual report on the costs and benefits of the tax-incentive deals it monitors. (EDC said that it follows the law on disclosures.)
Nor does the city Office of Management and Budget include the cost of the Times Square tax breaks in its required quarterly reports to the City Council on PILOT benefits — even though Local Law 73 of 2005 requires that OMB report the value of “each” PILOT-related tax break. (OMB didn’t respond to numerous requests for comment.)
In the reports, which THE CITY received through a FOIL request, OMB lumps together a total figure for PILOTs paid by six unidentified Times Square properties, without specifying the benefit granted for each parcel. The properties include the New York Times Building, according to documents the EDC released in response to a separate FOIL. (EDC uses this revenue to subsidize the NYC Ferry system.)
To calculate the value of all of the tax breaks listed in the reports, THE CITY subtracted the developers’ payments in lieu of taxes as disclosed by EDC from what full property taxes would have been, based on the city Department of Finance’s assessment of the land and buildings. For fiscal year 2022, the most recent year available, the combined property tax break for office buildings at 3, 4, 5 and 7 Times Square and the New York Times Building was $77 million, according to the records.
EDC said in a statement that the buildings at 3, 4, and 5 Times Square are paying rent that is the equivalent of full property tax, minus the balance under the Excess Site Acquisition Cost. The Times Square Tower, as 7 Times Square is known, will begin paying rent equivalent to full property tax on July 1, 2024, EDC said.
THE CITY’s analysis of property assessments and PILOT payments shows a different picture: in many years the PILOT payments (minus a 50% ESAC credit) were millions of dollars less than what full property tax would have been. That’s because the cost of PILOT payments scheduled decades ago is well below what actual property tax is today. The original schedules “would remain substantially less than what would be paid by competing towers,” as Sagalyn wrote.
“The fact that Times Square PILOT losses are still so large means the city failed to take its ‘foot off the gas pedal’ after the area recovered long ago,” said LeRoy of Good Jobs First.
Still, the success of the Times Square project seems to have immunized it against criticism over the price tag, which was hotly debated during the 1980s and ’90s. In a new book, “Times Square Remade,” Sagalyn writes that the original quartet of Times Square office buildings made the transformation of the area possible: “The big bet city and state officials made to intervene, cleanse the street, and return it to ‘productive use’ has been an economic winner.”
Supporters of the Times Square development say these benefits were needed to persuade developers to invest in a place that had become an international symbol of urban decay.
“It is really unique and it’s probably the most creative project that the city and state did in the development area,” said Carl Weisbrod, who was president of the 42nd Street Development Project and is now a senior advisor at HR&A Advisors. He called it “lucrative in terms of returns to the city,” adding, “You have to go back to when the Times Square project was conceived at the beginning of the 1980s. At that time there was literally no capital budget.”
With the city coming out of near-bankruptcy at the time, the ESAC mechanism provided the means to acquire land through condemnation, he said.
Developers pointed to the transformation of Times Square when asked to comment on the tax breaks they continue to receive.
A spokesperson for the New York Times Co. highlighted the economic benefits of the Times tower. “It’s worth noting that by the EDC’s own calculations that our project has generated over $4.4 billion in tax revenue to date vs. the $8 million in tax benefits the Company has received to date,” Danielle Rhoades Ha said via email.
The tax revenue is an EDC estimate that includes employees’ personal income taxes and revenue from other companies that benefit from the Times company’s business. The EDC’s calculation of $8 million in benefits does not include the $76 million reduction in PILOT payments to subsidize the cost of buying the land. (Brookfield Properties, which acquired the Times’ developer partner, Forest City Ratner, declined to comment.)
The Durst organization said in a statement that neither of its taxpayer-subsidized Midtown office towers — the Bank of America building at One Bryant Park and 4 Times Square — “would have moved forward without these tax programs and the City would have lost out on significant long-term value creation.”
Both came at critical moments for New York City, the company said. In Times Square, it was the first to commit to an office tower. For One Bryant Park, it said, “The tax program incentivized Bank of America to build its global headquarters in New York City in the aftermath of 9/11, when there were worries that banks would flee the city and no one would want to work in skyscrapers again.” (Another early developer in the 42nd Street project, Boston Properties, Inc., leaseholder at 7 Times Square, declined to comment.)
RXR Realty, leaseholder at 5 Times Square on Seventh Avenue between 41st and 42nd streets, also declined to comment.
The building had received $300 million in upgrades after major tenant Ernst & Young announced in 2017 it was moving its U.S. headquarters to Hudson Yards, according to Curbed.
Despite that, it’s struggling. The 38-story, “ultra-modern” and “trophy” building has some 750,000 square feet of office space available, floors 6 to 29. When Ernst & Young left Times Square in 2017, a company spokesperson cited the appeal of Hudson Yards to millennial workers as a reason for the move.
New Reuters Jobs — in India
A 1990s deal with Thomson Reuters exemplifies just how badly wrong granting such long-term, open-ended subsidies can go. When a “thrilled” Giuliani announced in 1997 that the Reuters news service would build its North American headquarters in Times Square, the deal looked like a winner for everyone.
For the mayor, it was a boost toward his easy re-election five days later. Reuters officials were enthused about bringing employees from seven New York locations together under one roof. For the city, the deal meant it had “retained” 1,800 jobs in town for 23 years and encouraged creation of 2,300 more — for what the mayor’s press release said was a cost to city taxpayers of just $12.6 million in sales tax breaks.
It didn’t work out that way. By 2005, Reuters was already 10% below the number of jobs it was supposed to retain, according to city records. The year before, Reuters established an office in southern India where lower-paid journalists helped cover New York’s finance industry.
After the Thomson Corporation acquired Reuters in 2008, the new Thomson Reuters won further tax breaks to stay in the city, despite political opposition. But in 2017, Thomson Reuters announced that it was moving the North American headquarters to Toronto. With the company’s New York workforce more than a quarter below the number of “retained” jobs, the Economic Development Corporation canceled the deal and required the return of sales tax breaks.
But despite all that, Thomson Reuters continues to share millions of dollars a year in property tax breaks through its half-interest (with the Rudin organization) in the 32-story office building at 3 Times Square, with its enormous electronic billboard beaming out from the corner of 42nd Street and Seventh Avenue. The cost to taxpayers was $9.1 million in the year that ended June 30, 2022, according to an analysis of city records, and $153 million over nine years.
“We are proud to have played an early and continued role in the successful public-private partnership that has transformed Times Square from a squalid, crime-infested neighborhood into what is now the most visited and vibrant mixed-use districts in the world,” the Rudin organization said in a statement.
Thomson Reuters declined to comment.
Hudson Yards’ ‘False Promise’
At Hudson Yards, office towers got property tax breaks ranging from 15% to 40%, with the larger cuts for buildings that are further west. Those 20-year tax cuts are based on faulty assumptions that were locked in at the West Side rail yard project’s outset in 2006 during the Bloomberg administration.
That’s the conclusion of an academic study published last year in the Journal of the American Planning Association, which concluded that Cushman & Wakefield, a consultant for the city’s Hudson Yards Infrastructure Corporation, vastly underestimated how much the Hudson Yards towers would be able to charge for rent. The city’s economic development agency took that estimate as the basis for granting large-scale property tax breaks to the office developers, claiming that without the city’s aid, Hudson Yards wouldn’t be economically feasible.
The study asserts that Cushman & Wakefield cherry-picked the data. Since Hudson Yards hadn’t yet been built, the consultant used another Manhattan office district in its place, deciding that the Penn Station area was the most comparable. It determined that office rental in top tier buildings there cost $63 per square foot.
Then the consulting firm calculated the cost of building Hudson Yards and concluded that the development would need property tax breaks of up to 40% to be viable, especially for properties west of 10th Avenue.
But the Cushman & Wakefield calculation excluded the priciest office district in the city, on Park, Madison and Fifth avenues, from its estimate of what Hudson Yard offices would be able to charge for rent. It turned out that office rents in the city’s Midtown luxury corridor — running up to $109 per square foot at the time — were the closest comparison to what the “trophy” offices in Hudson Yards have been able to charge.
Cushman & Wakefield declined to comment. EDC, which oversees the tax breaks through the Industrial Development Agency, also would not comment.
Nowadays, Hudson Yards buildings are collecting the highest office rents in the city — as Cushman & Wakefield noted in a 2022 study done for a Hudson Yards Infrastructure Corp. bond prospectus. Asking prices for the Hudson Yards offices averaged about $118.54 per square foot, or 80% higher than for the supposedly comparable office buildings in the Penn Station area.
The bottom line, the academic study finds, is that “the tax breaks were likely unnecessary.”
Rachel Weber, a co-author who is a professor of urban planning and policy at the University of Illinois in Chicago, said that when major developments are planned, there is often uncertainty about the property value, an ambiguity that can be exploited.
Ultimately, the majority of Hudson Yards office tenants moved in from other parts of the city, especially Midtown — where office vacancy rates are now much higher.
“I would just argue that a lot of the subsidy to Hudson Yards ended up just costing other parts of Manhattan,” Weber said.
Debate continues to rage over how much office space Manhattan will need in the post-pandemic era.
The authors of “Work from Home and the Office Real Estate Apocalypse” — business professors at NYU, the University of North Carolina and Columbia University — project a 49% drop in the value of New York City office buildings, following $70 billion in “value destruction” among New York City office buildings from the pre-pandemic end of 2019 to the end of 2022 — a loss of more than a third of their value.
In the long term, the study predicts, changes in office rentals will lead to a 7% loss in the city’s overall revenue, a devastating hit. City Comptroller Brad Lander rejected this scenario in his own report in June.
The M-CORE tax break will be the latest subsidy for the race to create grander offices. While EDC characterizes M-CORE as a renovations program, recent luxury projects, such as Google’s new headquarters constructed in the shell of a former train car terminal west of SoHo, are pushing the limits of what counts as a “renovation.”
Meanwhile, PILOT subsidies keep coming for new Hudson Yards buildings as they open for business, including the 66-story office tower called The Spiral, which is wrapped in ascending terraces that elevate a path of greenery toward the summit. Developer Tishman Speyer markets amenities that include fine dining at restaurants run by a Michelin-starred chef, as well as “intimate venues for small plates and wine after work.” Also: a bicycle room equipped with showers and a changing area, an executive parking area with chargers for electric vehicles, and a “clubhouse” lounge with an open-air terrace.
Will adding 10 million more square feet of top-quality office space through M-CORE help create jobs and populate vacant Manhattan offices?
Stijn Van Nieuwerburgh, one of the authors of the “Office Apocalypse” study, said he believes there is a market for the additional high-end office space. “I think this program has potential,” he said via email, adding that he could not comment on the need for tax breaks because he had not studied that.
Laura Wolf-Powers, an urban planning professor at Hunter College, sees a cycle in which the city keeps subsidizing increasingly luxurious corporate digs. “We do have enough Class A office space,” said Wolf-Powers. “We keep defining upwards what Class A means, so that perfectly good office space gets abandoned.”
Data sources
This story compiles property tax breaks for Manhattan office buildings that make a payment in lieu of taxes (PILOT) instead of paying property tax. For office buildings in Hudson Yards, and for One Bryant Park, 30 Rockefeller Plaza, 120 Wall St., 345 Park Ave. South, and 50 W. 47th St., the source is quarterly reports the Mayor’s Office of Management and Budget files with the City Council under Local Law 73 of 2005. Since that report excludes the Times Square developments, THE CITY has done its own calculation of the tax benefit granted for these properties. The tax liability for 3, 4, 5 and 7 Times Square and 620 Eighth Ave. is based on the assessment listed in Department of Finance records. The payments are based on data in the Annual Investment Projects Report of the city EDC. The tax break is the difference between these two figures.