The City’s Economic Development Corporation (EDC) has leased the historic Battery Maritime Building to a ski resort operator, Stoneleigh Capital for up to 99 years at an annual rent that amounts to significantly less than one percent of comparable, prevailing rates.
The publicly owned structure, located at 10 South Street, next to the Staten Island Ferry terminal, is a landmarked Beaux Art ferry terminal built in 1909. It served as the gateway to boats taking passengers across the East River for three decades, but after commuters and vehicles gained direct access to Manhattan with the advent of bridges, tunnels and subways, ferry usage declined and the building fell into disrepair. Today, its sole use as a berth is for ferries taking passengers to and from Governors Island.
For decades, developers and community activists have proffered competing visions for the building, with the former advocating commercial uses and the latter pushing for civic amenities, such as a school or museum. This argument was settled in 2007, when the EDC (the city agency that negotiates strategic partnerships designed to harness private-sector resources to public projects, and thus foster economic growth) designated the Dermot Company to create a 140-room hotel with a rooftop restaurant and bar, an event space, and an indoor market.
The Dermot Company is a developer of garden apartment complexes around the United States that more recently branched out to New York projects, such as the conversion of Brooklyn’s landmarked Williamsburgh Savings Bank tower into condominium residences.
For the Battery Maritime project, the firm partnered with the Poulakakos restaurant family, owners of a dozen dining establishments in Lower Manhattan. (In 2011, the same Dermot-Poulakakos partnership won the contract for a similar project, to redevelop and operate the nearby Pier A, in Battery Park City.)
The Battery Maritime project included a redevelopment plan that added 50,000 square feet to the building’s original layout of 140,000 square feet, and was initially slated to open in July, 2015. But the June, 2007 selection of the Dermot-Poulakakos team coincided with the real estate downturn that gained momentum later that year. Construction did not begin until 2012, and later stalled until 2014, as the Dermot Company struggled to obtain financial backing for the project, which was budgeted at more than $100 million. Along the way, the vision for the building evolved, with the much-touted indoor market being dropped, and replaced by an event venue and community facility housed within the building’s Great Hall, a majestic 8,500-square foot space, with ceilings 34 feet high, lined with Gustavino tiles. The hotel design also morphed from 140 to 70 rooms.
The EDC estimates that construction is now more than 55 percent complete. But, according to EDC documents reviewed by the Broadsheet, “as a result of a combination of rising construction costs and unforeseen conditions at the site,” the Dermot-Poulakakos partnership, “incurred significant cost overruns that it is unable to cover. The Project will require the infusion of additional capital to achieve completion and will need a recapitalization and restructuring of the Original Sublease.”
In plain terms, this means that the Dermot Company has been removed from the project. (It was not immediately clear whether the Poulakakos organization would have a continuing role at the Battery Maritime development.) The same EDC documents say that the Dermot Company has been replaced by Stoneleigh Capital, a real estate firm that operates ski resorts in Colorado and California, as well as luxury hotels and spas around the world.
“On December 7, 2015,” the document notes, “NYCEDC and Stoneleigh… signed a letter of intent that described certain modifications to the Original Sublease that will allow Stoneleigh or an affiliated entity to fund the existing capital shortfall, complete construction of the Project, and manage the operations of the Premises.” (The EDC’s website contains no mention of having issued a new request for proposals, like the one that was used to recruit the Dermot Company in 2007. Instead, the agency appears to have negotiated terms with its new partner without competitive bidding.) The new lease has an initial term of 49 years, with five ten-year options to renew, at Stoneleigh’s discretion. The total, maximum term of the lease is 99 years.
The “certain modifications” referred to in the EDC document contain a broad range of rich incentives for the new operator. These begin with the rent that Stoneleigh will pay. The new lease calls for a first-year base rent of $120,000. For a structure containing 190,000 square feet of space (the original 140,000, plus the 50,000 square feet of new space created by new construction since 2012), this comes to an annual cost of 63 cents per square foot.
According the MarketBeat Retail Snapshot report produced by the global commercial real estate services company, Cushman & Wakefield, the average annual asking rent for retail space in Lower Manhattan in the fourth quarter of 2015 (the most recent period for which figures are available) was $423 per square foot. An annual rent of 63 cents per square foot amounts to a discount of 99.85 percent from this rate.
The same lease provides that Stoneleigh’s annual base rent for the Battery Maritime Building will rise to $400,000 (or $2.10 per square foot) by the eighth year of the firm’s lease, but even this amounts to a discount of approximately 99.5 percent from current market rates.
Moreover, starting in the ninth year of the lease, there will be no further dramatic increases in base rent for 40 years. The agreement says, “after Lease Year 8 the annual Base Rent will increase annually by the percentage increase in the Consumer Price Index (CPI) during the preceding lease year.” This seems to indicate that Stoneleigh’s base rent will not rise by more than the rate of inflation through the first five decades of its lease, regardless of how much market rates for retail space in Lower Manhattan increase during those decades. (After year 50 of the lease, the rent can be increased once every ten years based on an appraisal of the property’s value.)
The lease also provides for “supplemental rent,” in the event that certain financial conditions are met. (This essentially means that Stoneleigh will pay more if the project turns out to be successful.) These supplemental amounts range from $200,000 in the lease’s second year, to $600,000 in the lease’s fourth year. But, as with the base rent, any further dramatic jumps in supplemental rent are prohibited, with increases starting in year five limited to the annual rate of inflation as gauged by the CPI. The supplemental rent replaces a “net percentage rent” contained in EDC’s original lease with the Dermot Company, which would have claimed a share of any profits made by the company operating the Battery Maritime Building. The new lease also waives an “additional rent payment” of $2 million that was originally required in year five.
As an illustration of how the lease’s new terms might play out, in the fourth year of the lease, Stoneleigh’s base rent will be $250,000, and the supplemental rent (assuming the project is wildly successful) will come to an additional $600,000, for a total of $850,000. For 190,000 square feet of space, this amounts to an annual rent of $4.47 per square foot. This is a discount of 98.9 percent from current market rates.
Additionally, the new lease stipulates that Stoneleigh will be exempt from $2.4 million in sales taxes that would otherwise be due under its operation of the hotel, restaurant, and event space in the building. This is an increase from the $1.5 million exemption that the Dermot Company had been offered under the previous lease. In addition to the sales tax exemption, the new lease says that Stoneleigh will be able to take advantage of up to $18 million in federal tax credits, which apply to the rehabilitation of historic buildings.
Finally, Stoneleigh (like the Dermot Company before it) will directly benefit from the $68 million in capital improvements made to the Battery Maritime Building by the EDC, before it sought a private-sector partner to operate the facility. The new lease also extends the deadline for completion and opening of the Battery Maritime Building from July 1, 2015 (the due date that the Dermot Company missed, which appears to have triggered EDC’s search for a new partner) to December 31, 2017.
Matthew Fenton