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New York’s Biggest Issues—and How to Fix Them

May 26, 2015

New York City is a vibrant place. And with approximately 9 million residents and 55 million tourists, it’s important to have a candid discussion of the key challenges facing our city, which include a lack of affordable housing, lagging infrastructure, growing inner-city challenges, and political construction.

We brought together a trifecta of passionate New Yorkers to discuss these challenges, including Red Apple Group CEO and Chairman John Catsimatidis; Mintz Levin member Jeffrey Moerdler, who’s also commissioner of the Port Authority of New York and New Jersey; and former New York State Governor David Paterson, who now serves as chairman of the state’s Democratic Party. The three men have long histories together: Moerdler and Paterson first met at Columbia College nearly 40 years ago, while Moerdler met Catsimatidis in 1988 and represented both he and Paterson as clients on and off since then. Here’s what they had to say about the biggest issues impacting NYC:

421a Tax Program

The Dealmakers Forum followed the announcement of Mayor Bill de Blasio’s sweeping overhaul of the 421a tax program in hopes of spurring a new wave of affordable housing in NYC. He called for provisions to the program that will expand affordable housing requirements citywide, double the amount of affordable housing it generates, and ensure tax benefits are only granted when new buildings have a minimum of 25% to 30% percent of their apartments set aside as affordable housing. He also called for a 1% tax on the most expensive residential property sales to generate $180 to $200 million each year dedicated solely to building more affordable housing. It still has to be approved in legislation.

“It could have been a lot worse,” Catsimatidis reflects. “It doesn’t sound as bad as it could have been.” But he notes that he has been rushing to get a tower he’s building in Brooklyn into the ground before 421a’s original June 15 deadline. Depending on how a city treats its developers—and that’s just one of his businesses—he says the next $100 million he spends will either be in New York City or Miami. (Or in legal fees, Moerdler joked).

Paterson says this motion dispels the rumor that was going round recently that the mayor and a number of advocates were trying to preempt the extension of 421a, which passed in 1971 and provides for partial real estate tax exemptions for new construction of multifamily units and rental housing. The mayor has finally come to the understanding that he needs 421a to be expanded, he says.

One negotiation was changing the 80/20 rule to 75/25, a discussion that was had with the Real Estate Board of New York. Paterson says those in the Senate may want to create a further compromise which will provide cover to Catsimatidis and other developers because as it stands, it does to some degree disincentive development.

Also, the mayor wants to reverse policy changes that were made 12 years ago that provided for vacancy decontrol and vacancy allowance, but Paterson asked how he would reverse that when it was passed  147-3 in the Assembly and 37-24 in the Senate. “So there are plans, and then there are fantasies.… What we have today, while we disagree with it, is at least an outline that can actually be negotiated.”

Catsimatidis says he believes in low-income housing, “But for whom do the bells toll? We have to straighten out who’s entitled to it.” Instead of giving it to someone who catches a Greyhound Bus to NYC or a person who just says, “I’m here, give me an apartment,” he says we should be giving affordable apartments to police officers and firefighters to be closer to work and to teachers in order to keep them in the educational system here.

“It’s great to finally have a sense—assuming this gets approved—of what the new rules of the game are,” Moerdler say. On the other hand, he says he’s terribly disappointed because this happened over 16 months into de Blasio’s administration. “Having this program announced 14 months ago would have been a hell of a lot better for everybody in the industry and avoided unnecessary rushes to get deals done and a lack of certainty about investing in New York in the future.”

Getting Complex Deals Done

If you go out and pay a crazy price for a piece of real estate, it’s going to be tougher on you, Catsimatidis says. “You decide you want a bigger building than you can afford to do, and you have to borrow money from mezzanine lenders vs. banks. Boy, a little bit of turn, you’re in trouble,” he warns. Downturns are out there and are going to happen, he says. But he expects interest rates to be low for at least the next two years—maybe longer. And New York continues to be a safety zone.

Simplifying the Bureaucracy

Paterson points back to 421a, which has been ratified every four years—that’s 11 times in total. “Why does it get ratified every four years?” he asks. Because the legislators want to bring everyone back to the table and fundraising events to extend it. “Basically, it’s shakedown time for both sides to come and talk to the legislators.” He says the first thing the government can do is take some of the temporary laws that sunset and make them permanent. “This is a situation where you’re literally just hurting people and spreading rumors to frighten them that their program is going away—just so you can pick their pocket.”

The Outer Boroughs

Catsimatidis says that developers need inducements to develop in new areas. He recalls when he attended Brooklyn Tech, it was such a tough neighborhood “that you didn’t go to Fort Greene Park without the football team.” When he had the opportunity to buy three city blocks nearby and pay less than a million for it, he said “What the heck?” Soon Metrotech Center was built, which served as an inducement to start upgrading the whole neighborhood around it. Now Red Apple Group has 1.2 million square feet and three buildings in the ground right now.

Paterson says that Kings County has surpassed Manhattan in property values and is only exceed by San Francisco. With the new development we’re beginning to see in Astoria and Long Island City all the way down to Flushing, he says Queens is certainly the new frontier. And the pioneer investors are now in the Bronx, where the MTA is going to put four new subway stops to stimulate development. (Which should be good news to Moerdler, who grew up in the Bronx. Both Catsimatidis and Paterson grew up on 135th Street, but on opposite sides of the park).

“I would buy in Queens with both fists,” Catsimatidis adds. It’s going to take time, he says, but if you’re in a location that’s only 10 minutes from Manhattan, it’s a great investment. He says he’s also looking in the Bronx in areas where the MTA is adding stations, but while transportation is important, rule No. 1 is that you have to feel safe. He also thinks Staten Island is a great borough (“They voted for me,” as mayoral candidate, he laughed.) He had a plan of building a monorail and putting it on both sides of the Verrazano Bridge, which he says is doable and would serve the transportation-lacking population.

NYC’s Aging Infrastructure

Paterson says the biggest mistake that the Obama Administration made was in 2007’s stimulus program, choosing short-lived projects like painting roads and signs. “They should have gone back and looked at some of the programs under President Franklin Roosevelt… they actually didn’t go into fruition until years later, yet these are the infrastructure projects we’re talking about nearly 80 years later.” He contends we should have used stimulus money to rebuild highways and bridges. While we can still do that, the U.S. has accumulated so much debt that it’s very hard to bond out these types of projects.

Catsimatidis says that we can’t build any more subway lines—the money doesn’t make sense. “We’ve been building the Second Avenue Subway for how long?” he asks. Instead, he commends Gov. Andrew Cuomo for moving to create the AirTrain to LaGuardia Airport, because building that is affordable. “Let’s build something that people say, ‘I don’t mind living that far in Queens… look at that beautiful AirTrain that goes there.’”

Moerdler added that while there are no plans for rail on the Tappan Zee Bridge, the Port Authority is including a right-of-way on the Goethals Bridge between Staten Island and New Jersey for potential rail link in the future.

The Cost of Doing Business in Manhattan

At one point, Red Apple Group owned and operated 200 supermarkets in the New York metro, but the number is now down to 30 Gristedes stores in Manhattan, Brooklyn, and Westchester. “The average rent of a Manhattan supermarket today is over 10% in sales,” Catsimatidis notes. And energy costs in Manhattan are over 3% in Manhattan, versus 1% in the Garden State, he adds.

“So when people say, ‘Oh, I can buy milk in New Jersey for XYZ, how come you’re charging so much?’ I tell my operations people they have a choice,” he continued. “We can renew the lease and pay, or not renew the lease and not pay. But if we do renew the lease, we have to charge more for the product. And that’s the cost of doing business in Manhattan.”

Catsimatidis says the industry talks about free enterprise in real estate, and while he’s certainly a believer in it, the city also needs essential services in neighborhoods. “It’s a problem that has to at least be discussed without hurting the real estate industry, but let’s talk about not hurting the neighborhoods either… The joke I tell around town is that if I wasn’t in the supermarket business, I’d be higher up on the Forbes list,” he quips. (Catsimatidis was No. 272 on the Forbes 400 list of richest people in America in 2014, with a net worth of $2.3 billion that also comes from interests in the real estate development and energy industries.)

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