March 6, 2019
Too Good to Be True: Lessons Learned from Hudson Yards
By Bridget Fisher and Flávia Leite
Amazon bailed on its HQ2 plans in Long Island City when residents started questioning the project’s billions of dollars in taxpayer subsidies. Unfortunately, we didn’t ask the same questions concerning Hudson Yards, now set for a March 15 “grand opening.” Why? Probably because we were told the project wouldn’t cost us anything.
In 2005, Mayor Michael Bloomberg assured city residents we could build infrastructure needed to redevelop a post-industrial stretch of Manhattan’s Far West Side without bearing the costs by using a version of tax increment financing, or “TIF.” However, 14 years later the City has spent an additional $2.2 billion in taxpayer dollars to build what we know today as Hudson Yards. That’s a far cry from being “self-financing.” And it prompts the question: Would New Yorkers have chosen to build a new commercial office district in Manhattan if they understood that rather than it being cost-free, we would end up footing a $2.2 billion bill?
Projects using TIF-type financing are described as “self-financing” based on the theory the revenue generated by a development will pay back the costs of realizing it. However, as the case of Hudson Yards shows, the theory often doesn’t reflect the reality when projects are implemented.
The City rezoned Hudson Yards and decided to build new infrastructure to incentivize commercial office development intended to stem a tide of office leases lost to New Jersey and Connecticut. Using a TIF-type financing structure, $3.5 billion in bonds was issued to finance westward extension of the Number 7 subway line to the area and build a park to wind through the projected new office buildings.
Under the definition of “self-financing” used for TIF-type projects, these bonds would be paid back by designated revenue sources generated by the project. In this case, the City created a set of revenue streams, including payments in lieu of property taxes (PILOTs) and development fees, dedicated to retiring the debt.
But it didn’t go as planned. Instead, the project hit hurdles commonly associated with megaprojects, including revenue shortfalls, cost overruns and spillovers, as well as revenue lost to tax breaks. Taxpayers picked up the tab, paying:
$359 Million in Debt Costs: In 2006, development in Hudson Yards was projected to generate $1.9 billion in revenue by 2018. In reality, revenues came in $556 million short - 30 percent less than expected - largely due to the Great Recession that ground Hudson Yards’ development to a halt.
This lack of revenue drove up costs for the City, which had agreed to pay Hudson Yards’ annual interest payments until the project secured enough revenue on its own. This direct expenditure of tax dollars was the first sign the project would not fulfill its “self-financing” promise. And how. Given the project’s revenue shortfalls, these “interest support payments” turned out to be 40 times higher than projected. In 2006, the City expected to pay only $7.4 million through 2015. It ended up paying $359 million.
$400 Million in Cost Overruns & Spillovers: These materialized, as is often inevitable, as the project moved forward. Additional costs related to the subway extension, construction of the new park and cross streets, reconstruction of water infrastructure and sewers, and street reconstruction added up to $217.7 million. In addition, $182 million of cost spillovers - costs associated with additional public services and infrastructure investment required for the area’s new residents, workers, and visitors but not budgeted – were paid by the City.
$1.4 Billion in Tax Breaks: The project included heavily discounted property taxes for Hudson Yards developers justified as business as usual, rather than required to further incentivize development. The seven new commercial buildings that have qualified so far received tax breaks that amount to $1 billion in foregone property taxes, with more to come. Additionally, tax breaks for certain residential developments determined by State law (known as “421-a” abatements) reduced City property taxes by at least another $367 million between 2009 and 2018.
The Bloomberg Administration’s central argument for the development of Hudson Yards was the need to build office stock to reverse New York City’s dwindling share of the region’s demand for commercial office space. However, rather than bringing in new office business from New Jersey and Connecticut, 90 percent of Hudson Yards commercial tenants have come from Midtown, which has seen its vacancy rate rise in recent years. At a $2.2 billion cost, the Hudson Yards project arguably may have spurred economic growth. However, it may also be simply shifting the city’s existing economic activity to Hudson Yards without creating new net economic growth.
Some say that over a long enough time horizon, new development in Hudson Yards will bring in the general revenues needed to pay for itself, such as sales and incomes taxes. But this is not the definition of “self-financing” used to sell the project. Rather, the PILOTs and other designated revenue streams were promised to be enough. And when they didn’t come through, the City taxpayer was on the hook.
Labeling a project as “self-financing” is, in itself, a powerful political argument. Who wouldn’t support something that sounds free? But the label bypasses a necessary discussion of risks and costs inherent in financing an urban megaproject, and can short-circuit essential public debate about potentially substantial costs to taxpayers. As New York City looks for new ways to build, Hudson Yards should be a reminder that when you hear “self-financing,” buyer beware.