With talk of eminent domain at the stalled Filene’s redevelopment in Boston’s Downtown Crossing moving from closed-door threats to screaming headlines, both the city and the developers have a number of difficult decisions to make.
Now that Boston Mayor Thomas M. Menino has hit developer Vornado Realty Trust with a very public broadside, lambasting its treatment of the Downtown Crossing site as “outrageous,” “callous,” “reprehensible” and “inexcusable,” he is faced with two tough options: Either follow through on his threats and seize the One Franklin project through eminent domain, or let the project proceed. Each option carries its own pitfalls.
The choices for the development team, a joint venture of Vornado, Gale International, Mack-Cali Realty and JP Morgan, are equally unsavory: Soldier on, despite the wrath of an angry Menino; scale back development and risk the return on their investment; or sell outright and leave town. The development partnership bought the site in January 2007 for $100 million.
Menino’s open letter to Vornado chairman Steven Roth, released last week, attacked the New York developer for telling a group of Columbia University students that he let a blighted Manhattan site stagnate as a way of extracting concessions from government officials.
The letter capped 18 months of tension between City Hall and the developers of the stalled Downtown Crossing project. Work on the 39-story, $700 million tower stopped in November 2008, when project financing collapsed. Gale has been unable to secure replacement debt, and Vornado has been unwilling to use its own substantial balance sheet to finance the project.
“The Roth quotes put the mayor over the top,” one source close to City Hall said. “He has no use for these guys. He feels like they’ve lied to him. City Hall thinks Vornado’s a bunch of scumbags.”
Girding For Battle
Menino considered taking the project site through eminent domain early this year, but reportedly backed off because he feared the cost of seizing the land would be prohibitive.
In City Hall’s view, there are two benefits to an eminent domain taking. The first would come in unceremoniously sweeping Vornado out of town. Industry veterans believe the city would then flip the site to a developer that could afford to build a smaller project on the blighted site.
Values in eminent domain cases are notoriously difficult to establish. Banker & Tradesman spoke to sources who pegged the site’s value anywhere from $50 million to $200 million. Any eminent domain taking would undoubtedly lowball the Filene’s owners, who might then sue the city to recoup their sizable investment in the site. Taking and flipping the site for a low price would expose City Hall to a large loss, if a jury found Vornado’s team had been shortchanged by a below market value seizure.
The development team appears to have been readying themselves for a courtroom battle. Annual reports from Vornado and Mack-Cali show in 2008, the partners booked a $69.5 million impairment charge on the project. But neither firm wrote down the project at all in 2009. Several industry sources said the decision not to recognize a second impairment may have been made with an eye towards having to defend a high project value before an eminent domain jury.
An Established Precedent
City Hall might try to avoid a big-ticket taking by seizing the ground at the Filene’s site, but leaving Vornado’s team with development air rights.
There’s precedent for such takings in Boston. Mayor Kevin White seized Lafayette Place, built an underground public garage, and left foundations for private development above. Former Senate President William Bulger took the site of the current TD Garden for the MBTA, leaving Garden owner Jeremy Jacobs to build above an expanded North Station.
But that strategy is not without risks.
Former state transportation head Fred Salvucci noted that the MBTA built a series of now-useless foundations around South Station in anticipation of an air rights tower that eventually saw its footprint change, rendering the foundations virtually useless.
“To just build it and think you can come back to it in 10 years, it’s hard to actually get the upper stories built,” Salvucci told Banker & Tradesman.
On the other hand, Salvucci noted that Bulger’s North Station gambit delivered a strong message to Jacobs: “Stop fooling around and step up to the plate and build something.”
In the days before Menino’s caustic letter, Banker & Tradesman reported that the city and the Filene’s developers were discussing a phasing plan to speed work on the project’s garage and low-rise retail components. That option looks less likely now, as it was predicated on public bonding assistance – assistance unlikely to come after Roth’s Columbia boasts.
Ultimately, Vornado could simply sell the project to another developer, one that hasn’t yet earned the mayor’s enmity.
“The best thing they can do is get out of town,” the source close to City Hall said. “The longer they’re there, the worse it is for them. The blood is that bad.”
