The Real Deal New York

MTA fires back over Apple deal

December 02, 2011 02:27PM
By Guelda Voien

While State Comptroller Thomas DiNapoli has blasted the Metropolitan Transportation Authority for their $60-per-square foot deal with Apple for retail space in Grand Central Station, and plans an investigation, the MTA is keeping its cool, urging politicians and the public to “bring [the investigation] on,” the MTA said in a statement today.

Taken at face value, some observers say, the transaction looks like it gives the MTA — and by extension, the taxpayer — a raw deal. Apple’s rent in their 23,000-square-foot lease is far lower than what other tenants pay at the transit and retail hub (Shake Shack will pay $200 per foot for Grand Central space, according to a report Tuesday in the New York Post). Also, the MTA failed to secure a percentage of sales revenue from Apple in their deal, something every other tenant at Grand Central pays. But the agency points to a number of constraints that explain that fact and why the deal generally made sense for the state agency.

First off, Apple was the sole respondent to the MTA’s request for proposal, perhaps due to the odd dimensions of the space, which leave no room for storage, according to MTA spokesperson Aaron Donovan. It’s possible that only a retailer that sells tiny $200 devices could make such a space make sense. “The lack of space for merchandise is an issue,” Donovan said.

The rules imposed by the state’s Historic Preservation Office also likely limited the number of interested respondents, Donovan said. Very little if any signage is permitted in the landmarked station. In addition, there can be absolutely no alterations made to the space, cosmetic or structural, he said.

And while the Post quotes real estate lawyer Steven Wagner jokingly suggesting that developer Harry Macklowe might have assisted in negotiations (he famously nabbed a sweet percentage of Apple’s total revenue in the deal at their 767 Fifth Avenue store, netting the landlord approximately $15 million per year), the MTA said that Apple’s policy is never to share a percentage. “Our understanding is that was an early effort for their retailing, something that hasn’t been repeated,” the MTA’s Donovan said of the Fifth Avenue lease. Apple stands to make around $100 million in profits per year at their Grand Central instantiation, the Post said.

Critics of the MTA, such as DiNapoli, have called the authority’s handling of its real estate portfolio shoddy and blasted the marketing of MTA-held properties. “The MTA did not have a strategic plan for marketing its real estate holdings,” a July 2010 audit by DiNapoli’s office found.

Donovan said the space that Apple has signed for was advertised in a number of publications and that the available space “received a fair amount of publicity at the time.”

And of course, there is the fact that the retailer of beloved gadgets will draw foot traffic and add prestige to the retail destination.

“Apple has all kinds of intrinsic value,” Robin Abrams, executive vice president at Lansco, a commercial real estate firm, told The Real Deal. Abrams said in the Post that she was surprised the deal did not have an upside for the MTA, but, she noted to The Real Deal, she also believes the transaction is a total win-win, as it will boost revenue for all tenants at Grand Central. Calls to Apple were not returned.

The comparison with Shake Shack in terms of rent and lease terms is also not quite fair, according to Abrams.

“Other burger chains were probably competing for the [the Shake Shack] space,” inflating the price, she said. And the mezzanine space, away from the main flow of foot traffic, is probably hard to fill, she said. “A restaurant might take it, but a restaurant would pay less,” than Apple, as restaurants generally have a lower asking rent per square foot.

And, all that aside, there is the $5 million Apple will pay to buy out the lease and fix up the space. That sort of capital contribution is not common these days from retailers, as they struggle in our relatively bleak economic climate. “It’s very difficult to find credit tenants who will put that kind of substantial upfront capital into any deal,” Abrams said. “It’s usually the other way around, [with landlords putting in the cash].”

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