https://therealdeal.com/issues_articles/vornados-moment-of-truth/
Vornado’s Penn plan, decades in making, reaches inflection point
BY KATHRYN BRENZEL AND RICH BOCKMANN
MAR 3, 2022
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On the seventh floor of Vornado Realty Trust’s office building Penn One is a 12,000-square-foot showroom dedicated to CEO Steven Roth’s dream: to create a grand office campus surrounding Penn Station.
Over the decades, Roth has given it pet names including “Vornadoland,” “the promised land” and “the big kahuna.” He has called it Vornado’s “moonshot,” its “bullseye.”
“All this will take time but will be enormously rewarding to the patient investor,” Roth wrote to shareholders in 2018.
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For a man who turned 80 last year and heads a publicly traded real estate investment trust, Roth has shown a Herculean level of patience. His company has amassed more than 9 million square feet of property around Penn Station since the 1990s, eyeing a grand transformation that, like a desert oasis, slips away whenever Vornado gets close.
New York state has over the past three decades proposed and abandoned several plans for the district, unable to undo a Gordian knot of politics, finances, engineering and bureaucracy.
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But now Vornado’s vision of a massive, modern office campus is on the cusp of becoming a reality.
Transit improvements to feed the development now have a federal partner in the Biden administration, and Gov. Kathy Hochul has stuck with the plan since succeeding its biggest champion, Andrew Cuomo, in August. She did reduce its commercial component from 20 million square feet of new towers to a little more than 18 million, but that would still eclipse nearby Hudson Yards.
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Vornado is expected to be the developer on five of the eight Penn District sites slated for 10 towers, and could reap lucrative tax benefits in the process. With much of its $18 billion portfolio served by the transit hub, the developer has considerable influence over its future.
Because its assets sit on top of Penn Station, the developer has leverage in the state’s gradual overhaul of the transit hub. And Vornado has shown, on numerous occasions, that it can be a valuable neighbor.
For the rebuilding of the Long Island Rail Road concourse, Vornado agreed to close every one of its stores in the basement of One Penn Plaza and to move the retail 30 feet back. It is also paying for the Norman Foster-designed canopy above the revamped Penn Station entrance on Seventh Avenue. Half of the new West 33rd Street entrance is on land owned by Vornado, which the developer gave to the Metropolitan Transportation Authority for free.
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Having to deal with only two property owners — Vornado and Madison Square Garden — for Penn Station renovations helps streamline the process, said Dan Biederman, president of the 34th Street Partnership, the local business improvement district.
“And we want these plans to move forward as quickly as possible,” he said.
The Hochul administration rejects the notion that Vornado is dictating terms of the general project plan, the blueprint that will enable the redevelopment. “It hasn’t been as if they have handed us plans and said, ‘This is what we’re doing,’” said Holly Leicht, executive vice president of real estate development and planning for Empire State Development. “There has been a lot of back-and-forth.”
She said the plan allows the expansion and renovation of Penn Station and the development around it to be planned in a comprehensive way.
“I think it was really important for us to do this as a holistic [plan] as opposed to Vornado continuing to get approvals building by building,” she said.
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…. The state is considering allowing the city to collect the current level of tax revenue on these properties, and only diverting the increase in taxes resulting from the new development. The Adams administration has expressed support for the project in spirit but is seeking clarity on how it will be financed. Funding could also come from ground lease payments and the sale of development rights and land.
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For decades, real estate’s two Steves have wanted to get their hands on Madison Square Garden’s air rights. Steve Roth and Related Companies’ Steve Ross came tantalizingly close between 2005 and 2008, when they tried to persuade the Dolan family to sell the arena so that it could be relocated to the Farley Post Office. That would have paved the way for a comprehensive renovation of Penn Station, which is directly under the Garden. But the Dolans backed out.
In 2013, the city tried once again to move the arena. The City Planning Commission wanted to renew Madison Square Garden’s special permit, which allows the arena to operate its current space, for just 15 years, but the City Council extended it by only 10 years. That was enough time to find a new home for the Garden, lawmakers reasoned, and would give Penn Station’s railroads and the state leverage in negotiations with the arena’s owner to renovate the station.
That threat, however, has rung hollow. With the Garden’s special permit up for renewal next year, the state has made no apparent effort to relocate it, which would cost billions and accomplish little besides giving Penn Station a “giant skylight,” one insider said.
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The earlier version would have moved Madison Square Garden to the Farley Post Office. Instead, Vornado and Related teamed up to turn the post office into the Moynihan Train Hall and office space, where Facebook leased 730,000 square feet.
In 2010, the REIT won approval to replace the Hotel Pennsylvania at Seventh Avenue and West 33rd Street with a 67-story office building, where Merrill Lynch planned to put its headquarters. In exchange, the company agreed to a series of public improvements. The Great Recession killed the bank’s move, and the tower approval has since expired, but the improvements — including an underground path connecting Penn and Herald Square — will likely be part of the redevelopment, and may still be completed by Vornado. The hotel closed in 2020, and the company is in the process of demolishing it.
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The state’s general project plan would upzone the area around Penn Station and extinguish remaining development rights over Moynihan. It does not, however, touch the Garden’s air rights, nor preclude their use by a developer should the arena eventually relocate.
That may require some patience. Though the arena’s special permit expires next year, state officials have estimated that moving Madison Square Garden would cost more than $8 billion. In an interview last year, MTA Chair Janno Lieber said that just using the arena’s Hulu Theater to expand Penn would cost $1 billion.
“We’re not ruling out moving Madison Square Garden,” Lieber said. “It is a process that has been under discussion for generations.”
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