Downtown, a Menu of Incentives

New York Times Real Estate

Sunday, May 19, 2002

Downtown, a Menu of Incentives

By John Holusha

"A lot of New Yorkers want to distance themselves from what happened there," said Ruth Colp-Haber of Wharton Property Advisors, a brokerage that represents tenants. "It is as if Manhattan has been divided into two cities, with 14th Street as the border."

Adding to the Bottom Line

Among the government benefit programs designed to encourage businesses to stay or relocate downtown.

Incentives to Stay or Relocate

Federal

Liberty Zone

Accelerated depreciation for property improvements: 5 years rather than 39.
Tax credit of $2,400 per employee per tax year through 2003 (limited to businesses with 200 employees or less).

State and City

Small Firm Attraction and Retention Program (limited to concerns with 200 or fewer employees).

South of Canal Street$3,500 per employee for new or renewed leases after Sept. 11, 2001.
Restricted Zone $5,000 per employee for companies initially located in Restricted Zone who remain there; $3,500 per employee if relocated to elsewhere in the city. $3,500 per employee if relocating from elsewhere in New York City.

Payment to Offset Business Losses

A federal program administered by the state provides payments for business interruption because of the events of Sept. 11. Companies must have had operations in the indicated areas, and resume them within New York City. Amounts shown are the maximum, and may be reduced by insurance or other programs.

Between 14th Street and Houston St. - $50,000
Between Houston St. and Canal St. - $100,000
South of Canal St. - $150,000
Restricted Zone - $300,000

To help revive the downtown office market in the wake of the Sept. 11 attack, a complex set of federal, state and city incentives – cash allowances and tax breaks – are being offered to businesses that renew leases or move into the area. The incentives, together with rents that have gone down since the attack, have reduced the cost of office space to the point where it is 40 to 45 percent less than in Midtown, rather than the traditional 20 to 25 percent, according to real estate executives.

Although few deals have been done in recent months, brokers say this price gap has begun to attract the attention of professional service firms, like lawyers and accountants, whose partners would pocket the savings. The question for these people, said Andrew M. Peretz, a managing director of Insignia/ESG, a real estate services company, is, Would you be willing to move downtown for $1 million?

Vacancy rates have continued to climb downtown and rents to soften as more space has come on the market than has been leased. More than $500,000 square feet of space was added to the downtown market in April, pushing the vacancy rate higher by six-tenths of a point, to 14.8 percent, according to a report by Insignia/ESG. Average asking rents declined 32 cents a square foot, to $39.15 a year. But some brokers caution that asking rents may not reflect the true state of the market because some landlords are offering concessions that reduce the effective rent.

The government-administered incentive programs, which are substantially financed with federal money, may influence the pattern of development throughout the city by attracting to lower Manhattan businesses that might otherwise consider locations in other boroughs. A case in point may be the 37 block sector of Long Island City in Queens that was rezoned last year to encourage development of high-rise office buildings.

According to Sanford H. Zuckerbrot, president of Shalom & Zuckerbrot, a commercial brokerage active in Long Island City, the downtown incentives are likely to nullify the objective of the Queens rezoning. "It will be hard to convince people to move to Long Island City if the price in lower Manhattan is the same," he said.

But the incentives will also have to overcome what many brokers describe as a psychological resistance to moving downtown, where the transportation system is still snarled and the proximity to horrific events is inescapable. "A lot of New Yorkers want to distance themselves from what happened there," said Ruth Colp-Haber of Wharton Property Advisors, a brokerage that represents tenants. "It is as if Manhattan has been divided into two cities, with 14th Street as the border."

Others say that dollars will ultimately trump fears that the transportation will be rebuilt and improved and amenities developed. "There is $21 billion committed to downtown, so it is going to be a wonderful place to be five or seven years out," said Marc Shapses, a senior managing director for Julien J. Studley, a brokerage that specializes in representing tenants. "Once people figure that out, they will start to react."

It is this combination of factors; rather then the incentives alone that will bring about the revival of downtown said Mitchell Moss, director of the Taub Urban Research Center at New York University. "The incentives will combine with the infrastructure changes to make lower Manhattan the most attractive place to live, work and visit," he said. "It will be the only place in the city with a 21st-century transportation system."

Brokers report there has been little leasing activity downtown in recent months, despite the existence of large amounts of vacant sublet space left by companies that decided to move out of the area. Nevertheless, Carl Weisbrod, president of the Alliance for Downtown New York, which promotes the southern tip of Manhattan, sees the glass as half full.

Even if there has been no rush by businesses to move there from other parts of the city or the suburbs, he said, neither has the outflow continued. "We are clearly seeing a stabilization of the downtown market," he said. "The ones that were going to leave have left. We don’t see more companies leaving."

Despite the loss of about 13 million square feet of office and retail space in the attack and related events, he said, downtown remains the third largest central business district in the United States (after Midtown Manhattan and Chicago). As such, it is receiving "an unusual amount of attention from all levels of government," Mr. Weisbrod said.

The incentive programs are part of that attention. Although the impact of the incentives will vary with each company or professional firm based on size, activity and location, they could be substantial, according to calculations made by the alliance.

A company with 10 employees that could take advantage of the incentives, for instance, might have a total rental cost downtown of $279,659 for a five-year lease. A similar company in Midtown would have a total rental cost of $612,500 over five years, according to the estimates of Mr. Weisbrod’s group, well over double the cost downtown.

Similar savings could be achieved by larger companies, the study found, although the mix of benefits might be different because companies with more than 200 employees are not automatically eligible for some incentives.

Since the incentives are intended to draw businesses downtown or persuade those already there to sign new leases, the benefits are concentrated at the early years of a lease and the savings decrease as time goes on. According to the alliance’s calculation, a downtown tenant would save $48.48 a square foot compared with its Midtown counterpart in the first year of a lease because of incentives and lower rental rates downtown. That premium would diminish to $22.31 a square foot in the fifth year as the incentives would largely expire.

One major program has nothing to do with rent, but is intended to compensate companies for revenues lost as a result of the attack and its aftermath. It is called the World Trade Center Business Recovery Grant Program and is administered by the state’s Empire State Development Corporation. Applications for these grants must be filed by Dec. 31 of this year.

Businesses would have to show that they had losses in revenue not compensated by insurance or other government programs. They must have been in operation on Sept. 11 and must have continued in operation or plan to resume in New York City. They need to have had one to 200 employees at the downtown location and no more than 500 in the overall company.

The grants have a maximum amount in each of four zones, which are intended to reflect the degree of disruption based on proximity to the attack. The largest grants available in the Restricted Zone immediately adjacent to the World Trade Center, where there is a maximum of $300,000. The Restricted Zone is bounded by Chambers Street on the north, Rector Street on the south, Broadway to the east and the Hudson River on the west.

Outside the Restricted Zone south of Canal Street and Rutgers Slip, the limit is $150,000. In the area north of Canal and south of Houston Street, river to river, the limit is $100,000. And in the area between Houston and 14th Streets the limit is $50,000.

Another plan to put cash in the hands of businesses that commit to move downtown or to stay there is the Small Firm Attraction and Retention Program. Established by the city and state governments, it is aimed at companies employing 10 to 200 people who sign or renew leases for at least five years in the designated zones. A recent proposal, still not approved, would reduce the size threshold to businesses employing one person.

Companies that have stayed in the Restricted Zone are eligible for $5,000 per employee, payable in two installments. Businesses that have stayed or moved into the area south of Canal Street and Rutgers Slip but outside the Restricted Zone are eligible for $3,500 per employee.

In addition, the city’s Economic Development Corporation has the discretion to make grants to companies with more then 200 employees that relocate to lower Manhattan or extend their leases.