Construction Engines

Economic Development Corporations Manage Busy Slate of Projects

Whether at the local, regional, or state level, economic development corporations are playing a bigger role in spurring, overseeing, and shepherding large development projects.

by Adrian MacDonald

New York's regional real estate market is chock full of big projects launched by private developers or public agencies. But there also is a busy middle ground mixing public and private development power through the growing presence of economic development corporations.

These public-benefit entities of various shapes, sizes, and legal structures are now pervasive in the real estate development scene. They wield different types of power than other "fully" public agencies, often opening a faster but also murkier path for officials to pursue big projects.

By and large a post-World War II phenomenon, the agencies have historically focused on improving economically stagnant areas of developed urban centers. They can focus on neighborhoods like Times Square and the South Bronx or instead take in entire cities or regions. New York, New Jersey, and Connecticut all have entities that cover the entire state.

These corporations most often focus on economic development initiatives to aid businesses in expanding or relocating to redevelopment districts, but the larger, more established ones also take on real estate development in projects that, while public in name, occupy a unique place in the construction industry.

"It's very similar to the private sector," said Mike Mennella, executive vice president at Tishman Construction in New York, which was construction manager in a joint venture with Frederick R. Harris on the Whitehall Ferry Terminal in Manhattan, a project of the New York City Economic Development Corp.

Mennella said that project, completed in 2005, was the city EDC's most significant to date. Tishman is currently handling additional EDC projects, including a $53 million restoration of the Battery Maritime Building in Manhattan.

EDCs Come in Various Shapes, Sizes

New York serves up various flavors of development authorities, from the Empire State Development Corp., a full-fledged state agency, to the city's EDC, a not-for-profit corporation led by city officials.

State agencies like the ESDC or the New Jersey Economic Development Authority get most of their funding from the state and a smaller amount from their real estate portfolios. The South Bronx Overall Economic Development Corp., meanwhile, has 150 employees and gets most of its funding from contracts with the city to run community programs.

But all such corporations should work for the public benefit, said Greg Coemen, acting executive director of the New London Development Corp. in Connecticut.

"It's very clear in the world of development corporations that we serve the public interest," he added.

Real estate work is usually a small part of a development authority and typically forms a minority of the revenues. Glen Phillips, a spokesman for New Jersey's state authority, said that of its 140 employees, only 25 work in real estate, with most of the rest focused on low-interest financing to aid business enterprises.

While some agencies play an active development role through ownership of sites and selection of private developer partners, others play a background role to facilitate the development process. Elizabeth Spinelli, director of the Hudson County Economic Development Corp. in New Jersey, said her group focuses mainly on brownfields redevelopment.

"There are no properties that we have control over," she said. "Our role is acquiring grant money, hiring people for environmental site assessments, and helping a town secure developments."

Development authority projects tend to be larger efforts to reclaim underused or underdeveloped land or make other urban landscape improvements.

They also tend to be complex from a project management standpoint, Mennella said. The ferry terminal, for example, involved the Metropolitan Transportation Authority and traffic and ferry divisions of the city's Department of Transportation.

"There's another layer on an EDC project," Mennella said. "Those are the kinds of projects that fall into EDC's lap, the multiagency ones."

With such broad powers, development authorities sometimes step in hot water. New York adopted greater oversight of the entities through last year's Public Authorities Reform Act, which calls for independent auditing and review of state agencies, said Jim Malatras, legislative director for Richard Brodsky, a Democratic state assemblyman from Westchester County who sponsored the bill. One incident sparking the bill was a 2001 deal in which the New York State Canal Corp. was set to sell development rights along the entire 1,000-mi. stretch of the Erie Canal to a Buffalo developer for $30,000 after a limited RFP that only resulted in one bid. The deal was canceled in 2004.

In New Jersey, Gov. Jon Corzine signed an executive order in September to enact similar reforms recommended by a 2005 task force. The order calls for all contracts with independent authorities to be awarded on merit with preset, transparent procedures. In most cases, it will require low-bid contracting, and all contracts will require public advertising. It also sets up new financial auditing procedures.

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Acting as a State Economic Engine

Statewide agencies are the most powerful models of development corporations.

New York's Empire State Development Corp., is a true government agency with power to override local zoning and acquire property through eminent domain. Charles Gargano, who is ESDC chair and commissioner of the state's Department of Economic Development, helped form the corporation by consolidating four state agencies, including the Urban Development Corp., which the state formed in 1968 to build affordable housing and is still the agency's legal name.

The ESDC normally takes on projects championed by local municipalities and community leaders for their economic development potential. It develops a plan, hires professional consultants, and issues RFPs to qualified developers, though in most cases, it needs approval from the state's Public Authorities Control Board before committing resources to a project.

The corporation typically begins by acquiring the land for the state, either by purchase or through condemnation proceedings. It then engages private firms to redevelop the land on lease terms of 99 years. The state retains ownership.

When the ESDC issues an RFP, it must seek the highest qualified bid with the best financial return to the state. On the ongoing $2.3 billion, 74-acre Queens West redevelopment on the East River, an industrial property the agency acquired from soft drink producer PepsiCo in 2003, the ESDC designated New York-based Rockrose Development to develop a 20-acre northern parcel into luxury residential high-rises around a state park, after the firm committed to build at least $1 billion worth of new buildings.

"We don't make capital investments ourselves," Gargano said. "We provide the financial assistance to do so. The public sector gets its money back, its return on investment. We encourage economic investment. We clean up neighborhoods."

The ESDC has broad authority, including power to purchase property from other state agencies for $1. But ESDC paid $230 million to buy Manhattan's James A. Farley Post Office complex from the federal government, which it plans to redevelop into the $880 million Moynihan Station. And ESDC got $700 million in federal money in 2001 to redevelop Lower Manhattan after the Sept. 11 attacks.

For projects such as Lower Manhattan's redevelopment, Queens West, Moynihan Station, Buffalo's Inner Harbor, or the $1.7 billion Jacob K. Javits Convention Center expansion in Manhattan, the ESDC typically sets up a subsidiary with its own board of directors, as it did with the 42nd Street Development Corp., which oversaw much of the rebuilding of Times Square in the 1990s. In a 2005 audit, New York's state comptroller's office criticized the ESDC for having created 202 subsidiaries, nearly half of which are inactive, and called on it to dissolve them. But ESDC has said it has not yet complied because it regards the request as unnecessary and time consuming.

New Jersey's EDA is an independent authority that operates like New York's version, with roles that include acquisition and cleanup of sites as well as pure real estate development oversight. It is overseeing large-scale public and not-for-profit projects such as the $108 million expansion of Liberty Science Center in Jersey City; construction of the $190 million, 460,000-sq.-ft. Greystone Park Psychiatric Hospital in Morris Plains; and the "Portfields" plan to redevelop brownfields into warehouse and distribution centers.

The Connecticut Development Authority focuses little on pure real estate but has a brownfields redevelopment program directing incentives to businesses seeking to build high-tech centers on vacant industrial land.

Variety in Local Corporation Model

Local development corporations operate in a different realm. Some are privately sponsored groups that work independently, while others are explicitly set up by municipalities but operate at an arm's length.

As a separate, tax-exempt, not-for-profit entity, New York City's EDC is not a city agency, but under its charter, city officials appoint its controlling officers. It contracts with the city to redevelop public property, with a role akin to a program manager.

Unlike the norm for public projects, the EDC is not required by state law to select the lowest bidder in its RFPs. Contractors bid both a technical proposal and a cost proposal, as they would to a private owner.

"The EDC truly functions as a [private] client," Mennella said. "They treat buildings like they own them, although they represent several city agencies."

The city's deputy mayor for economic development and the EDC's board both must approve projects and contracts the EDC handles. But new construction projects can derive from various sources, such as the mayor's economic development priorities; facilities the EDC already manages for the city; requests for assistance from other elected officials or city agencies; and assignments of complex multiagency projects, such as the ferry terminal, that utilize EDC's staff of real estate professionals, architects, engineers, and planners.

Another model is the Capital City Economic Development Authority in Hartford, Conn., which the state Legislature created as a "quasigovernmental agency" with an unpaid board of directors to oversee six redevelopment projects worth $700 million, including a $481 million convention center complex built last year.

The New London development corporation made headlines last year from a U.S. Supreme Court ruling that let the authority condemn seven private houses in the Fort Trumbull district to allow redevelopment around a new facility that Pfizer, the drug company, had built. The case sparked a national debate over eminent domain.

Coemen said the plan was for the public good because the land largely consisted of an old Navy base, salvage yard, abandoned housing, and other unused property.

"The only way for that to be brought back on the tax rolls was to acquire the property and put in the necessary infrastructure to service it," he said.

The smallest scale of real estate work by development corporations comes from organizations such as SoBRO, which Bronx officials formed as a not-for-profit corporation in 1972 to spur development in the famously blighted South Bronx. Neil Pariser, senior vice president at SoBRO, said that while his organization gets government contracts, it operates independently and develops its own projects, usually on a small scale, such as a job last year to transform an abandoned 1919 comfort station in a city park into a Wendy's restaurant.

SoBRO's unpaid board of directors, which selects the projects, focuses development efforts on affordable housing, such as Taino Plaza, a $19 million mixed-use project in Central Morrisania built in 2004 with 105 units of low-income family housing. But Pariser said the group has also started developing market-rate housing.

"Market-rate housing is in the public interest, so you don't get neighborhoods of only poor people," Pariser said.