Roosevelt Island Riverwalk Building 5-6 Not Profitable For Developer Hudson Related Says RIOC Deal Memo - Negotiations For Building 7 Continuing, Update At Today's Executive Session RIOC Real Estate Committee Meeting

The Roosevelt Island Operating Corp (RIOC) Real Estate Advisory Committee is meeting later today in Executive Session (closed to the public) for an update on current negotiations with Hudson Related Companies regarding the future development of Southtown (Riverwalk) Building 7.

Image of Riverwalk Building 1-6 and future site of 7-9 from Wall Street Journal

According to RIOC:

PLEASE TAKE NOTICE that a meeting of the Real Estate Development Advisory Committee of the RIOC Board of Directors will be held on Wednesday, May 15, 2013 at 5:30 p.m. at the RIOC administrative office, 591 Main Street, Roosevelt Island, New York.

Agenda:

1. Chair�s Motion for Executive Session for Update on Current Negotiations Regarding Southtown Development (Building 7)

2. Any Other Committee Business That May be Brought Before the Committee

What are these current negotiations about? The RIOC Board of Directors had previously approved a Lease Amendment for Southtown (Riverwalk) Buildings 7-9 during the February 28 Board of Directors meeting. As previously reported:

... the Southtown Building 7-9 Ground Lease amendment with Hudson Related was approved during the February 28 RIOC Board of Directors meeting. According to RIOC CFO Steve Chironis the ground lease payment from Hudson Related to RIOC  for building 7 was reduced from $32 million to $28 million. The terms for buildings 8-9 remained the same.

Here's video of Mr. Chironis explaining the Ground Lease amendment to the RIOC Board.

Here is the February 26, 2013 Deal Memo prepared by Mr. Chironis to the RIOC Board. According to the Deal Memo (Page 3) tentatively agreed upon terms, the closing for Southtown (Riverwalk) Building 7 was scheduled for April 30 of this year.

Site Of New Southtown Building 7 Covers Northern Section Of Area By Shed/Tot Lot

The RIOC prepared Deal Memo also states (Page 1):

Hudson/Related (H/R) holds an option to develop the remaining three lots (7-9) of the Southtown Development Project, which expires on December 31, 2012 (the “Option”). In March 2012, H/R requested a modification of terms based on a claim that the last 2 buildings to be developed (5 &6) were not profitable and the overall market was not as favorable as the conditions in 2006 when the original agreement was reached. However, the original first four buildings (buildings 1-4) were very profitable and the agreement for 5-9 was designed to recover profits lost by RIOC.

Building 5, which is a condo that was completed in 2009, still has 15 unsold units out of a total of 122. On average, the sales prices of units sold from 2009 through 2010 have been approximately 25% below original condominium asking prices with a moderate rise in 2011 and 2012. Recent resale prices of sold units are still significantly less than the original purchase prices. However, Building 6 — originally intended to be a condo — was instead built out as a rental and is nearly fully rented.

Prior to the proposal and confirmation of the Cornell project on Roosevelt Island H/R gave little indication of their intent to exercise the Option. The agreement provides for a “De-designation fee”, an amount H/R must pay to RIOC in the event of not developing the project. The fee —based on the amount of undeveloped square footage in Southtown 7-9 at a rate of $2/SF — is collateralized by a letter of credit in the amount of $1,420,800. This fee would paid to RIOC in the event H/R does not go forward with 7-9. With the announcement of the Cornell project the prospects for the Roosevelt Island real estate market are brighter but at this point it would be difficult to quantify the impact given that: 1) completion of the first Cornell buildings is not scheduled until 2017; and (2) the overall market faces high-risks posed by existing global financial uncertainties.

At the commencement of negotiations in March 2012 RIOC was initially advised by Jones Lang LaSalle (JLL) and subsequently CBRE pertaining to deal modification issues. JLL, the original advisor to the Southtown project,was replaced by CBRE due to JLL’s financial interest through earned commission that would be due to them upon the closings of buildings 7-9....

and (Page 4):

... The financial components upon substantial construction completion are summarized as follows:
1. Ground Rent:
- Prepaid Ground Rent ($50/SF@ 201,600SF) - $10,080,000
- Starting Annual Ground Rent w/ 3% escalation - $765,760.00...

...  4. Public Safety Fees: $20/unit/month w/ 4% escalation (est. 200 units)
- starting annual public safety fee - $48,000.00...

 and (Page 2 of CBRE attachment to Deal Memo):

Subject to compliance with environmental and other law and to a modification to the GDP if required, RIOC will allow (but not require) below-grade parking at Building 8 and Building 9.

Click here for the full RIOC/Hudson Related Southtown (Riverwalk) Deal Memo.