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BY TERESE LOEB KREUZER | On July 25, New York City Comptroller John Liu released an audit of The Howard Hughes Corporation’s leases at the South Street Seaport stating that Hughes owes the city almost $1.8 million in back rent and interest. The report faulted the New York City Economic Development Corporation, the master leaseholder at the Seaport, for failing to ride herd on the Dallas-based developer and for giving it preferential treatment.
“How sad that we must report that the management of the Seaport by the Economic Development Corporation has badly served the Seaport itself, the city and our taxpayers,” Liu said at a press conference on Pier 17 at the Seaport. “Especially at a time when retail here is struggling to recover after Superstorm Sandy, it is discouraging to find that the company that the E.D.C. contracted to run this historic area, the Howard Hughes Corporation, has shortchanged the city on its rent.”
Liu said that the E.D.C. had not noticed the underpaid rent until his office pointed it out.
By the terms of its lease, Hughes is supposed to be paying $3.50 a square foot for its leasehold. Liu said that The Howard Hughes Corporation had understated the amount of square footage it was leasing and that the E.D.C. had never performed its own survey of square footage “so it had no idea that Howard Hughes was shorting it.”
Liu went on to say that he found it even more distressing that in 2010, “E.D.C. went out of its way to help Howard Hughes when the company [General Growth Properties] emerged from bankruptcy.” At that time, Howard Hughes was spun off from General Growth. E.D.C. erased part of Howard Hughes’ debt and modified the lease terms to lower future payments to the city.
“If this is the best and most qualified candidate that the E.D.C. could find to manage the world-famous South Street Seaport, then we might be in trouble,” Liu said. He was referring to the fact that Howard Hughes is already redeveloping parts of the Seaport with its eye on more of it.
“As part of this impending redevelopment, there are significant amounts of revenue that the city and taxpayers should realize from this very important city asset,” said Liu, “and yet, because of what’s happened these past few years, it shakes our confidence that the city will actually get what it deserves in what it realizes. The E.D.C. has to step up to this. They have to manage their vendors and contractors more carefully so that the taxpayers of New York City are not fleeced in any way.”
The comptroller has recommended that E.D.C. obtain an independent survey to determine the leasable square footage under its management and regularly review Howard Hughes’ financial reports to ensure they are accurate.
The Comptroller’s Office has also recommended that E.D.C. put Howard Hughes on notice that it owes rent and interest and that the failure to pay what it owes within 15 days would constitute default under its lease. But having completed its audit, the Comptroller’s Office no longer has a say in what happens next. “It is now up to the Economic Development Corporation and City Hall to get the money back for the taxpayers,” Liu said.
The Howard Hughes Corporation responded to the audit report by saying that it was “extremely disappointed with today’s announcement by Comptroller Liu in regard to this audit and reject their findings. We have acted in good faith and are confident there is no merit to their report. We look forward to a timely resolution.”
The Economic Development Corporation also disputed the audit report.
In a rebuttal to some of the allegations, Patrick Muncie, an E.D.C. spokesperson, said that, “All outstanding issues concerning rent payments with the tenant were settled in Federal Bankruptcy Court in Manhattan in October 2010.”
Not so, said Matthew Sweeney, a Comptroller’s Office spokesperson. “There is no reason why the E.D.C. cannot collect the $1.8 million that Howard Hughes Corporation owes to the City. The E.D.C. didn’t know it was being underpaid in 2010, and wasn’t aware that it was being shortchanged until Comptroller Liu’s audit pointed it out. Unfortunately, as this audit found, the E.D.C. hasn’t fulfilled its fiduciary responsibility to New York City at the Seaport.”
Although as Muncie noted, the Comptroller’s Office signed off on that 2010 bankruptcy settlement, the audit report states that, “The Comptroller’s approval was granted based on information and documentation provided by E.D.C. and Corporation Counsel and Corporation Counsel’s assertion that the amendment protected and possibly improved the manner in which rent would be calculated for the remaining decades of the Marketplace Lease term and would be in the best interests of the City.”
In that section of the audit document, the comptroller goes on to say that Howard Hughes proceeded to take tax credits in excess of net expenses incurred and that the agreement “proved not to be in the City’s best interest.”
The comptroller’s audit of The Howard Hughes Corporation’s activities in the South Street Seaport takes place in the context of an impending deadline for Hughes to announce its plans for a “mixed-use project” in the Seaport. It would presumably entail construction of hotels, apartment buildings and additional retail.
Save Our Seaport, a coalition of Seaport stakeholders and individuals opposed to this prospect, is lobbying for a moratorium on land use approvals until the issues raised in the comptroller’s report have been resolved. S.O.S. is also proposing that governance of the Seaport should be in the hands of a local development corporation instead of E.D.C.
“We were anxiously awaiting this report and it hits all the high points that we’ve been talking about,” said Michael Kramer, a member of the S.O.S. steering committee. “It talks about how E.D.C. has been asleep at the wheel and not adequately monitoring The Howard Hughes Corporation to ensure compliance with their lease. It questions why they were given the lease in the first place, coming out of a bankruptcy situation. We look forward to people paying attention to this because we need a new form of governance at the South Street Seaport.”