Thursday, June 4, 2009
Times Square Red by Samuel R. Delany
The Times Square problem I perceive entails the economic "redevelopment" of a highly diversified neighborhood with working-class residences and small human services (groceries, drugstores, liquor stores, dry cleaners, diners and specialty shops ranging from electronics stores to tourist shops to theatrical memorabilia and comic book stores, interlarding a series of theatres, film and stage, rehearsal spaces, retailers of theatrical equipment, from lights to makeup, inexpensive hotels, furnished rooms and restaurants at every level, as well as bars and sexually orientated businesses that, in one form or another, have thrived in the neighborhood since the 1880s) into what will soon be a ring of upper-middle class luxury apartments around a ring of tourist hotels clustering about a series of theatres and restaurants, in the center of which a large mall and cluster of office towers are slowly but inexorably coming into being.
The generally erroneous assumption about how new buildings make money is something like this: a big company acquires the land, clears it for construction, an commences to build. After three to five years, when it is complete, the company rents the building out. If the building is a success, all the offices (or apartments, as the case may be) are leased, and the site is a popular one, then an only then does the corporation that owns the building begin to see profits on its earlier outlays and investments. Thus the ultimate success of the building as a habitation is pivotal to the building's future economic success.
If this were the way new office buildings were actually built, however, few would even be considered, much less begun.
Here is an only somewhat simplified picture of how the process actually works, it gives a much better idea of what goes on and how money is made.
A large corporation decides to build a building. It acquires some land. Now it sets up an extremely small ownership corporation, which is tied to the parent corporation by a lot of very complicated contracts- but is a different and autonomous corporation nevertheless. That ownership corporation, tiny as it may be, is now ready to build the building. The parent corporation also sets up a much larger construction corporation, which hires diggers, subcontracts construction companies, and generally overseas the building proper.
The little ownership corporation now borrows a lot of money from the bank- enough to pay the construction corporation. It also sells stock to the investors- enough to pay back the bank loan. The tiny ownership corporation (an office, a secretary, a few officers that oversee things) proceeds to pay the parent construction corporation with bank funds to build the building. It uses the stock funds to pay back the bank. Figured in the cost of the building is a healthy margin of profits for the construction corporation- and for the large corporation that got the whole project started- while investors pay off the bank, so it doesn't get twisted out of shape. Meanwhile both the ownership corporation and the construction corporation pay the parent corporation and the construction corporation pay the parent corporation as their controlling stockholder.
Yes, if the building turns out to be a stunningly popular success, then (remember all those contracts?) profits will be substantially greater than otherwise. But millions and millions of dollars of profit will be made by the parent corporation just from the construction of the building alone, even if no single space in it is ever rented out. (Movies are made in the same manner, which is why so many awful ones hit the screen. By the time they are released, the producers have long since taken the money and, as it were, run.)
Believing in the myth of profit only in return for investments, public investors will swallow the actual cost of the building's eventual failure- if it fails- while the ownership corporation is reduced in size to nothing: an office in a building on which no rent is paid, a secretary and/or an answering machine, and a nominal head (with another major job somewhere else) on minimal salary who comes in once a month to check in,..if that.
Two facts should now be apparent. First: The Forty-second Street Development Project ( I use this as a metonym for the hidden [limited liability] corporate web behind it) wants to build those buildings. Renting them out is secondary, even if the failure to rent is a major catastrophe for the city, turning the area into a glass and aluminum graveyard. In short term speculative business adventures of (to choose an arbitrary cutoff point) more than three million dollars, such as a building or civic center, (second fact) the profits to be made from dividing the money up and moving it around over the one of six years during which the money must be spent easily offset any losses from the possible failure of the enterprise itself as a speculative endeavor, once it's completed....
Far more important than whether the buildings can be rented out is whether investors think the buildings can be rented out. In the late seventies, three of those towers were tabled for ten years. The ostensible purpose for that ten-year delay was to give economic forces a chance to shift and business a chance to rally to the areas. The real reason, however, was simply the hope that people would forget the arguments against the project, so clear in so many people's mind at the time. Indeed, the crushing arguments against the whole project from the mid-seventies were by the mid-eighties, largely forgotten; this forgetting has allowed the project to take its opening steps over the last ten years. The current ten-year delay means that the public relations corporations have been given another decade to make the American investing public forget the facts of the matter and convince the same public that the Times Square project is a sound one. It gambles on the possibility that, ten years from now (@2008) , the economic situation might be better...