Audit Claims Apple Received Favorable Treatment in Grand Central Terminal Lease Talks

[MacRumors]

Last December, Apple opened a massive new retail store in Manhattan's historic Grand Central Terminal, adding a high-profile presence to the busy commuting, tourist, and shopping hub. Apple's lease agreement with the Metropolitan Transportation Authority (MTA) was quickly questioned by government officials, who were concerned that Apple had received favorable treatment during the negotiations and was paying significant lower rent than would otherwise have been expected for the location.

The MTA countered those claims with its own statements outlining how Apple is paying four times as much rent as the restaurant it replaced while also paying $5 million to the restaurant to vacate its lease and investing in building upgrades for the new store. The agency also argued that Apple's presence would indirectly boost terminal revenue through increased traffic at other merchants that, unlike Apple, pay a portion of their revenue to the terminal.

But the New York Post now reports that a state audit of those lease negotiations has determined that Apple did indeed receive an "unfair" edge in what was supposed to be an open competition for the space.

A fresh audit by state Comptroller Thomas DiNapoli says the MTA last May allowed the California-based tech giant to set a daunting hurdle for rival bidders to clear in a tight, 30-day window -- namely, that they be willing to front $5 million in cash.

"The competitive process followed by MTA . . . was at a minimum severely slanted toward Apple," reads the report, submitted to MTA officials Friday and expected to be made public today.

The state comptroller's office has announced the release of the audit report, revealing that Apple and the MTA had been in negotiations for the space for over two years and that Apple had already made payments to the vacating restaurant before the space was publicly opened for proposals.

"While Apple may turn out to be a good tenant, the MTA set a troubling precedent when it played favorites and gave Apple a competitive edge over others for the Grand Central space," DiNapoli said. "Apple was directly involved in setting the terms of the lease and given exclusive access to information more than a year before any other vendor knew the Grand Central location was available. The company even signed a $2 million agreement with the current tenant to vacate its space five days before the MTA issued the RFP.

In response to the audit, the state is proposing increased oversight on competitive public authority contracts, a move which give the comptroller's office more authority to examine such agreements before they are finalized.

In a statement responding to the audit, MTA Chairman and CEO Joseph Lhota called the results "not fact-based" and "worthless", also accusing the comptroller's basis of "overt bias" against both the MTA and Apple in declaring that the process was not open and transparent.

Article Link: Audit Claims Apple Received Favorable Treatment in Grand Central Terminal Lease Talks

 

[ConCat]

Looks like the free market is dead. Apple got favorable treatment because having an Apple store in you station increases revenue from all of your shops due to increased foot traffic. I don't see how this is any of their concern. Clearly, people have been enjoying the Apple store.

Really, the free market is a beautiful thing. It works well, and both sides are happy. You give me a product or service I want, and I give you money so you can buy a product or service you want. Really, that's all there is to it. We have not lived in a true free market for almost a century now.

 

[applesith]

Who cares. MTA is a bureaucracy. Let's take a closer look at what their union friends have been offered over the years.

 

[guzhogi]

I wonder how much additional/less foot traffic the other stores have been getting due to Apple's moving there.

A little OT, but I've been in Chicago's western suburbs a few times. Kinda wish they'd build an Apple store in Yorktown mall. The one in Oak Brook is always packed.

 

[allpar]

So... the first responder claims that it's only a free market if the quasi-government agency is allowed to choose the tenant in advance?

I agree that Apple's foot traffic and prestige should have been a factor, but I disagree that it's okay to choose a store in advance and not open the space to anyone.

Our impressions of "free markets" are different -- and irrelevant since the MTA is not a private company.

 

[JBunkers]

Who's slanted here?

So the state comptroller conducts an audit which finds that the state comptroller should have more power?

I think the audit is "at a minimum severely slanted toward the Comptroller".

 

[Swift]

Politics. If somebody couldn't put up $5 million, how on earth could they lease the space? Who exactly was cut out? Look no further than the Murdoch filth, the NY Post. Is some different series of regulations necessary? Maybe so. Note: this is a great business deal for Grand Central. Any businessman would see that. But apparently, the Post never saw a public bureaucracy they liked. Gee, was Bain Capital thinking of buying Grand Central and moving it to Mexico?

 

[FrizzleFryBen]

Seems logical to me. Apple's shiny, cool and brings people into the terminal and increases dwell time in the terminal.

Would it have been nice if Apple didn't get a sweetheart deal and then pass the increased revenue onto other shops with a discount in their royalties paid? Sure. But that's just not how capitalism works. From the sounds of it, everyone benefits in this deal. Therefore, to me...it ain't a big deal.

Oh NO!!! Everybody's happy!!!

 

[samcraig]

Politics. If somebody couldn't put up $5 million, how on earth could they lease the space? Who exactly was cut out? Look no further than the Murdoch filth, the NY Post. Is some different series of regulations necessary? Maybe so. Note: this is a great business deal for Grand Central. Any businessman would see that. But apparently, the Post never saw a public bureaucracy they liked. Gee, was Bain Capital thinking of buying Grand Central and moving it to Mexico?

I'm not commenting on the great business deal for Apple and MTA (who really needs money despite having a terrible budget).

But the one thing that does not sit well in this scenario is that Apple "signed a $2 million agreement with the current tenant to vacate its space five days before the MTA issued the RFP.

Bold is mine. That's shady.

 

[Mad-B-One]

Looks like the free market is dead. Apple got favorable treatment because having an Apple store in you station increases revenue from all of your shops due to increased foot traffic. I don't see how this is any of their concern. Clearly, people have been enjoying the Apple store.

Really, the free market is a beautiful thing. It works well, and both sides are happy. You give me a product or service I want, and I give you money so you can buy a product or service you want. Really, that's all there is to it. We have not lived in a true free market for almost a century now.

I agree with you but I also think that a free market is not needed for Pareto efficiency. To be honest, this was a mutual goal of MTA and Apple to get the store there. The reason why the bidding wasn't "open" is quite simple: No one would be able to outbid the benefits an Apple Store gets to Central Station simply because of the traffic effect. MTA was looking for a magnet, Apple for a location. Now, find one business (other than a casino) that would have the same effect and would pay the renovation needed and can (and is willing to) pay the rent on top of it.

PS: The auditor should also read up on the Nash equilibrium... that would help and point towards the flaws in his arguments.

 

[benpatient]

Looks like the free market is dead. Apple got favorable treatment because having an Apple store in you station increases revenue from all of your shops due to increased foot traffic. I don't see how this is any of their concern. Clearly, people have been enjoying the Apple store.

Really, the free market is a beautiful thing. It works well, and both sides are happy. You give me a product or service I want, and I give you money so you can buy a product or service you want. Really, that's all there is to it. We have not lived in a true free market for almost a century now.

If this were strictly true, then there never would have been an "open period" for others to bid. They had a requirement to offer that, and used shady/sketchy business practices to basically nullify that requirement. If they hadn't considered it a possibility that another company would want to bid more for the space, with less of a sweetheart deal, then they wouldn't have done everything in secrecy and paid off the current tenants.

That reeks of "hush money." The truth is that Apple didn't want to compete for the space in the open and free market, so they snuck in around the back, paid off whomever was around who could stop them from having guaranteed approval, and planted their flag as soon as they knew nobody else could react quickly enough to challenge them.

----------

The reason why the bidding wasn't "open" is quite simple: No one would be able to outbid the benefits an Apple Store gets to Central Station simply because of the traffic effect. MTA was looking for a magnet, Apple for a location.

Then why go to such efforts to hide the impending vacancy and availability? If nobody else had a good (financial) argument for why they should be allowed into that space, then it would have gone to Apple anyway, and there would have been no need for pay-offs or secret deals.

 

[sailmac]

So the state comptroller conducts an audit which finds that the state comptroller should have more power?

I think the audit is "at a minimum severely slanted toward the Comptroller".

Agreed.

 

[shartypants]

What a waste of taxpayer money doing the audit, sometimes I think government people just look for ways to justify their jobs instead of doing something useful.

 

[Slovak]

the state is proposing increased oversight on competitive public authority contracts, a move which give the comptroller's office more authority to examine such agreements before they are finalized.

Translation: Nobody asked us, nobody greased our pockets.

 

[rjohnstone]

So Apple was given exclusive knowledge 1 year in advance of the upcoming vacancy and already paid off the current tenant BEFORE the MTA opens up the bidding process?
I don't care how much additional foot traffic is generated having an Apple store there, the process was unethical.
Anyone making excuses for Apple or the MTA should be ashamed of themselves.

 

[ConCat]

If this were strictly true, then there never would have been an "open period" for others to bid. They had a requirement to offer that, and used shady/sketchy business practices to basically nullify that requirement. If they hadn't considered it a possibility that another company would want to bid more for the space, with less of a sweetheart deal, then they wouldn't have done everything in secrecy and paid off the current tenants.

That reeks of "hush money." The truth is that Apple didn't want to compete for the space in the open and free market, so they snuck in around the back, paid off whomever was around who could stop them from having guaranteed approval, and planted their flag as soon as they knew nobody else could react quickly enough to challenge them.

----------



Then why go to such efforts to hide the impending vacancy and availability? If nobody else had a good (financial) argument for why they should be allowed into that space, then it would have gone to Apple anyway, and there would have been no need for pay-offs or secret deals.

Have you considered the fact that maybe, it really isn't any of our business? The fact is, this is between grand central and Apple. If grand central was fine with having Apple as the company to fill the vacancy, then great, and to be perfectly honest, I like the Apple store. If I didn't like who filled the vacancy, then I'd complain, naturally, and if people complained enough, they may look for another tenant, but people are not complaining. I really don't see the problem. Really, everyone but the regulation nazis (and their sheep) are happy with this.

 

[Rocketman]

If Apple simply bought out the restaurant company, retained the old lease at the old much lower price, they would be far better off financially and have avoided politics entirely.

As it is they engaged in free market contracts with the tenant to move by paying them to do so along the way in fully compliant ways, let the governmental authority set a set of rules for a new lease with a new tenant and are now being sucked into drama by dozens of Monday morning quarterbacks over what the tenant, former tenant and landlord agreed to do in a CONTRACT entered into even after a PUBLIC COMMENT AND OFFER period. The fact it was 30 days is normal.

Here in CA when the state sells a property formerly used for its own purposes, like for example the DOT facility in or next to Old Town San Diego, they made the terms so onerous and hard to cope with the few offers they did get were lo-ball by listed commercial property standards.

It's the government, it doesn't have to make sense.

 

[rjohnstone]

If Apple simply bought out the restaurant company, retained the old lease at the old much lower price, they would be far better off financially and have avoided politics entirely.

As it is they engaged in free market contracts with the tenant to move by paying them to do so along the way in fully compliant ways, let the governmental authority set a set of rules for a new lease with a new tenant and are now being sucked into drama by dozens of Monday morning quarterbacks over what the tenant, former tenant and landlord agreed to do in a CONTRACT entered into even after a PUBLIC COMMENT AND OFFER period. The fact it was 30 days is normal.

Here in CA when the state sells a property formerly used for its own purposes, like for example the DOT facility in or next to Old Town San Diego, they made the terms so onerous and hard to cope with the few offers they did get were lo-ball by listed commercial property standards.

It's the government, it doesn't have to make sense.

Apparently that wasn't the case here.
The MTA opened up a bidding process for a new lease on the space (as they are required too with publicly owned property).
This process was rigged, fixed, whatever you want to call it, in Apple's favor nearly a year in advance.
Sounds like some folks at the MTA got some "favorable treatment" from Apple's check book.

 

[ConCat]

Apparently that wasn't the case here.
The MTA opened up a bidding process for a new lease on the space (as they are required too with publicly owned property).
This process was rigged, fixed, whatever you want to call it, in Apple's favor nearly a year in advance.
Sounds like some folks at the MTA got some "favorable treatment" from Apple's check book.

Here's where people's mental block is. The issue is that they're required to open a bidding process. If that wasn't the case, then there wouldn't be anything "perceived" as wrong. They wanted to make a deal with Apple, but they couldn't because of the bidding process, so they worked around it. That's the free market circumventing government intervention in its finest.

 

[Swift]

I'm not commenting on the great business deal for Apple and MTA (who really needs money despite having a terrible budget).

But the one thing that does not sit well in this scenario is that Apple "signed a $2 million agreement with the current tenant to vacate its space five days before the MTA issued the RFP.

Bold is mine. That's shady.

True, it's aggressive. Again, though, all somebody would have to do who really wanted to use the space would be to give more vig to the tenant. That would have been part of the cost of the deal.

If some bureaucrat takes a bribe, that's corrupt. Maybe the participants should have more time to make a counter-offer. But frankly, at the time Apple signed it, I don't think there would be all that many competitors.

Lawyers tend to see things legalistically, you know. The best prosecutor will be a little too zealous from time to time. DiNapoli is a reformer, no doubt; but compared to the scandals he's fixed up so far -- I think a case against Apple is a news-getter. It's the other side of secrecy, partially.

 

[TyroneShoes2]

Please.

This is a non-story.

There is a difference between "favorable" treatment and "unfairly-favorable" treatment. Let's not fret about trying to fabricate a conspiracy that actually doesn't exist.

Compared to you and me, the taller, younger, richer, better-looking guys at the bar seem to get "favorable" treatment from young girls, too. No one guaranteed that life was fair, although it probably feels fair to the taller, younger, richer, better-looking guys at the bar. Get over it.

 

[dsburdette]

Here's where people's mental block is. The issue is that they're required to open a bidding process. If that wasn't the case, then there wouldn't be anything "perceived" as wrong. They wanted to make a deal with Apple, but they couldn't because of the bidding process, so they worked around it. That's the free market circumventing government intervention in its finest.

It's all rigged, who cares. When I sold stuff to the government in a previous job that had to go to bid, it was all a joke. They wink, wink, nudge, nudge you to get two other competitive "higher" quotes and you ultimately win the bid. All in a days work.

 

[samcraig]

It's my business as a tax payer in NYC. Thanks.

Have you considered the fact that maybe, it really isn't any of our business? The fact is, this is between grand central and Apple.

Wrong.

True, it's aggressive. Again, though, all somebody would have to do who really wanted to use the space would be to give more vig to the tenant. That would have been part of the cost of the deal.

If some bureaucrat takes a bribe, that's corrupt. Maybe the participants should have more time to make a counter-offer. But frankly, at the time Apple signed it, I don't think there would be all that many competitors.

Lawyers tend to see things legalistically, you know. The best prosecutor will be a little too zealous from time to time. DiNapoli is a reformer, no doubt; but compared to the scandals he's fixed up so far -- I think a case against Apple is a news-getter. It's the other side of secrecy, partially.

Aggressive is putting a positive spin on it. You don't THINK their might have been many competitors. You don't know. I don't know. But even if there was ONE competitor - this is shady. Period. There's no way to spin it to me.

 

[IJ Reilly]

So... the first responder claims that it's only a free market if the quasi-government agency is allowed to choose the tenant in advance?

I agree that Apple's foot traffic and prestige should have been a factor, but I disagree that it's okay to choose a store in advance and not open the space to anyone.

Our impressions of "free markets" are different -- and irrelevant since the MTA is not a private company.

QFT. We seem to have a lot of instant experts around here on the arcane topic of the New York City MTA's bidding rules. I won't claim any knowledge of them. All we know is that the MTA is a public agency, and has bidding rules. The auditor made a finding that they were violated. That's all we can fairly claim to know. Except on the 'net of course where anyone can claim to know everything.

 

[SPUY767]

So if one guy wants to put in a dildo shop, and one guy wants to put in an pizza joint, and the lessor wants to charge the guy with the dildo shop more money because of the nature of his store, that's not free market? Lrn2economy.