MTA gambles on no. 7 costs.

Scrapping a plan in recent days to sell the Western Rail Yards to the city for $500 million, the Metropolitan Transportation Authority gave initial approval for a new proposal late last week that would secure a far higher value for the site, but could also leave the MTA responsible for cost overruns on the $2.1 billion No. 7 subway extension.

As part of the new deal, developers will be invited to respond to a request for proposal for the site issued by the MTA but whose development guidelines will be outlined by the city. By doing this, the MTA is expected to collect more than a billion dollars for the Western Rail Yards while still allowing the city to have a key role in determining what is developed there.

A committee comprised mainly of MTA staff members but also two city representatives will select the winning development plan, which MTA officials said could be a combination of proposals from different developers or a single plan. City officials have envisioned sweeping development on the rail yards that they hope will spark the transformation of the far West Side from a neighborhood of dreary looking low-rise industrial and storage buildings into a thriving westerly extension of midtown.

This development is also essential for the city's financing plan for the No. 7 Subway extension, which will be funded with diverted real estate taxes in the Hudson Yards district. The extension, in turn, is expected to help popularize the area by greatly improving its accessibility.

But as part of the current deal, which isn't binding, the MTA will be responsible for any cost over-runs for the No. 7 Subway extension, a liability transit watchdogs say the authority can't afford to take on.

Even though there is a clear financial connection between the development of the rail yards and the subway extension, the fact that the two were together on the bargaining table marks a divergence from the terms of the prior deal and is already being called a negotiating flap made by MTA chairman Peter Kalikow.

"I think by linking the two issues it reduced our bargaining power on the No. 7 line and changed the dynamics of the negotiation," said MTA board member, Mitchell Pally.

The previous deal included only the transfer of the Western Rail Yards to the city and outlined no commitment from the MTA to cover overruns on the subway project.

The city has stated in the past that it would fully cover the cost of the subway extension. Because the extension markedly increases the monetary value of the rail yards however, some observers feel that its insertion into the negotiations likely allowed the city to extract financial support from the MTA for its construction--a concession the city may have been able to exert even more pressure for after it walked away from its bid to buy the rail yards.

There has been wide speculation that there will be overruns given the spiraling costs of construction materials and labor.

But Kalikow expressed confidence that the MTA would be able to complete the subway project on budget. "We built projects all over ... most of them are on time and on budget," he said.

The MTA has projected deficits of $2.2 billion by 2010, debt it is trying to curb in part through the sale of real estate assets.

"Unfortunately, the Transit Authority has a bad record on overruns," said Gene Russianoff, spokesman for the Straphangers Campaign. "They are $2 billion over on the East Side Access project and they're over on Fulton Transit Center. It could wipe out everything they get if they have to pay hundreds of millions of dollars."

The MTA may be liable for more than just ballooning construction costs. Board member Andrew Albert pointed out that the current financing arrangement for the extension doesn't include the cost of new subway stations.

"Will it be borne by the MTA?" Albert asked.

"I don't know," Kalikow said. "It's an issue that will come up when it comes up."