Will city kill the high-tech goose?

When Mayor Rudolph Giuliani took office, along with restoring law and order, he created incentives designed to fill buildings south of City Hall with more than just ghosts of stock traders.

That Downtown incentive plan has been enormously successful, taking 1994's 30 million vacant feet and converting close to 5 million for residential use, while creating incentives for all companies to locate and expand Downtown.

The Cushman & Wakefield mid-March 1999 overall vacancy rate for the now approximately 95 million square-foot Downtown commercial market stands at 9.4 percent, and more deals are done each day.

According to the Alliance for Downtown New York, the business improvement district which was created in 1996, a joint program with the city's Economic Development Corp. known as Plug 'n' Go, was devised to nurture the high-tech industry, and has resulted in more 200 leases in its three years of operation in 13 buildings. The Alliance continues to reach out to owners and expects to add several more buildings in the near future.

But as those Plug 'n' Go companies go into an expansion phase and seek larger spaces outside their cozy wired community, concerns are arising over surging market rents, credit for the tenants, the timely availability of fiber optic lines and Internet wiring, and the lack of incentives outside the Alliance area.

"It is a real concern; affordable real estate is foremost in everyone's head," said Sharon Greenberger, vice president for Economic Development for the Alliance for Downtown New York."

Says Bruce Bernstein, president of the New York Software Industry Association (NYSIA), "The bottom line is, if you want to keep the growth curve going, the rents have to stay reasonable. We don't expect it to be cheap, but every effort has to be made to keep the marginal costs within reason."

The city is competing not only with the region, and with New Jersey's low-priced waterside towers just a PATH ride away, but with San Francisco, Silicon Alley, Los Angeles, Boston and Atlanta. The Internet magazine @NY reported last week that GT Interactive is moving to Los Angeles, NeoPlanet is heading to Phoenix and Cyber-Shop left for New Jersey last year. As REW broke the news earlier this year, MovieFone is taking 30,000 square feet in White Plains, moving staff from Midtown.

"Our industry is growing at rate of 15 percent a year, and we are up to 30,000 jobs in 3,000 companies," said Bernstein. "It's good, but threatened by the rising real estate costs."

John J. Gilbert III, COO of the Rudin Organization, which was a pioneer in developing the Technology Center at 55 Broad as an Internet incubator, said he still thinks there are opportunities Downtown. "But clearly the city needs to focus on expansion, and securing and insuring the vitality of Silicon Alley and the companies that occupy and work in Silicon Alley. I don't think we've hit the wall yet, but expansion of that market is something to watch. There are other areas of the city where expansion can occur."

He also worried, "What happens when they look to Jersey and find cheap residential rents and cheap office rents?"

Because these companies can be anywhere, the specter does have politicians worried, but so far they are merely reacting on a case by case basis. The city recently provided an incentive deal to DoubleClick, which moved into about 40,000 square feet at 450 West 33rd Street, the old 1.4 million square-foot John Hancock Building, which has 125,000 square-foot floorplates, leading edge technology that includes two fiber optic loops, Internet and microwave service, and heavy floor and electrical loads.

Don't think that the incentives are not known to the other web-based companies - they talk about them incessantly, and like every huge financial firm and entertainment based firm that has ever had its hand out to New York City, they all want them.

But can New York City be proactive enough to keep the 10,000 to 20,000 square-foot tenants that may or may not be flush with IPO money, need room for new hires, but are yet to turn a profit?

"The issue is that they have strong balance sheets and no income," said Keith Barket, managing director of Angelo Gordon, which is an investor in 450 West 33rd Street. "Credit is an issue you have to look at. What happens when they run out of cash and can't raise money from Wall Street?," he worried. "It will happen, and there will come a time when some of these tenants can't pay the rent."

That sentiment was echoed by an influential Midtown broker who asked not to be identified. "They are weak tenants. They don't have any assets and some owners on Lower Madison Avenue have asked me not to bring them to the building because they won't take them anymore," he said of the newest technology companies.

"That's Madison Avenue's loss," scoffed Bernstein.

While Midtown South owners may turn them away, the Downtown experience has been very different with the actual tenants in place.

Greenberger said the owners of the Plug 'n' Go buildings want them to stay in the buildings. "They have paid their rent on time, they are growing, and the owners want to keep the medium-sized companies in the building. They realize if there is a mixture of small and medium-sized companies, it's better for the buildings."

In fact, she said, many of the owners are granting expanding tenants below market rents on floors that are not set aside for Plug 'n' Go use.

Jonathan Rudes, a vice president of Newmark who helped lease up the Rudins' building, and has created and leased Plug 'n' Go spaces for other owners, said he is one of the most concerned, adding "I keep wondering where the city expects to put all the people they are growing in the new media companies. New Jersey?"

Bernstein isn't counting on the generosity of a dozen Downtown buildings either, and his group is pushing for legislation that would create three more geographical incubation/accelerator zones for the companies.

They are looking right now at the emerging night-life and retail district around Delancey Street; Greenpoint in Brooklyn; Long Island City; the West Side of Manhattan; and the area between Columbia and City University, but not being familiar with the real estate, are open to suggestions. Some of the companies are also exploring industrial areas of Staten Island.

"Our companies cluster geographically," Bernstein said, dismissing a generic city-wide program. "We want a line drawn around them, and incentives and grants for new development and rehabbing, coupled with guarantees that the rents stay low." He is also seeking property tax waivers, incentives to build and incentives for wiring.

Meanwhile, the small companies that started with $15 leases two years ago have been subject to rent escalations, and are worrying about two or three years from now when they have to renew after watching market rate buildings leap from the $20's to the $30's and even $40's a foot Downtown. Current Plug 'n' Go spaces start at $19 a foot all in, with negotiated escalations over the life of the lease.

Some tiny tenants are still astounded at being handed 75-page to 100-page leases, although the Alliance has a much shorter and simpler template for those owners that can understand the need to be flexible, and that legal bills to read and comment on a long lease can run into thousands of dollars, these start-ups don't have.

And some haven't yet gotten over the fact that hundreds of square feet of their space can be "lost," and they are paying for footage they don't technically use even though they may walk through hallways and lobbies and use bathrooms not within their space.

"That's an issue with a lot of companies," said Greenberger, who says it's a matter of tenant education to the New York City marketplace.

If Greenberger had her wish, it would be that the buildings creating spaces for Internet companies add a couple of conference rooms, as well as a vending room or game room, or a place to keep bikes. "It makes it easier for smaller companies to use their space more effectively," she said.

While not every company needs these extras, they do need the flex space, the ability to expand, and the low cost, Bernstein explained.

Bernstein was unfamiliar, however, with the current Industrial and Commercial Incentive Program (ICIP) for which building owners can apply before they do certain work that would otherwise increase the assessment - and therefore the property taxes - that would be passed along to tenants. Part of the DoubleClick benefits, in fact, will flow through the ICIP.

When apprised of the basic details, Bernstein indicated they needed even more targeted, as-of-right kinds of incentives.

As one model, he is using the residential Mitchell-Lama program, which helped finance the development of middle income housing while keeping rents low. Of course, as incomes increase, Mitchell-Lama owners also must pay surcharges, and they tend to balk when asked to contribute to capital improvements.

There are also areas where wanting fiber optic Internet access and actually getting it becomes a gulf that may be too wide to cross.

"It's not always easy to say, 'I'm going to get wiring quickly,'" said Greenberger. "There is no guarantee the building has the riser capacity, or that the wiring is in the street. I know people who have looked at the West Side and they love the huge warehouses, but some have been waiting for Internet access for over three months. That's a tradeoff that not everybody is willing to make."

Other discussions have revolved around the expenses of living in Manhattan apartments, but many employees are finding their way to alternative areas in Brooklyn and Queens. The rehabbed housing being created Downtown, which is being gobbled up by uptown and financial services money, has simply been too expensive for the young Internet workers. The Bronx, too, seems to have been missed by these Internets' search engines. Should the city look towards planting them as part of the mix in a revitalized Yankee Village scheme, for instance?

Responding to concerns the city is in danger of losing these second stage companies, the City Council's Economic Development Committee, chaired by Staten Island Council Member Jerome X. O'Donovan, will be holding a hearing on June 10th at 1 p.m. at City Hall. This is a fact-finding hearing only and not directed at a written proposal.

Smaller companies have always complained that the larger ones get all the benefits, and those in other industries may wonder why they are once again getting left out. Why shouldn't the city drop taxes like the Unincorporated Business Tax for those that don't live in the city, for instance? And why shouldn't an artist that works on canvas or paper get incentives available to a web artist? The city will have to grapple with those kinds of issues, while also encouraging the growth of this targeted industry.

As much as Rudes is a huge booster for the tech companies, he also believes when they become wealthier they shouldn't keep taking. "When they become capitalized they should pay market rent and taxes, and become paying members of the community," he said.

Barket of Angelo Gordon agrees, "Having these tenants in Manhattan is great for the economy, and the city has done a great job of creating financial incentives to keep them." But it is a balancing act, he said, and the city shouldn't have to provide incentives for all on a random basis.

"Explosive growth is something to plan for, and the digital world is in the middle of explosive growth," noted Gilbert. "The people from the Governor's office and the Mayor's office should focus on making sure we do as best we can and plan for the expansion."

Greenberger of the Alliance said, "We believe that Downtown is an ideal home, but we understand not everyone wants to be down here. In the end, the industry's growth is important, and if there are other areas of the city where the growth can be nurtured, we're all for it."