Friday, February 3, 2012

Millennium, Filene’s and the Skeletons in the Closet

Millennium, Filene’s and the Skeletons in the Closet

Let me begin with a quote from the New York Time in which Tony Pangaro, Boston Principal for Millennium Partners, discusses Hayward Place in Boston. Please note the date: “‘We think we can build this summer after two years when we couldn’t,’ said Anthony Pangaro, a principal of Millennium Partners-Boston, which has previously developed luxury condominiums downtown. This month Millennium’s $200 million Hayward Place project in the theater district sought city approval to convert from 200 condominiums to 265 units, mostly rentals.” (NY Times, February, 2011).

Well, obviously that didn’t happen, given that the official groundbreaking was November 15, 2011. Yes, the mayor had his shovel out. Of course, he also misled the public in June 2011 by announcing that construction would begin in 2 weeks.

Yesterday, referring to the Filene’s site and Vornado, Vornado announced it “has reached a deal to team up with a local developer to jump start the stalled project.” (Boston Business Journal, 2/2/2012.) First of all, Millennium is not a local developer. They began in NYC, have most of their holdings there, and are headquartered there. Their website opens with a camera scanning the New York skyline. The only thing missing is a Giants logo.

Millennium did not buy the Filene’s site. They have an undefined “deal” with Steve Roth. The problem is that there has been no movement in the condition of the intended market for the site for which Vornado overpaid to the tune of $100 million. The rent the target market of users for space within a 1.2 million square foot tower are willing to pay is not high enough to generate a sufficient return on Roth’s investment.

The rough cost of developing the property (land cost + construction costs) will be roughly $500 million, according to Millennium. On a per square foot basis, the development cost would be roughly $420.00. Developers demand high rates of return for new construction because of the high risk involved. Let’s use 20% as a desired return. Let’s take the case of a potential office user. In order to meet any developer’s acceptable rate of return, an office user would have to pay roughly $110 per square foot in rent (20% of $420 + $25.00 in tax and operating expenses.) The average market rent in Boston for Class A space today is $50.00. The highest priced space is $70.00. The latter are in premier office towers in premier locations—111 Huntington Avenue, International Place, the Hancock Tower, 75 State Street—not in the middle of Downtown Crossing. Of course, the project has other components—retail and residential—but the market is still not at an acceptable rate of return. Perhaps I am underestimating the residential component but full plans have not been presented. And achievable residential sale prices do not currently fit what the cost structure seems to be at Filene’s.

Millennium cannot change the market. They bring Boston expertise to the project, but there is an awfully big skeleton in their closet and it is only 2 blocks away.

The Mayor has spent about 2 years blasting Vornado after, with full permits in hand, they legally demolished a significant part of the former Filene’s, the first step of construction and not inexpensive. When rents in the market dropped and sources of financing dried up during the recession, Vornado put the project on hold. Menino has been enraged ever since.

Let’s look at the Filene’s timeline.

1. November 2007: City grants full permit to Vornado for demolition and construction of 1 million square foot mixed use project.

2. Summer 2008 to November 2008: Demolition completed.

3. November 2008 to present: No further construction.

4. February 2012: Announce “deal” with Millennium.

Now let’s get to the skeleton in Millennium’s closet. It’s called Hayward Place. It’s been and still is a shabby parking lot on lower Washington Street facing the Paramount Theater and the Millennium-built Ritz-Carlton Hotel and Towers. The city owned the property and put it out to bid for residential development in in April 2001.

By July 2001, eight developers had submitted proposals. The bids included, as required, both project designs and price offers. All but Millennium proposed housing, in combination with other uses such as school, retail, and office. The high bidder, at $23 million, was Lincoln Property Co, in a joint venture with Equity Residential Company. Millennium bid $20.5 million. The high bidder was not awarded the site for development.

And then the “irregularities” occurred. For reasons never explained, rather than selling to the highest bidder meeting the original requirements, the BRA invited the other short-listed developers, including Millennium, to match Lincoln’s high bid. They then awarded the designation to Millennium as the developer for Hayward Place. The BRA’s reasoning for blatantly changing the requirements of the bidding process to make sure Millennium got the project were feeble. In its summary of the “bidding”, the BRA stated that the choice of office rather than housing use was explained as due to an oversupply of housing in the area. The BRA also stated that it chose this proposal for the “vitality” to be created by an office building. And, then, just for the heck of it, in June 2003, the city allowed Millennium to lease rather than purchase the land, an opportunity not granted in the original bidding or subsequent bidding.

What really happened? Lincoln Properties and Equity Residential, a combined entity with far more capital and experience than Millennium, outbid Millennium. This disappointed the Mayor. So the BRA changed the selection criteria to favor office and gave the designation to Millennium. And, after all these years, what is Millennium building on the site? You guessed right—residential. That’s the same Millennium that’s part of the new Filene’s team.

The Hayward deal was manipulated and everyone in the market knew it. As bad as that is, let’s look at the Hayward timeline and compare it to the Vornado timeline.

January 2001: Millennium designated to develop project.

November 2011: Millennium holds groundbreaking.

From 2003 to present: Millennium collects substantial parking revenue, effectively making their holding cost zero.

So let’s see. Vornado buys the Filene’s site in a private transaction for $100 million. Millennium buys the Hayward site from the city by way of a politically manipulated bidding process for $23 million.

Vornado receives development approval in November 2007, begins and finishes demolition work in November 2008, and puts further construction on hold. Time between last activity on site and today: 3 years, 2 months.

Millennium receives development approval on January 2003 and does nothing until it holds a groundbreaking on November 15, 2011. Time between last activity on site and next action: 13 years, 11 months.

The Mayor has never uttered a peep about Millennium’s failure to move forward on its eyesore. Millennium’s reasons, when given, for not moving forward match those of Vornado, namely that market pricing is not high enough to justify development and financing is not available. The Mayor never vilifies the principals of Millennium as he does with Vornado. The Mayor doesn’t call the Mayor of New York to urge him to make Millennium to build, as he did in a plea to have Vornado build.

And now, we have a team. Millennium sat on a project in the neighborhood for nearly 14 years and received no criticism. Vornado did the same for 3 years and he has been held up as the real estate devil incarnate.

I want to see development at both the Filene’s site and at Hayward Place. I don’t see how adding Millennium to the team assures this given its own hole in the ground. I hope they prove me wrong.


  1. Jim, I have been out of the Boston scene for some years now. However, knowing the players on the Government side of the equation, I can imagine this behavior to be routine. My experience there saw similar events.

    1. You can't wish things to come true. Don't think for a minute that Roth gave up any control on the site. It's his $100 million. There have no postings at the Registry regarding any change in ownership and there won't be. Whatever Millennium's partnership agreement is, I can guarantee that Roth is coming out whole and then some. And if Pangaro can't do that--and he can't--we'll be looking at the same empty site in 8 years. Just like we've been looking at the Hayward Place skeleton in Pangaro's closet for 9 years.