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July 30, 2012

 

DiNapoli: MTA Gave Apple Inside Advantage For Grand Central Terminal Lease

Comptroller Recommends Change to Public Authorities Law to Ensure Fair, Competitive and Transparent Contracting

The Metropolitan Transportation Authority (MTA) slanted a supposedly competitive process to fill prime retail space in Grand Central Terminal (GCT) in Apple's favor, according to an audit issued today by New York State Comptroller Thomas P. DiNapoli. Auditors and investigators found that the MTA worked exclusively with Apple behind the scenes on a lease for more than a year before issuing a request for proposals (RFP) that resulted in only one response—from Apple.

"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.

"Our prior audit revealed problems with how the MTA managed and leased out its vast real estate portfolio. It is clear that more scrutiny is needed to ensure the best deal is struck."

Auditors examined the Apple lease while completing a follow up audit of real estate practices at the MTA. Auditors found only two of 12 recommendations from the 2010 audit had been fully implemented. One recommendation that was only partially implemented concerned MTA's Real Estate Department's (RED) use of a competitive process for marketing its rental properties.

When auditors examined the Apple lease, they found that while RED claimed the process for filling the GCT space was competitive, the playing field was not level and fair for all prospective lessees. Auditors found that Apple, with MTA's knowledge and support, began negotiating exclusively with Metrazur, the existing restaurant tenant, for the buyout of the space in GCT more than a year before the RFP was issued. This negotiation set the terms for the RFP.

A general timeline of how the process unfolded:

  • November 2008 - Discussions began between MTA's RED and Apple regarding the potential to lease space in GCT.
  • April 2009 - MTA approached Metrazur, occupants of the space on the East Balcony of GCT, about a buy-out for the term of its lease, which had ten and one half years remaining.
  • July 2009 - Metrazur approached Apple about the buy-out. Negotiations between pairs of parties among the MTA, Apple and Metrazur commenced, with an eventual $5 million buy-out agreement reached between Apple and Metrazur. This amount later became the required upfront payment amount in the RFP process.
  • May 18, 2011 - Five days before the RFP was issued, Apple and Metrazur entered into a separate agreement in which Apple would advance $2 million of the buy-out amount to spur Metrazur to vacate the premises early. MTA solicited a letter from Apple stating that the agreement did not bind them and that the lease would be pursuant to a competitive RFP.
  • May 19, 2011 - MTA signed an agreement with Metrazur to terminate its lease for $5 million.
  • May 23, 2011 - MTA advertised the RFP for the GCT space. Among the RFP requirements were an upfront payment of $5 million as prepayment of rent to fund the Metrazur termination agreement. On the same day that the MTA publicly released its competitive RFP for bidders to apply, Apple paid $2 million to Metrazur.
  • June 27, 2011 - Responses for the RFP were due; only Apple responded.
  • August 10, 2011 - MTA and Apple signed a lease for the GCT space and Apple wired the remaining $3 million to a closing agent.
  • March 19, 2012 - The lease provided for Apple to make infrastructure improvements. MTA indicated these improvements would cost about $2.5 million. However, about $1.6 million of the improvements were not yet completed and it is uncertain when they will be done. In addition, by this date, Apple had not yet paid $414,142 for work done by MTA to enable the infrastructure improvements.

DiNapoli is recommending a statutory change to increase oversight of public authority contracts exceeding one million dollars. Under current law, only contracts over one million dollars that are non-competitive or funded with state dollars can be reviewed by the State Comptroller's office. DiNapoli's proposed change would make all contracts over one million dollars eligible for review. Because the MTA lease to Apple was purportedly a competitive process, it was not eligible for the Comptroller's review before it was finalized.

The MTA's full response is included in the audit. For further recommendations of the follow-up audit, please click here.



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