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New York audit finds Apple had unfair advantage in Grand Central bid

post #1 of 41
Thread Starter 
A New York state audit has concluded that the Metropolitan Transportation Authority gave Apple an unfair advantage when the iPhone maker bid for its retail location at Grand Central Terminal.

New York state Comptroller Thomas DiNapoli concluded in his report that the MTA's process "was at a minimum severely slanted toward Apple," according to the New York Post. He found that rival bidders were at a disadvantage, as they had only a 30-day window to submit competing offers.

DiNapoli found that Apple was in private talks with the MTA for more than two years until the bidding process opened up. The company eventually inked a 10-year deal with the MTA last July for a 23,000-square-foot retail space inside New York's bustling Grand Central Terminal. The store opened last December.

The state of New York announced late last year that it would investigate Apple's deal with the MTA, as DiNapoli expressed concern that the authority may have "given away the store." His final conclusion that Apple was given unfair preferential treatment was delivered to members of the MTA last Friday.

In response, the authority said DiNapoli's office has an "overt bias against the MTA and Apple." MTA Chairman and CEO Joseph Lhota issued a statement dismissing DiNapoli's audit as "not fact-based," and calling the conclusion "worthless."

"The MTA's lease process with Apple was open, transparent, and followed both the spirit and letter of the law," Lhota said.

Grand Central Apple Store


Apple's unique deal with the MTA means the company does not share any of its sales revenue with the authority. That makes Apple the only store among about 100 in Grand Central Terminal that doesn't share a percentage of its sales with the MTA.

The MTA has noted that it is collecting more than four times what it was paid by the previous occupant, Charlie Palmer's Metrazur restaurant. Apple is said to pay $1.1 million in rent for the space this year.
post #2 of 41

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

post #3 of 41

My bet is all the other retailers are getting much better sales and traffic as well.  So the net income for New York is very good.  Regarding the 2 years of discussion, other bidders could have been active as well with New York on this deal.  All had an opportunity to bid in the 30days, and I suspect the bid offer was not a big surprise either.

 

People are just getting greedy.  

post #4 of 41

I'm sure there is no question Apple enjoyed an advantage on many levels...

 

But an "unfair" advantage? Why… because they're an iconic company, a world-renowned brand, the largest company in the world by market cap? 

 

By this logic, ANY advantage Apple would enjoy in ANY situation could be deemed "unfair". If I want to buy some Flash Memory, but Apple uses their massive cash hoard to snatch up all the available supply… is that an "unfair" advantage? I think not...

 

I can cite many such examples… It's true that Apple has an inherent advantage just because of their position as a successful, cash-rich company. But are those inherently "unfair" advantages? I don't think that flies…….

post #5 of 41
Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

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Quote:
Originally Posted by tribalogical View Post

I'm sure there is no question Apple enjoyed an advantage on many levels...

But an "unfair" advantage? Why… because they're an iconic company, a world-renowned brand, the largest company in the world by market cap? 

By this logic, ANY advantage Apple would enjoy in ANY situation could be deemed "unfair". If I want to buy some Flash Memory, but Apple uses their massive cash hoard to snatch up all the available supply… is that an "unfair" advantage? I think not...

I can cite many such examples… It's true that Apple has an inherent advantage just because of their position as a successful, cash-rich company. But are those inherently "unfair" advantages? I don't think that flies…….

It sound absurd to say that Apple had an unfair advantage because they had been trying to rent space there, unsuccessfully, for two years. Bottom line: The MTA and the businesses there, providing none are PC retailers, are benefiting from Apple's presence.

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post #6 of 41

LIFE JUST ISN'T FAIR!!! WHY????

 

Lol

 

So absurd.

post #7 of 41
Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

 

This is a common practice for commercial space owners.  The revenue share is paid mostly by smaller tenants who could not afford large rent fees.  Large "anchor" tenants generally don't have revenue shares because they draw traffic to the mall and often get preferential treatments.  For example, Macy's may get 5 years lease free if it signs a 20 year contract with a new shopping mall.  So what Apple got was not out of ordinary.

post #8 of 41
Quote:
Originally Posted by winstein2010 View Post

Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

 

This is a common practice for commercial space owners.  The revenue share is paid mostly by smaller tenants who could not afford large rent fees.  Large "anchor" tenants generally don't have revenue shares because they draw traffic to the mall and often get preferential treatments.  For example, Macy's may get 5 years lease free if it signs a 20 year contract with a new shopping mall.  So what Apple got was not out of ordinary.

Except that it is out of the ordinary of GCT, which itself is the "traffic draw" for the "mall", not Apple.

post #9 of 41
Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 


Actually they're not paying a lot at all - they're paying well below market value. Also, to answer your question, yes its normal for business located in stations to share their profits with the owner of the station... all over the world.

 

One has to hand it to Apple, they sure know how to negotiate, and the MTA is probably getting something out of this, otherwise they'd never have agreed. I just hope it's all above board. The insinuation is that it's not, but that remains to be seen.

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post #10 of 41

It appears to be a good deal for MTA and the area stores. Here's an extract from this link.

 

From a Jun 25th NYDailyNews.com article:

 

Apple's new megastore at Grand Central Terminal has helped boost sales at other businesses in the historic hub, officials said Monday.

Sales at restaurants, stores and other outfits rose 7.5 % between December and March compared to the same time frame ending in March 2011, Nancy Marshall, director of Grand Central development at the MTA, said.

"Apple has been a super thing for tenants and the overall public," Marshall said at an Metropolitan Transportation Committee meeting. "The tenants couldn't be happier."

post #11 of 41
Quote:
Originally Posted by Zoolook View Post


Actually they're not paying a lot at all - they're paying well below market value. Also, to answer your question, yes its normal for business located in stations to share their profits with the owner of the station... all over the world.

One has to hand it to Apple, they sure know how to negotiate, and the MTA is probably getting something out of this, otherwise they'd never have agreed. I just hope it's all above board. The insinuation is that it's not, but that remains to be seen.

According to the article:
"The MTA has noted that it is collecting more than four times what it was paid by the previous occupant"

I would call that a major plus for the MTA.
post #12 of 41
Quote:
Originally Posted by JeffDM View Post

Quote:
Originally Posted by Zoolook View Post


Actually they're not paying a lot at all - they're paying well below market value. Also, to answer your question, yes its normal for business located in stations to share their profits with the owner of the station... all over the world.

One has to hand it to Apple, they sure know how to negotiate, and the MTA is probably getting something out of this, otherwise they'd never have agreed. I just hope it's all above board. The insinuation is that it's not, but that remains to be seen.

According to the article:
"The MTA has noted that it is collecting more than four times what it was paid by the previous occupant"

I would call that a major plus for the MTA.

But is it a major plus compared to a more traditional profit sharing lease...? We have no idea.

post #13 of 41
Quote:
Originally Posted by jukes View Post

But is it a major plus compared to a more traditional profit sharing lease...? We have no idea.

I think the MTA's bean counters know the long term profits involved and they went with Apple. Remember that this was all happening during a recession when many businesses were folding and business was slowing down. Getting 4x the rent that before and having it be guaranteed is a pretty strong case even before one considered how a company like Apple can improve the traffic for other businesses just by being there.

I'd like to hear from at least one business as to why being next to the Apple Store in GCS isn't a good thing for them.

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post #14 of 41

Time for Apple to move...    

 

The MTA can find a new customer.   Maybe Google or Microsoft can rent it to sell their phones.

post #15 of 41
Quote:
Originally Posted by CodeWarrior View Post

It appears to be a good deal for MTA and the area stores. Here's an extract from this link.

 

From a Jun 25th NYDailyNews.com article:

 

Apple's new megastore at Grand Central Terminal has helped boost sales at other businesses in the historic hub, officials said Monday.

Sales at restaurants, stores and other outfits rose 7.5 % between December and March compared to the same time frame ending in March 2011, Nancy Marshall, director of Grand Central development at the MTA, said.

"Apple has been a super thing for tenants and the overall public," Marshall said at an Metropolitan Transportation Committee meeting. "The tenants couldn't be happier."


So one of the two parties accused of colluding in a sweatheart deal says that it was a really good deal and everybody's happy... color me shocked.

 

Top priority for the MTA should be keeping transit costs down for the citizens of New York state. No doubt they'll wave their hands and claim the deal will somehow increase overall revenue, making up for the Apple's low square foot rent. Unfortunately they're a known bunch of crooks (see the Atlantic Yards debacle, for instance, where they sold off prime real estate to the LOWEST bidder who just happened to be Mayor Bloomberg's ex-roommate) so the benefit of the doubt is no longer available.

 

Which is exactly why we're supposed to have open bidding for these things. And anyone who thinks that 30 days is enough time to prepare a proper bid for a project of this scale, along with the 5 million dollar application fee... well, it's an overused phrase, but I've got a bridge to sell you. MTA and Apple clearly already had a backroom arrangement here; the 30 day window is a joke.

post #16 of 41
Quote:
Originally Posted by gprovida View Post

My bet is all the other retailers are getting much better sales and traffic as well.  So the net income for New York is very good.  Regarding the 2 years of discussion, other bidders could have been active as well with New York on this deal.  All had an opportunity to bid in the 30days, and I suspect the bid offer was not a big surprise either.

People are just getting greedy.  

Agreed. Greed seems to infect those that get close to Apple business.
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post #17 of 41

Put a Microsoft store there instead and watch the reverse happen.

post #18 of 41
Quote:
Originally Posted by gprovida View Post

My bet is all the other retailers are getting much better sales and traffic as well.  So the net income for New York is very good.  Regarding the 2 years of discussion, other bidders could have been active as well with New York on this deal.  All had an opportunity to bid in the 30days, and I suspect the bid offer was not a big surprise either.

 

People are just getting greedy.  

New Yorkers? Greedy?

 

/rolleyes

post #19 of 41
Quote:
Originally Posted by jukes View Post

Except that it is out of the ordinary of GCT, which itself is the "traffic draw" for the "mall", not Apple.

Re. GCT-with-Apple versus GCT-without, you know this how? Any evidence?

 

Quote:
Originally Posted by jukes View Post

We have no idea.

Yep, listen to yourself: see above.

post #20 of 41
Quote:
Originally Posted by anantksundaram View Post

Quote:
Originally Posted by jukes View Post

Except that it is out of the ordinary of GCT, which itself is the "traffic draw" for the "mall", not Apple.

Re. GCT-with-Apple versus GCT-without, you know this how? Any evidence?

It almost sounds like you don't know what the GCT is. They don't have a problem with foot traffic. My evidence is that they don't have any other stores without a profit sharing lease.

post #21 of 41

screw Apple.

 

Bring back the steak restaurant!

post #22 of 41
Quote:
Originally Posted by JeffDM View Post


According to the article:
"The MTA has noted that it is collecting more than four times what it was paid by the previous occupant"
I would call that a major plus for the MTA.

 

That's all well and good, but that's not the point.    The implication is that Apple was able to negotiate their deal over a 2-year period and other potential vendors had only 30 days to submit.     In these types of situations, all vendors have to be treated equally as this is public property.     In addition, Apple does seem to have gotten a cheap deal, even if it is substantially more than the restaurant was paying.   Apple has 23,000 square feet.   Typical retail ground floor rents in midtown are a minimum of  $200 a square foot.   (They can go up to $500 a square foot).    So Apple really should be paying around $4.6 million per year.    Let's say they get a 30% discount for taking so much space and because Grand Central isn't open 24 hours a day:     that's still $3.2 million.     OK, you also have to compare it to what other retailers in GCT are paying, although Apple is in premium space -- only the Michael Jordan restaurant is in equivalent space and the MTA broke its own rules because after the renovation some years ago, no retailers were permitted in the main hall, aside from the two balcony restaurants.

 

So while Apple appears to have been a net positive for the MTA and apparently, for the other retailers in the Terminal (although I find that a bit hard to believe, except perhaps for the food vendors), this still could have happened in violation of various regulations/laws.    I don't think this was about greed by the MTA and I don't think anyone got any kickbacks - I think that the MTA executives in charge were simply Apple fanboys and really wanted Apple in the Terminal and in the end, caved to Apple's superior negotiating skills.      And because they really wanted Apple, I think they purposely rigged the system a bit so that no one else could jump in and take the space by submitting a slightly higher bid - especially a retailer who might have been more downmarket, like a Target or a Best Buy.       

 

I don't necessarily think that the MTAs insistence on getting an upscale retailer in the space was a bad thing (it's frequently only the big, crappy national chains that can pay the most rent), but it probably did violate their own rules.  

post #23 of 41
Quote:
Originally Posted by jukes View Post

It almost sounds like you don't know what the GCT is. They don't have a problem with foot traffic. My evidence is that they don't have any other stores without a profit sharing lease.

You didn't understand my question, did you? Re-read.

post #24 of 41
Quote:
Originally Posted by mcrs View Post

Apple f4anbois have this believe that the world is revolving around their Apple grand central of universe. People ain't gonna take those subways and trains and are about to abandon the transit system entirely had it not for Apple having its store there.  That's their logic. It's absurdity at its best.

Ok, first-off why are you name calling (and not even doing it right, I might add)? I think that it is a fair assessment that if all of the stores are having a higher percentage in sales after the Apple store went in there, it only adds evidence that having that Apple store was a smart move. Secondly, no one said that no one was using GCS before Apple, all that is inflammatory and a red-herring statement.
Quote:
Originally Posted by jukes View Post

It almost sounds like you don't know what the GCT is. They don't have a problem with foot traffic. My evidence is that they don't have any other stores without a profit sharing lease.

Now, that is a fair statement to make. The real question really should be then is why does Apple have a non-sharing lease. Apple is paying $1.1M per year to the MTA. The MTA has already said it was getting more than 4x the previous tenant, which I am assuming did have that agreement. So, I think Apple basically requested that they would pay a lot more, in exchange for a non-sharing agreement. If that is the case, then blame the MTA; they are the ones who agreed to the deal.
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post #25 of 41

This is quite low rent for manhattan. Heck the world of Disney store on 5th avenue closed because their rent went from $3million a year to $20 million a  year. So apple paying $1million a year especially for a grand central station location is quite low.

post #26 of 41

To sum up: Apple greased several palms but DiNapoli's wasn't one of them. Since he didn't get his share, he obviously found fault with the Apple deal. Had Apple shot something his way he wouldn't have got his nose out of joint and we'd never hear of this. Just another day in New York City when you're dealing with city officials.

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post #27 of 41

They mention other potential vendors having only 30 days to submit.  So, who were the other vendors?  And I believe the issue is that after Apple had their bid in, then other vendors had 30 days to submit a "better" offer to the MTA.  Sounds completely reasonable to me.  How else would it happen?  They make it out that Apple was the only company allowed to negotiate over the course of 2 years.  My guess is that it was as much the MTA holding off on giving Apple the green light, hoping that someone else would come in with a higher bid, which of course didn't happen.

post #28 of 41
Apple should collect a percentage of train ticket sales, out of fairness, for the traffic they're driving to the station.
post #29 of 41
Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

 

This is very common practice for malls. The idea being the draw of the other stores and the fact that that the have group services provided that you might not have in a stand alone store. Public restrooms, a food court or other such arrangement for eating, common advertising of sales at your anchor tenants which bring in business for the smaller stores although in this case it would could be argued the the Apple Store is an anchor. A good anchor e.g., Apple should increase revenue across the board.

post #30 of 41
Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

It's protection money. Everytime you sell something, we take a convenience tax. Nobody has to get hurt. In New York we call this a win-win situation.

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post #31 of 41
Quote:
Originally Posted by rob53 View Post

I find the part about paying tenants of Grand Central Terminal having to "share" part of their sales with MTS as something I would investigate. Apple is paying a lot of rent so why should they have to pay anything else? Is this practice normal or just something that's done in NYC? 

 

Gee, reminds me of developers having to share 30% of App Store sales, on top of the yearly fee.
post #32 of 41
Quote:
Originally Posted by mcrs View Post

Apple f4anbois have this believe that the world is revolving around their Apple grand central of universe. People ain't gonna take those subways and trains and are about to abandon the transit system entirely had it not for Apple having its store there.  That's their logic. It's absurdity at its best.

 

I remember when Whole Foods (with a Jamba Juice attached) opened up under the Time Warner Center at Columbus Circle in midtown west and people came in from all of the outer boroughs to do their grocery shopping there.  I think the Apple Store in GCT will have a similar effect and bring in a lot of people off the line who are coming in just to go to that store.  Of course, GCT isn't really ever lacking in foot traffic... but probably lacks 'interested in shopping' foot traffic.  That being said, I do regret not having taken the chance to dine at Metrazur at one of their tables overlooking the main promenade.

post #33 of 41

Visit the store and buy something from the other businesses there and tell them how glad you are Apple is there because that is the only reason you came today.
 

post #34 of 41
Quote:
Originally Posted by jukes View Post

But is it a major plus compared to a more traditional profit sharing lease...? We have no idea.

Yes we do.

MTA is getting 4 times more than what they were getting with the previous tenant, who's lease included profit sharing.

Based on Apple now paying $1.1 million, the previous tenant paid the MTA only $275,000.

I'd say 4 times the amount for the same space is a major plus.

 

But if are asking how it would compare to what Apple would pay for a profit sharing lease, the answer would (almost definitely) be that Apple would not be there if MTA had required a profit sharing lease.

post #35 of 41
In all likelihood, Apple increased the value of the retail property by moving in, so rent sharing being nixed isn't a huge surprise. $4/SF/month is a huge surprise though. I would have expected at least $10/SF, but $20 would not have surprised me.

As for the 30-day period, if you are interested in that kind of space you don't just sit down one day reading the paper and notice it is up on the market and whip out your checkbook. You are looking at 10-20 options, talking to the landlords, and understanding what could come up on the market. I am sure a lot more people would have been interested in the property at $4/SF though, but I doubt they increased the value of the broader shopping area as much.

Anybody know the total retail/restaurant area of GCS?
post #36 of 41
Quote:
Originally Posted by Chris_CA View Post

Quote:
Originally Posted by jukes View Post

But is it a major plus compared to a more traditional profit sharing lease...? We have no idea.

Yes we do.

MTA is getting 4 times more than what they were getting with the previous tenant, who's lease included profit sharing.

Based on Apple now paying $1.1 million, the previous tenant paid the MTA only $275,000.

I'd say 4 times the amount for the same space is a major plus.

 

But if are asking how it would compare to what Apple would pay for a profit sharing lease, the answer would (almost definitely) be that Apple would not be there if MTA had required a profit sharing lease.

Right, because having iconic stores in iconic locations really isn't Apple's MO, I'm sure they would have just let it go. Plus, I'm glad that you figured out that I was talking about apple having a more traditional lease, that must have been taxing.

post #37 of 41
Quote:
Originally Posted by jukes View Post

Right, because having iconic stores in iconic locations really isn't Apple's MO, I'm sure they would have just let it go.

For a percentage of sales, which likely would have amounted to a much, much larger payment (and also allow MTA to see actual sales figures), I believe they would have let it go.

 Plus, I'm glad that you figured out that I was talking about apple having a more traditional lease, that must have been taxing

Why are you glad about it? There's no need to to be a dick.

post #38 of 41
Quote:
Originally Posted by AppleInsider View Post

The MTA has noted that it is collecting more than four times what it was paid by the previous occupant

More importantly, ask the other stores how they are doing since Apple moved in next door. The only people not happy with the "deal" have a definite personal bias!
post #39 of 41
Quote:
Originally Posted by jukes View Post

But is it a major plus compared to a more traditional profit sharing lease...? We have no idea.

Er, yes we do - go check out the post from CodeWarrior and follow the link...
post #40 of 41
Quote:
Originally Posted by jukes View Post

It almost sounds like you don't know what the GCT is. They don't have a problem with foot traffic.

I think the other merchants in GCT might disagree with you....

But then again, when you don't have skin in the game talk is cheap and forum electrons are the cheapest of all....
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