City begins revoking Filene’s permits

Could move deepen stalemate over Downtown Crossing hole?

Boston development officials are initiating a process to pull development permits from the stalled Filene’s project today. Aides to Mayor Tom Menino believe the move, which they are describing as unprecedented, will help clear the path for the sale of the half-demolished site. But it’s just as likely that the city’s newest offensive could deepen the stalemate over the hole at Downtown Crossing.

The Boston Redevelopment Authority told the Filene’s project’s owners today that, because they have had their permitting approvals for three years, but have yet to pull a full building permit for their planned $700 million tower, the city is starting the process of revoking the project permits.

In a letter to the Filene’s developers, BRA Director John Palmieri described the city as being “extremely frustrated” by the project, which has left a hole in the center of Boston’s downtown shopping district. He said the BRA was initiating a review to determine whether the project’s delay “has increased the impacts of the proposed project and whether those impacts warrant resubmission” of a permitting application.

The letter was addressed to John B. Hynes III and to New York investors Vornado Realty Trust. Vornado is the project’s majority owner, and Hynes is its local developer. Their minority investors are JP Morgan, Mack-Cali Realty. The development partnership began demolishing the former Downtown Crossing department store in early 2008, only to halt work later that year, when construction financing for the planned retail, office, hotel and condominium tower collapsed. 

It’s City Hall’s belief that, without development permits, the Filene’s site is worth less than it is now. If the site is less valuable, the thinking goes, more bidders will be able to take a run at the project, increasing the likelihood that a motivated developer will gain control of the site. And the less a new developer pays for the Filene’s site, the less they’ll have to build, easing the search for financing.

But local real estate insiders told CommonWealth that voiding the Filene’s permits could make things worse.

For one, the tower, as permitted, can’t be financed in today’s markets. As a result, the permits in place aren’t worth much as-is, and any new buyer would have to go to City Hall and re-permit the project. 

Then there’s the problem of the site’s value to its current owners. Thus far, the Filene’s site has been treated as a long-term holding. The Vornado partnership paid $100 million in cash for the Filene’s site in 2007, and has no debt on the property, making it easier to hold onto for an extended period of time.

The all-cash buy also magnifies any potential loss Vornado’s team would take in a sale. Vornado began marketing the property for sale last week, but Hynes told the Boston Herald that the owners wouldn’t take a steep loss just to exit the project.

That stance is consistent with the way Vornado has previously approached the Filene’s site. This summer, Vornado’s investment partners at Suffolk Downs were said to be pressuring the firm to exit the Filene’s project so they could focus on building a casino in East Boston; they argued that Vornado could sustain a big loss at Filene’s because they’d be printing money at Suffolk Downs, but Vornado resisted those entreaties. If Vornado’s focus on minimizing its potential losses continues, City Hall’s aim of lowering the project’s value could backfire, incentivizing Vornado to hold on for longer.

The battle over the Filene’s permits is unfolding against the bigger backdrop of eminent domain. Tensions at the dormant construction site have been running high since March, when Vornado chairman Steve Roth told a group of Columbia students that he was able to extract a development subsidy by letting a blighted Manhattan development site sit fallow. Menino quickly fired off a letter to Roth, drawing parallels between the Manhattan project and Filene’s, and lambasting Vornado’s treatment of the Downtown Crossing site as “outrageous,” “callous,” “reprehensible” and “inexcusable.” That letter raised the possibility of seizing the development site by eminent domain, and said Boston officials would weigh voiding Roth’s development permits.

It’s unclear whether Menino has the cash, or the political capital, to actually wage an eminent domain fight with Vornado, a $16 billion company. Eminent domain land pricing is a notoriously difficult and contentious exercise; local real estate observers believe a case could be made for the site being worth anywhere between $40 million and $200 million.

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Paul McMorrow

Associate Editor, CommonWealth

About Paul McMorrow

Paul McMorrow comes to CommonWealth from Banker & Tradesman, where he covered commercial real estate and development. He previously worked as a contributing editor to Boston magazine, where he covered local politics in print and online. He got his start at the Weekly Dig, where he worked as a staff writer, and later news and features editor. Paul writes a frequent column about real estate for the Boston Globe’s Op-Ed page, and is a regular contributor to BeerAdvocate magazine. His work has been recognized by the City and Regional Magazine Association, the New England Press Association, and the Association of Alternative Newsweeklies. He is a Boston University graduate and a lifelong New Englander.

About Paul McMorrow

Paul McMorrow comes to CommonWealth from Banker & Tradesman, where he covered commercial real estate and development. He previously worked as a contributing editor to Boston magazine, where he covered local politics in print and online. He got his start at the Weekly Dig, where he worked as a staff writer, and later news and features editor. Paul writes a frequent column about real estate for the Boston Globe’s Op-Ed page, and is a regular contributor to BeerAdvocate magazine. His work has been recognized by the City and Regional Magazine Association, the New England Press Association, and the Association of Alternative Newsweeklies. He is a Boston University graduate and a lifelong New Englander.

The eminent domain threat dominated headlines, but Boston officials have been slow in pursuing that line of attack. They actually considered, and rejected, an eminent domain taking in the months before Roth’s Columbia address went public, and have been focusing on permit-voiding as a less costly way of pushing Vornado into leaving town.

Today’s BRA letter asks the construction site’s abutters, neighbors, local politicians and other interested parties to weigh in “on new or increased impacts that are the result of the inactivity at the site.” Those comments are due in late October. Presumably, few will cheer the current state of the inactive construction site, which covers an entire city block; the BRA will then use that feedback to justify voiding the project permits.