Mass Pike service plazas, air rights concessions flop

Massachusetts Turnpike service plazas will not be privatized in a longterm concession. The state's transportation secretary (called Executive Office of Transportation) and the Turnpike CEO Jeff Mullan concurred in deciding this week to reject the bids made in a recent concession procurement.

A spokesman for the Executive Office is quoted: “The decision was made that it would not be a good long-term deal for the taxpayers and tollpayers."

Highest offer of two qualified was $160m for the 30 year lease of the eleven plazas.

The decision was not referred to the Turnpike Authority board which is increasingly being bypassed in its remaining months' existence. Responsibility for the Turnpike will be transferred to a new hybrid state department of transportation Nov 1.

According to the procurement the master concessionaire would have taken over from the Turnpike the fastfoods sublease to McDonalds currently paying $11m/yr and running to 2025 and the gasoline/diesel sublease to Gulf that runs to 2010 and currently pays about $6m, as well as some smaller subleases.

COMMENT: If the Turnpike currently nets about $20m/year on the service plazas it doesn't make sense to give away that income for a payment of less than around $400m if the Turnpike can raise capital at 5%.

Only if it was unable to raise capital at 12.5% would the $160m offer make sense.

Of course we think they'd be better off privatizing the whole Turnpike, but that's another argument.

Air rights flop

Massachusetts Turnpike has been more active than any other toller in the US in trying to market air rights. The Turnpike goes right through the middle of the best part of the Boston central business district so air rights sales in among towering office buildings, hotels and posh stores and restaurants seem like a good idea.

In practice air rights projects in Boston have been a disappointment.

Now it's the economy and a glut of real estate. But even at the height of the boom the Turnpike was never able to do any especially lucrative deals on air rights. And those deals it did do are falling through.

A Columbus Center complex of hotel, retail and condos valued at around $800m a couple of years ago hasn't been able to break ground.

And the developer of a complex called Fenway Center on top of the Turnpike  - the only bidder on air rights near Kenmore  Square - has now said he can't start to build without the state paying for the bridging construction over the turnpike of the pad under his buildings.

The Boston Globe reports that the state has offered $30m toward the cost of the Fenway Center pad in an effort to keep the project alive.

The head of real estate at the EOT Peter O'Connor is quoted by the Globe: "There has always been a feeling that these air-rights parcels had inherent value, but I don’t think anyone has ever proven that point."

Most of the air rights deals so far involve no upfront fee, just a share in future profits of the developer.

Of course building over a highway may have civic benefits. The plans often look attractive.

see: http://www.bostonredevelopmentauthority.org/pdf/PlanningPublications/Turnpike%20Air%20Rights%20Civic%20Vision.pdf

COMMENT: It is always popular to talk about the non-toll revenue potential of tollroads, but this usually turns out to be trivial. The real money is usually to be made at the heart of the business - on the road - in tolls.

TOLLROADSnews 2009-08-22