Unintended Consequences


The law of unintended consequences is nowhere more obvious than in the results of man-made laws. Prohibition, by eliminating demon rum, was supposed to alleviate poverty and disease. What we got was Al Capone. More recently, environmental laws have often served those who don’t give a hoot about the environment but care very much about what is built in their own back yards.

Among the earliest environmental laws were zoning ordinances, and they have long been put to use by individuals pursuing their self-interests. In the 1970s, for instance, an exclusive private club in New York used the city’s zoning laws, and not a little chutzpah, as nothing less than an instrument of alchemy, turning the thin air above its clubhouse into five million dollars.

Zoning laws themselves came about because of the unintended consequences of steel construction and the electric elevator, which first appeared in the 1880s. Once limited to six or seven stories, buildings could now soar to the skies.

In 1915 the Equitable Building at 120 Broadway, just north of Wall Street, went up. The Equitable was built to maximize profit, plain and simple. The building fills an entire city block, rising straight up from the building line on all sides for forty stories. Naturally there was an immediate outcry that New York’s streets would be reduced to sunless canyons if many more such structures were built. The country’s first zoning ordinance was the result, in 1916.

Over the years, New York zoning became more and more elaborate. Larger buildings could be negotiated with the city in exchange for public amenities, such as vest-pocket parks and subway entrances. Low-rise buildings next door could sell their “air rights,” allowing taller buildings than would otherwise be possible. Building plans had to be approved by both citywide authorities and local community boards.

All this, of course, only complicated what has always been a very risky business. Real estate, especially in the dense cores of great cities, is more subject to the vagaries of the business cycle, perhaps, than any other business, because the lead times between when large amounts of capital are risked and when income starts flowing in from tenants can be years long.

Major building sites must be assembled, often from dozens of bits and pieces. Old buildings must be demolished. Plans, permits, variances, waivers, and special legislation consume more time. Lawsuits, sometimes dozens of them, must be dealt with. The actual construction can take a year or more. But no income is generated until the entire project is completed.

Thus, major-league urban real estate is not a game for amateurs or the faint at heart. And that’s exactly whom Fisher Brothers, a large New York real estate firm, thought it was dealing with when it decided to build a new office tower behind the Park Avenue clubhouse of the Racquet and Tennis Club in the early 1970s.

The Racquet traced its history back to 1875. From its inception the club’s membership had been made up of male members of old New York Society. Its clubhouse, an Italian Renaissance palazzo designed by McKim, Mead, and White, had been built in 1918 at Park Avenue and Fifty-second Street. Among its amenities are bedrooms, a dining room, a comfortable bar where very serious backgammon is played for very serious stakes, and courts for various indoor racquet games, including one of the country’s half-dozen or so courttennis courts. (The game is a bit like squash, and the nice thing about it is that simply by taking it up, you are automatically one of the hundred best players in the country.)

When the club was built, Park Avenue north of Grand Central was lined with apartment houses designed for the very rich, exactly the sort of people who joined such clubs. By the 1960s, however, many of these had given way to towering office buildings.

Despite the affluence of the membership, by the 1970s the club’s finances were in some peril, thanks largely to the soaring taxes on its prime real estate. It needed to raise cash if it was going to remain in its old location. The Racquet Club thought it saw opportunity in the Fisher Brothers project.

Fisher Brothers had paid $22 million for the land, about the last large site left in the East Fifties. But it, too, had a problem. Although most of the projected building would have good views of Park Avenue over the lowrise Racquet Club, it did not have a Park Avenue address. This was thought essential to renting space at top prices, because side-street addresses in New York simply do not have the same cachet as avenue addresses. Fisher Brothers needed the Racquet Club’s address and was prepared to rent it.

In most businesses the needs of both the parties would have quickly led to a deal. But this was New York, where hardball was invented. Meetings were held in 1973 and 1974, but no deal was struck because the club wanted an escalator clause to protect itself against inflation and Fisher Brothers wouldn’t budge on that.

Then New York City’s financial crisis hit, and the real estate market collapsed. For the next three years the Fisher Brothers lot lay empty, the meter on the $22 million the firm had borrowed to purchase it ticking away inexorably. By 1977, however, things were looking up.