Unintended Consequences

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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.

Fisher Brothers went back to the Racquet Club and offered a deal. If it could run an arcade through the club to its building, thus giving it the precious Park Avenue address, it would pay the club $300,000 a year for the privilege. But the club said no. It insisted that the club’s architectural integrity had to be preserved and that its air rights had to be part of any deal.

So Fisher Brothers offered $600,000 for the entrance and the air rights, along with a modest escalator clause for inflation. The club thought the escalator should start at a cool $1.2 million a year. Fisher Brothers refused abruptly. The Racquet, however, remained confident it was in the catbird seat.

It was not. Fisher Brothers, after all, had not become the highly successful firm it was without having learned its way around the corridors of power in city government. First it went to Manhattan Borough President Andrew Stein and asked him to give its lot a new address. In the time it takes to issue a proclamation, 51 East Fiftysecond Street became One Park Avenue Plaza and the market value of the Racquet Club’s address vanished.

Next, Fisher Brothers hired Skidmore, Owings, and Merrill, one of the city’s premier architectural firms, to redesign the building. The architects were instructed to design a first-class building with enough public amenities to justify floor-area bonuses equal to what Fisher Brothers could have acquired by buying the Racquet Club’s air rights.

The architects came up with the idea of a public “galleria” running through from Fifty-second to Fifty-third Street and soaring fully sixty feet above street level. Sixty feet, by no coincidence, was exactly the height of the Racquet Club. It meant that all of the Fisher Brothers’ rentable floors would have views overlooking Park Avenue, thus commanding the highest rents. And the galleria, open to the public and even equipped with public rest rooms—a rarity in midtown Manhattan—would justify bonuses allowing a larger building.

In the 1970s a private club in New York used the zoning laws as an instrument of alchemy, turning thin air into five million dollars.

Fisher Brothers quietly negotiated with the city to win approval of this scheme. Only when it had clinched the deal, in March 1978, did the Racquet Club learn that far from having Fisher Brothers against the wall, the club was about to be cut out of the action.

It looked like game, set, and match for Fisher Brothers. But not quite. It turned out that some members of the Racquet Club were nearly as good at playing the game of New York real estate as other members were at highstakes backgammon.

Only three weeks later a headline in The New York Times sent a chill down the collective spine of Fisher Brothers: HOTEL IS PLANNED OVER RACQUET AND TENNIS CLUB . The hotel, utilizing an alleyway behind the club as an entrance, would leave the club itself untouched. But it would rise 475 feet, right up to Fisher Brothers’ fortieth floor. Fisher’s tenants, then, instead of having a wonderful view toward the Seagram Building, St. Bartholomew’s Church, and other splendors, would have a view of a brick wall a few feet away.

Fisher Brothers had already spent millions to buy the land and millions more to design and shepherd through the approval process a building that would cost $82 million to actually build. The Racquet Club’s hotel threatened ruination. But could it be built? Legally the answer was certainly yes. The proposed building’s design was in strict conformity with the zoning law and thus could be built “as of right” without any negotiations with the city. And the Racquet Club was not then a New York City landmark (it is now).

But could the Racquet Club really build a hotel? Again the answer was yes. Intercontinental Hotels, not only an owner and operator of large hotels but a builder of them as well, announced that it thought the scheme was feasible and worked with the club to refine the design. Brokers lined up lenders to finance construction. Structural engineers worked out ways of threading the hotel’s support structure through the clubhouse without disturbing its major rooms.

Fisher Brothers was sure the plan was nothing but a holdup. However, it was now in a tough time bind. It received the last piece of paper needed to begin construction on June 9. Any delay in construction at this point would have cost thousands.

Further it had lined up a major tenant who agreed to take three hundred thousand square feet of space, provided its employees could move in by 1980. And provided, of course, that Fisher Brothers guaranteed that it would not be looking out on a brick wall.

When Fisher Brothers failed to begin construction as soon as legally able, the Racquet Club suspected it had the real estate firm on the run. The club was right. When the dust settled, Fisher Brothers paid $5 million for four hundred feet of empty air.