Apple Got Special Deal for Grand Central Terminal Store, State Audit Says

By MATT FLEGENHEIMER

The Metropolitan Transportation Authority had given Apple the inside track to place one of its retail stores in Grand Central Terminal by creating a bidding process that made it nearly impossible for anyone but Apple to be awarded the space, according to a report released Monday by the New York State comptroller's office.

The report said the authority began discussions with Apple about the space more than two years before issuing a request for proposals, and agreed to specific terms with the previous tenant that afforded Apple an unfair advantage.

“The competitive process that was undertaken was not a level playing field, was not fair to all potential bidders and was significantly slanted in Apple's favor,” the report said.

In a statement Monday, Joseph J. Lhota, the authority's chairman, strongly defended the agency's conduct, and accused the comptroller's office of “overt bias against the M.T.A. and Apple.”

“The comptroller's audit staff clearly has no understanding of how high-profile commercial real estate works, given the shockingly inaccurate and clearly biased audit they issued,” Mr. Lhota said. “The M.T.A.'s lease process with Apple was open, transparent, and followed both the spirit and letter of the law.”

Apple did not immediately respond to a request for comment.

According to the report, which was reported in The New York Post on Monday, the authority and Apple discussed a potential lease as early as November 2008. In July 2009, the report said, the previous tenant, the restaurant Metrazur, approached Apple about a possible buyout of its space, which the restaurant was under contract to lease through 2019.

Apple and Metrazur reached a $5 million lease buyout agreement, the report said. On May 19, 2011, the transportation authority signed an agreement with Metrazur stipulating that the restaurant wou ld be paid $5 million to terminate its lease.

Four days later, the transportation authority advertised a request for proposals for the east balcony space in Grand Central Terminal. It included the requirement that the winning tenant paid $5 million for the buyout of Metrazur's lease. Responses were due a little more than a month later, and only Apple provided one.

“At a minimum, Apple had both an informational and time advantage spanning many months,” the report said, “whereas other vendors were afforded approximately one month to determine if the space was practical and the price feasible for them.”

The report cited one vendor who told the transportation authority that “the upfront cost of $5 million was too great of an investment and precluded the vendor from submitting a formal bid on the space.”

The authority acknowledged on Monday that the $5 million threshold might have been prohibitive for many companies. But the authority said that prenegotiations with Apple and Metrazur were necessary given the restaurant's long-term occupancy agreement.

In a response included with the comptroller's findings, Jeffrey B. Rosen, the authority's director of real estate, said that while “discussions with a potential proposer” were not common, “no buyout of Metrazur's lease would have been possible without such discussions and agreements.”

Mr. Rosen said the authority was “disappointed” that only Apple responded to the request for proposals.

Since the Apple store opened in December, officials at the authority have lauded its impact on the terminal. In his response to the report, Mr. Rosen said that in addition to the rent that Apple pays directly, the store “can be expected to generate significant new traffic” that will benefit the terminal's other tenants.

For the stores that were open during the first quarter of both 2011 and 2012, gross sales increased 6.5 percent this year, Mr. Rosen said.

“We can't say precisely how much of that is due to Apple,” he wrote. “But we do think the number speaks for itself.”