Broadway’s Shuberts Dine On KFC As New York City Coffers Settle For Scraps

UPDATE Thursday morning: Adds specifics of tax code “1031 exchanges,” in second paragraph, below.

EXCLUSIVE: Millions of untaxed dollars from the sale of the air above landmarked theaters — money that might be playing a starring role on Broadway — are going instead to buy fast-food restaurants and bank branches in such far-flung places as Mundelein, IL, and Odenton, MD. Thanks to a quirk in the federal tax code that effectively promotes the deals, millions more are likely to follow. At least, that is, until the current real estate bubble in Manhattan’s midtown west district eventually bursts.

For the time being, however, the good citizens of Mundelein are related to the Phantom of the Opera, who has been prowling the rafters and swinging from the chandelier of the Majestic Theatre on West 44th Street since 1988. When the Shubert Organization sold the oxygen above its landmarked house for $17.1 million in May, Broadway’s biggest and richest landlord sheltered the proceeds from taxes in part by purchasing a Chase Bank branch on Mundelein’s Townline Road. Shubert also bought a Bank Of America branch on Cicero Avenue in Crestwood, IL. The purchases were made under federal IRC 1031, which defers taxes on the proceeds from the sale of a property are used to buy another in a “swap” or exchange.

Screen Shot 2015-03-11 at 4.31.32 PMThose air rights were sold to Algin Management, which is developing the legendary Roseland Ballroom, currently a gutted shell awaiting total demolition. Algin plans to put up a 62-story high-rise apartment building on the parcel. The purchased air rights allow Algin to add floors, making it, at more than 500 feet tall, the latest outsize tower in the district.

The Majestic has been the gift that keeps on giving to the Shuberts: Back in 2008, the company — which owns 17 of Broadway’s 40 designated theaters –sold a $12.2 million cloud above the Majestic to the developer of the InterContinental Hotel at Eighth Avenue and 44th Street. Selling off air rights has brought more than $50 million to the Shubert organization.

When these deals are made public, they’re commonly embellished with a hat tip to Shubert and other owners on two points: The sales (which are a kind of payback for the landmark status that precludes landlords from roselandaltering these century-old structures) enable owners to upgrade and maintain their theaters. And some of the proceeds go to a fund created by the city to support theatrical development.

Both points are nonsense.

Broadway’s major landlords — in addition to Shubert, they include the Nederlander Organization, with nine theaters, and Jujamcyn Theatres, with five — already tack a “facilities fee” onto every ticket for maintenance and upgrade. At shows in Shubert-owned theaters, the current charge is $2 per ticket. For Phantom, at the Majestic, that translates into a potential windfall of $1.34 million every year, which is rich cream even for the Opera Ghost.

As for the Theater Sub-District Council Fund, as it’s officially known, contributions from the sale of air rights have endowed the group with current assets of just $2.9 million. The fund has distributed $2.3 million in grants since 2012-13, most recently a $500,000 each to Pregones Theater/Teatro Pregones and the New York Shakespeare Festival. Great companies, small beer.

“The public benefit has not been all that robust, not thought through,” understated a New York City official who spoke on condition of anonymity because he was not authorized to discuss the issue. “It’s failed to the extent that the theater owners are reaping windfalls, and given that they charge so much in ticket prices, the fact that we’re subsidizing these folks is crazy. None of these places are accessible to the deep vast majority of New Yorkers, and the plan was to make theater more accessible.”

Shubert Organization Chairman Philip J. Smith declined repeated requests for comment on the sale of air rights and the changes they are bringing to the Broadway Theater District. The Shuberts, as the company is known, never talk about real estate.

But Shubert is hardly a wholesale villain here. The Shubert Foundation (the nonprofit company that owns the commercial Shubert Organization, for reasons too nutty to go into, but as Casey Stengel said, you could look it up) last fall dispensed $22.5 million on assets of $410 million, according to IRS filings. Absent Shubert support, countless nonprofit theaters and dance companies would have long since gone under.

Health-Advocacy Group Asks FTC To Stop KFC PromoStill, in addition to those two long-running hit bank branches, Shubert also owns a McDonald’s and a neighboring Kentucky Fried Chicken in Atlanta, according to public records examined by Deadline, along with more banks in Massachusetts and Maryland. All were bought with profits from the sale of air rights.

Since 2008, Shubert has grossed some $50 million in sales of air rights over its 17 Broadway houses. Not all of that money has left the city. With an expanding bubble that includes the development of the giant Hudson Yards mixed-use project immediately to the south and west of Times Square, and high-rise apartment towers sprouting like glass dandelions in Hell’s Kitchen, square feet are worth more than ever before.

Last year, Shubert paid $2.6 million for New World Stages, an off-Broadway theater complex at Eighth Avenue and 50th Street, and $11.25 million for a warehouse building on 48th Street and Eleventh Avenue. Sale of Shubert-controlled air rights have figured heavily in an Extel Corp. development at 740 Eighth Avenue that may (or may not) include a new Broadway theater but which will likely be the tallest tower in the district. And there’s of course Roseland, where revelers once tripped the disco lights fantastic. The role played by landlords in turning the Theater District into a second-tier Billionaires’ Row has not gone unnoticed.

Screen Shot 2015-03-11 at 4.45.28 PMCommunity Board 5, which covers the area, expressed its concern during a meeting this past December: “The Board urges the City Planning Commission to re-think the contribution into the Theater Subdistrict Fund,” CB5 declared, “so that the contribution is updated on a yearly basis and in a manner which reflects the increase in real estate value.”

The board was none too happy with the plans for the Roseland site; it was “saddened to see that the Roseland Ballroom will be torn down to make way for this development and wishes that a development incorporating the Ballroom as a viable use and as an important venue in New York City would have been presented,” and noted that “the contribution into the fund of approximately $18 per square foot is significantly less than 1% of the value of the air rights being sold.” Nonetheless, CB5 gave its imprimatur to the proposal. At least that money was being spent in the district.

“If the air rights program is being subsidized by the taxpayers of the city,” a real estate expert told Deadline on condition of anonymity because he has dealings with the parties involved, “can’t a case be made that all of those proceeds ought to to be reinvested in the City [especially given] the Mayor’s current passion, for affordable housing, that it morally ought to be reinvested where the benefit was conferred?”

The answer may be yes, but as any gadfly knows, change doesn’t come easily and power does not yield without a fight. New York City’s planning commission chairman Carl Weisbrod last week put landlords on notice that Mayor Bill de Blasio’s is ”quite serious” about reconsidering the whole subject of air rights transfers. But Weisbrod was wrong when he called Broadway one of the program’s success stories. That may be true for theater owners, but producers, artists and ultimately theatergoers ought to figure into the calculation for success. Their interests and the interests of Broadway landlords don’t necessarily merge.

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