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June 3, 2014Ray Hair - AFM International President
As you know, the 99th Convention adopted a financial package that will raise $1.2 million in additional revenue annually for the Federation, from 2014 onward. The delegates debated and eventually affirmed the financial measures through a simple voice vote—bypassing the time-consuming roll-call vote process that has historically accompanied convention financial resolutions. This was seen as a vote of confidence for the conservative fiscal policies implemented in 2010 by a fresh, new International Executive Board.
It was also a vote of trust in the detailed, coordinated presentations made to the delegates by each IEB member about how the new money would be used. Of the new money, $650,000 was earmarked for relocation.
My portion of the IEB’s convention financial presentation concerned the relocation of Federation headquarters, which has been a prominent feature of the AFM’s political landscape since 1988. That year, AFM President Marty Emerson commissioned a committee headed by IEB member Richard Totusek to devise a plan to relocate away from Broadway and Big Apple toward more friendly environs, fiscally speaking. That effort saw the AFM conduct a municipal beauty pageant of sorts, with representatives from a top 10 list of locations, which included Nashville, Denver, and Fort Worth, vying to win Federation favor, and ostensibly, any positive economic impact from new jobs and business relationships.
Of course, because Fort Worth was then a contender and because I was also a newly-elected member of the IEB, I was squarely in the middle of the contest. But I found myself in the minority when the IEB voted in 1990 to remain in New York City, staying put at 1501 Broadway—in a Times Square location rented since 1986—to avoid the cost risks associated with disruptions to staff, or disturbing our complicated relationships with industry-wide employers also headquartered there, or moving away from the New York-based Music Performance Trust Fund, Sound Recording Special Payments Fund, and the AFM & Employers’ Pension Fund, each tethered in various degrees to the Federation. Then there were the physical and material costs of moving the office. Each time the opportunity for change presented itself, the IEB decided that the perceived costs outweighed the potential benefits.
As many of you know, previous conventions going back nearly two decades voted to allocate new money to help fund the relocation of Federation headquarters. In 1995, a portion of a convention per-capita assessment was earmarked toward relocation. Subsequent AFM administrations socked away up to $25,000 monthly into an IEB-designated “Relocation Fund” that eventually amounted to $3.1 million by 2003. Meanwhile, at every convention, I lobbied hard for the Federation to take the plunge, to get on the fast-moving real estate train and purchase a property in New York City that had enough square footage to house tenants, preferably firms that were related in some way to the Federation, to effectively reduce overall occupancy costs and improve our efficiency.
I was taken aback in 2001 when a previous administration voted to use a big chuck of our Relocation Fund to pay for new office build-out and other improvements to the existing office in an extended lease at 1501 Broadway that would run through January 2016, instead of using it to purchase a home for the Federation. At the time, elected officials defended the decision because it reduced the total amount of rentable space and cut costs.
Unsurprisingly, I had a different point of view. The world was teetering on a recession. Interest rates were very low. The real estate market in New York City was favorable. It was an opportunity for positive change where purchasing rather than renting should be aggressively explored. I remembered a decade earlier when Local 802 moved out of the McGraw-Hill building and bought its building at 322 W. 48th Street. I recalled my own experiences as a local officer in Texas in 1991 when we merged Local 72 (Fort Worth, TX) with Local 147 (Dallas, TX), and immediately bought a repossessed office condo in Arlington with built-in tenant income. We paid the building off in 12 years and saw it appreciate by 400%.
Sure, owning property has its share of problems, but the advantages of owning over renting can be huge. If the Federation can make the down payment, closing costs, and can cash flow our current rental digs at 1501 Broadway, while covering new mortgage and build out costs at the new location, then we can escape the rent rolls and get on the road to financial freedom. The idea is to own a property that has enough square footage to house the Federation plus additional space for tenants. The Music Performance Trust Fund is currently a tenant. We are looking for more.
The rewards of ownership can sometimes be obscured by the risks, but clarification is needed. Are the risks really risks, or are they major/minor inconveniences? Let’s look at the reward side of the equation.
The first reward is Appreciation. By owning in New York City, we are purchasing a safe, steady investment. The value will rise while the debt drops. Appreciation for New York City commercial real estate is on fire. One analyst predicted escalations of 4% to 7% this year, about half the 2013 rate.
A second reward is Equity. Equity, the difference between the appreciating property value and debt, rises over time and accompanies appreciation. It occurs faster in a hot market like the Big Apple. You can’t build equity if you are a renter. One wonders how many millions of dollars the Federation has paid in rent over the past 118 years. What a waste.
A third reward is Stability. As a renter, your rent goes up every year. With a fixed-rate mortgage, the payment is locked in for a long time—up to 10 years in a commercial mortgage. And with tenant income that rises over time, more and more of occupancy costs are offset by rents.
So, as we began 2014 with the optimism of additional revenue, we began to address the matter of relocation. After all, our lease expires January 2016. We believe it is in our best interests to continue our headquarters operation in New York City, preferably on the island of Manhattan for reasons that impact staffing and professional and institutional relationships
We have located an office-condo property in the financial district of Lower Manhattan and we are currently negotiating with owners and lenders for terms toward purchase and build out that would include significant tenant space to offset, and eventually reduce, occupancy costs.
Recently, the IEB voted to refer the prospective purchase of a new Federation headquarters to Secretary-Treasurer Folio and me. The irony is that some things never change. For more than 25 years, whenever the topic of Federation relocation arose, I was in the middle of it. At every opportunity, I advocated building equity, not more liability. In doing so, I focused on the obvious advantages, rather than the risks.
As your president, this time my point of view is different. The buck stops with me, and with my old pal, Sam Folio. The cost and risks of such a purchase must be thoroughly evaluated and a decision made that has the best interests of this great Federation uppermost in mind.
What will we do? The jury is still out, but not for very long. The anticipation builds. Read this column next month to learn whether the Federation will soon own its own home.