Spring cleaning at Nowe Miasto

By Karol Chlipalski and Daniel Tencer

According to sources close to Tishman Speyer Properties (TSP)'s Nowe Miasto development in Kraków, German developer ECE Projektmanagement will be taking a much larger role in the rebuilding of the area around the city's main train station.

Neither TSP's regional director for central Europe, Torben Nielsen, nor the project's manager, Chris Humnicki, were available for comment, but press relations staff at ECE's head office in Hamburg told the Business Journal that ECE would be making an announcement on its involvement in the project within two weeks.

"ECE has supposedly been pressuring TSP to make the announcement official, but TSP wanted to delay this," said one source close to the project, who asked to remain anonymous. "We've known about ECE's involvement in the project for a year more or less, but thus far we haven't received notification that ECE and Tishman will develop the project together. I wouldn't rule out a complete withdrawal from the project on the part of TSP."

ECE came onboard the Nowe Miasto ("New City") project last year to do the "functional design and leasing," as Jan Dębski, ECE Polska's director, put it. At that time the company made no investment outlay on Nowe Miasto, but press reports that TSP wanted to withdraw from the development due to difficulties in negotiations with government and railway officials fueled rumors that ECE would take over the project.

"We have no investment in Nowe Miasto now," Dębski said, adding that "we always usually do invest in our projects."

Given the similar nature of Nowe Miasto to several centrally-located complexes that ECE has built, such as the Galeria Dominikańska in Wrocław and the Galeria Lódzka in Łódź, Nowe Miasto would fit well into the company's portfolio of large-scale urban commercial complexes in Poland - although the project would represent an undertaking on a larger scale than what ECE has accomplished in the country so far.

ECE has a great deal of experience with projects similar to Nowe Miasto in Germany, among them the Allee-Center in Leipzig, a commercial complex built next to a suburban train station, and City-Point in Nurnberg, a centrally located, five-story "vertical mall."

A long and winding road

Whoever inherits the responsibility for developing Nowe Miasto - be it TSP or ECE or both - will have an uphill battle in winning Kraków's residents over to the project. Public enthusiasm for the development was high when it was first announced nearly five years ago. Since then, the country has gone from boom times to economic stagnation, governments have come and gone and little has changed around the train station in Kraków. Today the only visible indicator that the area is under reconstruction is a large construction information sign bearing the TSP logo, located outside the train station.

New York-based TSP, whose €9.2 billion ($10.5-billion) portfolio includes such high-profile assets as the Chrysler Building in Manhattan, has had no end of headaches in realizing the project since it won a competition to redevelop the 15-hectare plot of land surrounding the lackluster main train station in central Kraków back in 1998. The €611 million ($700-million) project was split into two phases, the first one consisting of a hotel, office buildings, retail space, the main hall of the railway station and a new bus terminal.

The second phase is to consist of a conference center, office space and parking for 1,100 vehicles. In all, the project would deliver 80,000 square meters of net lettable space to the Kraków market, with 22,000 square meters dedicated to office space.

Additionally, the city committed itself to significant infrastructure changes in the area, including construction of two underground tunnels, one for a new fast tramline and another for traffic. Once completed, it will be the largest single redevelopment project in Kraków since the 19th century.

But turning the idea into reality has proven very difficult for TSP. The company initially formed a joint venture with the city of Kraków, called TST Polska 1, for the purpose of developing Nowe Miasto. Under the terms of TSP's deal with the city, municipal authorities would withdraw from the special purpose vehicle once TSP had invested a minimum of €11.6 million (zł. 50 million) in the project.

No sooner had TSP signed the deal in 1998 than a new municipal government came into power and began to question the conditions to which the city had committed itself. The new administration announced its desire to renegotiate the terms of the contract, resulting in several press reports that TSP wanted to withdraw from the project - something that market analysts interpreted as indirect threats from the company designed to move the process along. In the end, TSP agreed to changes in its agreement with the city.

However, only a small fraction of the land involved in Nowe Miasto belonged to the city, while the lion's share of the property, approximately 12 hectares, was under the control of Polish State Railways (PKP). For at least two years TSP haggled with PKP over the details of the land transfer, finally coming to a conclusion early last year when PKP agreed to give TSP perpetual usufruct rights to the land for €7 million (zł. 30 million). That figure was considered to be low by many parties involved, and at least part of the blame for the long delay can be placed with central government officials, including members of the infrastructure ministry, who delayed their decision to permit the land deal.

Further problems arose during negotiations to purchase the plot of land adjacent to the train station where the current bus terminal is located. Unable to come to any agreement with the owner of the property, national bus operator PKS, TSP turned to the city for help. Last year, after lengthy discussions, PKS agreed to transfer the 4,600-square-meter plot to TSP in exchange for the city's 5,800-square-meter plot of land on the other side of the train station, where TSP has committed itself to build a new bus terminal.

TSP announced last year that it had already invested €21.3 million (zł. 92 million) in the project, and that the city was now obliged to withdraw from TST Polska 1, the special purpose vehicle developing Nowe Miasto. This month, the city officially withdrew from the project, paving the way for the development to begin in earnest.

Changing plans?

However, the specifics of the project have now been called into question. This month TSP signed new agreements with city authorities that obligated the developer to build the first phase in its "original form," but TSP press representative Witold Pasek told the media that the company would be redoing its market analysis for the project, as its current research is now four years old. This has led to speculation that the project will be significantly different in its final form than what had been previously publicized, or that the second phase could be eliminated altogether.

What the center will ultimately look like will not be known until after the final architectural plans are unveiled and handed in as part of the building permit application - a task that has fallen to ECE, rather than TSP, to complete. According to ECE's Jan Dębski, the final plans should be completed within a few months. Dębski laughed cynically when asked for a tentative completion date, but Chris Humnicki, TSP's project director on Nowe Miasto, told the media that the first phase is now targeted for completion in 2006. Under TSP's initial assumptions, the first phase was to have been opened in 2001.