Saraceno speaks out: NJ Transit lease is great deal for agency — and only bid that made sense

Head of Onyx, owner of Gateway, says company is giving unprecedented financial incentives along with 400K sq. ft. of Class A space with almost immediate occupancy in 25-year, $440M agreement

Onyx Equities Managing Partner John Saraceno said he knew that any deal to bring New Jersey Transit’s headquarters to Two Gateway in Newark would come under scrutiny.

“I’m not naïve and I’m not stupid,” he said.

“New Jersey Transit is the hottest political cake in the state of New Jersey, and it has been for the last 50 years. To think something of this magnitude wasn’t going to get some scrutiny would have been naïve.”

Saraceno, however, said he was stunned by the reaction of some political leaders and media since NJ Transit signed what is now known to be the biggest lease in state history (25 years for $440 million) on June 18.

Because the square-foot cost ($39) is higher than the two other bids, some said NJ Transit, an agency with severe financial troubles, was wasteful with public funds. Others, upon learning that Onyx and NJ Transit had discussions before the agency officially put out a Request for Proposals for bids, speculated there was a secret deal — or that Onyx was the preferred partner.

Worst of all, Saraceno said, some connected the lease as a political payoff for a standard contribution he and his co-founding partner, Jonathan Shultz, made to Gov. Phil Murphy. Some members of the Legislature have started calling for an investigation.

The fact that NJ Transit waited until Monday (or 30 days after signing the deal) to release the details of the lease — something that clearly was a matter of public record — only added to the intrigue, Saraceno said.

“What I thought would happen is Transit would face a lot of scrutiny relative to doing it — and then, maybe, I would be posed a question about it,” he said. “But I became the story, which wasn’t fair.

“Scrutiny to this level, and making it personal about me and our company, is highly disappointing.”

Two Gateway in Newark.

The biggest reason: Saraceno is confident the lease is a great deal for NJ Transit, the city of Newark and the state.

In a lengthy conversation with ROI-NJ from his office at Gateway Center on Tuesday morning — hours after the lease was released — Saraceno made his case for the deal:

  • It brings 2,000 NJ Transit employees into a Class A office building that is far superior to where they are now — one that literally is connected to Newark Penn Station;
  • It brings NJ Transit to Gateway in 14 months — or far faster than other bids and far faster than what would have been expected for a deal this size;
  • It provides incredible financial incentives — what Saraceno calls an unprecedented tenant improvement allocation package of $58 million on top of $15 million being spent for demolition of the space and a new HVAC system. This more than offsets the higher per-square-foot cost, he said.

A bad deal for taxpayers? Saraceno calls it one of the best deals any tenant has ever received — at Gateway or across the state.

“I’ve done this for 31 years,” he said. “This is the single-largest tenant improvement allocation I’ve ever given a tenant in my career.

“Talk to any landlord — $135 a foot or $58 million for improvements has never happened before. So, you can’t sit here and say to me that somehow the bag was in. They kicked my ass.”

Saraceno, who chose not to talk about the deal until NJ Transit released the lease, is just as adamant that the two other potential landing spots can’t come close to matching the Gateway offer.

The Panasonic building, which Saraceno admits was in play during NJ Transit’s original request of up to 350,000 square feet, could not meet the increased space requirements.

On incentives

Onyx Equities Managing Partner John Saraceno on why Onyx did not take any incentives in the purchase or renovation of Gateway:

“I’ve only taken incentives in one deal in my entire career. It’s not that I’m opposed to it; they are an enormously important part of the process of maintaining and attracting jobs into the state. But my view is: If you don’t need it, you don’t get it. Simple as that. So, when I started the process, our numbers said it worked. And our numbers said we could use our money to do it. I was like, let’s not muddy the water with having to go out with our hand out to the city of Newark or to the (Economic Development Authority) or anybody else and say, ‘Help us.’”

“They are about 100,000 square feet short,” he said.

The Horizon Blue Cross Blue Shield of New Jersey building has the space requirements but was not immediately available. Saraceno admits he doesn’t know the inside of the bid, but he said he is confident it would have taken years for NJ Transit to move in.

“If Transit could have gotten into that building in five years, it’d be a miracle,” he said.

During that time, NJ Transit likely would have to pour millions into its existing buildings at 1 and 2 Penn Plaza. NJ Transit officials themselves estimated their existing building needs $118 million in upgrades. Since NJ Transit now owns the building, the money for repairs (and to house the displaced workers) would have to come from the state, a tough ask.

Instead, NJ Transit can monetize the asset, Saraceno said — calling it another financial plus for the Gateway lease.

“The idea that they don’t have to spend the $120 million fixing their building, which they’re now going to sell and make money when they move in here, is incredible,” he said. “I’m not saying they’re going to get in here for nothing. But, we’re talking incremental dollars on a relative basis.

“There’s no doubt in my mind that, on a net basis, there’ll be no out-of-pocket costs for the state of New Jersey.”

Saraceno tips his hat to NJ Transit and its broker, Savills.

“The deal that they were able to construct is bulletproof,” he said. “At the end of the day, they made an awesome deal because they had created an enormously competitive landscape that resulted in us competing at a level that I never thought I would ever compete.”

On why deal is great for Newark

Onyx Equities Managing Partner John Saraceno on why it’s better for the city for New Jersey Transit to be in Gateway as opposed to the Panasonic building:

“Mayor Ras Baraka wants us to be successful, because, if we’re successful, that’s a good thing for the city of Newark. That means when you spend $70 million fixing an asset like this, and you get a good outcome, then you and others can go do the same thing at the next asset and the next asset. Why would you want to let Panasonic get out of its obligation just to backfill a building that you’ve already got a clean rateable on — a building that already is occupied?”

This is why Saraceno was so surprised and so taken aback that he was being criticized instead of celebrated for a deal that symbolically completes the incredible turnaround of Gateway — a complex Onyx was roundly criticized for when it purchased three of the four buildings on last day of 2018.

“This asset was the scourge of the state of New Jersey when we bought it,” he said.

Onyx spent $60 million of its own money to fix up the concourse and change the culture of a building that seemingly was built to keep Newark residents away.

“We connected it to the street,” he said. “We built a door on the ground floor in glass and told everybody, ‘Come in, we welcome you,’” he said.

And Onyx, Saraceno proudly points out, did not receive a single dollar in incentives from the city or state — even though it potentially would have been eligible for some programs.

This is the building and the firm that needs to be investigated? Saraceno asked incredulously — and then answered.

“As a state representative, instead of asking to have a hearing or an investigation, you should be saying: ‘These are exactly the kind of developers we need. They didn’t ask for $1 of state money and didn’t stop their construction during COVID when everybody else did. They went for it. They were 100% committed to the process and they pulled it off.’

“That’s the story that should be talked about.”

On Gateway leasing

Onyx Equities Managing Partner John Saraceno on state of leasing at the three Gateway buildings he owns following the lease to New Jersey Transit. Onyx controls approximately 1.7 million square feet:

“We’re plus or minus 83-85% — and we’re currently talking to three potential tenants about space greater than 100,000 square feet. Since we took over the property, we’ve leased and renewed in excess of 800,000. So, it’s an enormous success story, but we’ve fought like hell to get there.”

Saraceno touched on a number of subjects during the 75-minute conversation. Here’s more of the interview, edited for clarity and space.

ROI-NJ: You waited nearly a month before commenting on the lease — staying quiet despite being called out by media reports and some elected officials. Why did you wait — and do you regret waiting?

John Saraceno: My position at the time was to be deferential to NJ Transit taking the lead in regard to communications, knowing that it was going to be a completely transparent process. Every email ever sent has been OPRAed. There are no secrets. And I knew there would never be any secrets.

Transit didn’t do a great job of managing it, particularly post-lease execution. Before the lease is signed, I do think there’s a certain amount of propriety in the negotiation — not wanting to have information out there because it could have hurt their ability to negotiate.

But, once the lease was executed, they sat on it longer than they should have.

I would have loved to respond to that earlier, but I thought I needed to be deferential. In retrospect, I probably should have been less deferential because I got bloodied a bit.

ROI: Much has been made of a tour that Onyx gave NJ Transit officials in the spring of 2021 — more than a year before NJ Transit officially put out a Request for Proposals for a new headquarters. Your thoughts on that?

JS: We finished the capitalization of this deal on Dec. 31, 2018. At that time, we decided we were going to make a significant capital improvement plan. The decision was: Will it be Gateway 4, facing Prudential Center, or something associated with Newark Penn? We couldn’t do both then. We had to pick what we thought was most important to the rebrand of Gateway. We picked Newark Penn.

In doing that, we immediately reached out to New Jersey Transit, not as a relationship relative to leasing, but like, ‘Here’s what we’re going to do.’ Our engineering staff work with their team with regard to improvements around the plaza. My concept always was to turn this into Union Station, or as good a transportation hub as I could do it. Newark Penn, as a building, is never going to get any bigger. So, to me, the best way to enhance Newark Penn was to enhance Gateway Center to feel like it was a physical extension of Newark Penn.

On his next move

Onyx Equities Managing Partner John Saraceno said the lease with New Jersey Transit will help him move to the company’s next project. Onyx, which controls more than 7 million square feet of real estate in the state, recently acquired the former Merck campus in Kenilworth, a 2 million-square-foot site:

“I’m all about buying and fixing. And not that this has been a long time, but Gateway’s been a lot of work. We’re moving on to Merck, where we have 2 million square feet and 30 acres of developable land. I am very actively involved in running this company. This is not a part-time gig for me. But, the reality is, I can’t continue to spread myself. I’m not any younger than I was. My focus and attention is on Merck now. I know that and my partners know that. It was time for me to make the change.”

To their credit, they jumped on. And I would say that, once we started that rapport in that relationship, it led to the beginning of a conversation of how bad their building was. At some point in time, it just made sense to ask about their long-term plan. And, when I heard through the grapevine that Savills was retained to do some work for them, it just made sense to show them what we were doing.

ROI: Much has been made of the unsolicited proposal you sent to NJ Transit officials prior to the RFP. Your thoughts on that?

JS: I have sent more unsolicited offers out to tenants in my career than probably any landlord in the state. To me, you don’t always get a fair shake all the time from a broker. Sometimes, what you have to do is jump over the bow. And I jumped, and I don’t think there’s anything wrong with it. It’s completely appropriate.

Once we knew that it was a possibility, and that they were thinking about doing something, I went into John Saraceno mode. This is post-COVID. I’ve got to lease this building. We’ve made what is approaching a half-a-billion-dollar investment in the city of Newark. And this needs to be successful.

I don’t know if my unsolicited proposal initiated anything. I don’t actually believe it did. They had already made up their mind that they were going. And, once they officially announced they had they retained outside consultants — Savills was engaged for the purpose of doing this — I never spoke to another New Jersey Transit representative until the day that we were actually voted on by the board.

ROI: Much has been made of the campaign contribution you and Shultz made to the governor. Your thoughts on that?

JS: It’s a silly comment. They know it’s silly comment. It’s salacious. It sells newspapers. It gets clicks. Whatever. John and I contributed together to Gov. Murphy (he estimated $25,000). It is a pittance. And I’ll tell you, I was an enormous supporter of Gov. (Chris) Christie for many years.

I’m fair game until you start to get to a point where you’re questioning somehow that I bought the deal.

ROI: Let’s talk about the space. The original request was for up to 350,000 square feet. That increased to up to 450,000 square feet. How did it come together?

JS: That’s the other piece of this puzzle — it’s a 400,000-plus-square-foot lease. I terminated 200,000 square feet of leases early to make that deal. It’s eight floors. Four of those floors were leased through at least late 2025, up until early 2027, by Prudential and Standard Chartered. I have to terminate those leases — walk away from income related to those tenants — to actually make this deal.

It also means that it’s only 200,000 square feet of positive absorption for me, not 400,000.

Now, could I have kept Prudential and Standard Chartered long-term? I have no idea. But, early in the process, I knew, based on what everybody involved was telling me, I needed to present a clean, contiguous block of space with delivery as an absolute obligation.

So, to my own economic detriment, I went out and secured that space, so that the day they signed that lease, I would have complete control of all that space. In 14 months from the day we signed that lease, they will be in at least 240,000 square feet of the 400,000 — and, six to eight months later, they’ll be in the balance of it. No one else could do that.

ROI: What about the Panasonic building, what many are saying was a cheaper alternative?

JS: The largest gross rentable area that Panasonic has, as reported by CoStar, is 337,000 feet. You don’t have to be a rocket scientist to figure out they’re 100,000 feet short. It’s not like it’s a 337,000-square-foot block and there is 400,000 feet rolling over in the building the next couple of years that they could grow into it. That’s max; you can’t make it any bigger.

Here, we have 1.7 million square feet that we control. In Gateway 2, they’re only 50% of the structure. There’s another 50% of that building that’s going to roll over the next 10 years, so (NJ Transit) will have multiple opportunities to expand if necessary, or frankly, detract, as necessary.

ROI: Give us your thoughts on the Horizon building?

JS: The Horizon building is about same size as Transit; they probably could have made Horizon work physically in size. But Transit would have had to write a huge check for improvements in that building. And they would have had to write huge checks for their own building while they waited four to five years to move. To me, it was very clear from Transit’s perspective that the experience of occupying the building that they’re currently in is so negative — and the building is in such a high state of disrepair — that they wouldn’t want to be in the same position again. That’s not what they’re getting here.

Inside Two Gateway, looking at Newark Penn Station.

ROI: But, if it’s cheaper …

JS: I don’t know all the numbers, but I find it really hard to believe that any one of the other options were better in true net-effective rent. No matter what government calculus you do, with $58 million in tenant improvement allocation and $15 million dollars of base building improvements, I think it’s a net-effective equivalent.

I don’t know what interest factor you use in today’s world, but when you’re getting 70 million bucks, it’s probably worth somewhere in the area of 10 bucks a square foot. And that’s if you can find $70 million. Who has $70 million sitting around today?

Panasonic was always the building with regard to the brokers and everyone involved as to the competition. But that was before the space increased. Horizon was out there, but it never felt like it was it was in play. I could be wrong behind the scenes — Horizon could have been highly motivated and negotiating aggressively — but I’ve done this long enough to get a sense.

ROI: It sounds as if you are saying NJ Transit is the big winner in all of this?

JS: What New Jersey Transit was able to accomplish is an economic deal that rivals any economic deal that’s ever been made.

They are moving into a great building that has been unbelievably well-maintained and improved. And the experience that their employees are going to have for the next decade-plus is going to be an experience that they could never have anywhere else.

I think that this is a fair statement: This idea that government employees should be treated as second-class citizens, and that the experience that they can have should not be the same, is not fair.

You cannot replicate what we’ve done here in Horizon. You can’t replicate what we’ve done here in Panasonic. There’s no building in the state, other than maybe Harborside in Jersey City, that has a concourse environment with 12 restaurants and the activation and connectivity to Newark Penn.

We are physically connected by a bridge to their most significant infrastructure asset. If there is any place New Jersey Transit should be, it’s here.