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Chapter 5: Terms and Conditions of Dual System Contracts

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New Subways For New York: The Dual System of Rapid Transit ยท Public Service Commission

By the contracts signed March 19, 1913, the City entered into agreements with the Interborough Rapid Transit Company and the New York Municipal Railway Corporation, a company formed in the interest of the Brooklyn Rapid Transit Company, for the operation of various lines constructed or to be constructed as above outlined. Some of these lines have already been built by the City, some by the companies, and some are under construction. In the case of each company the City will furnish a part of the funds necessary for construction and the company a part, but the money for equipment of both subway and elevated roads, as well as for the reconstruction and extension of elevated railroads, will be furnished entirely by the companies.

Five-Cent Fare.

In the territory allotted to each company, the rate of fare for a continuous ride will be five cents. This will include transfers from new to old lines or vice versa on each company's system, but will not include transfers between lines operated by the Interborough Rapid Transit Company and lines operated by the New York Municipal Railway Corporation, nor from elevated to subway lines of the Interborough system.

The operating contracts made with each company will run for a period of forty-nine years from January 1, 1917. This provision applies to all subways or extensions of subways, whether constructed by the City or by the operating company or by both jointly.

The period of forty-nine years was determined after much negotiation between the Public Service Commission and the companies. The Commission would not consider any proposal from the Interborough company not providing for synchronizing the leases of the existing subway and the new lines. The old leases are two in number; one covering what is known as Contract No. 1, which embraces all of the subway above City Hall, Manhattan, and the other known as Contract No. 2, which embraces the subway south of City Hall in Manhattan, the tunnel under the East River from Bowling Green and the extension to Atlantic and Flatbush Avenues in Brooklyn. These leases differ in the length of term; that for Contract No. 1 being for fifty years with the privilege of renewal for twenty-five years after readjustment of rental, and that for Contract No.2 being for thirty-five years with the privilege of renewal for twenty-five years after readjustment of rental. The former would expire in 1954 and the latter in 1940. With the renewal privilege of twenty five years, the longer contract, therefore, had yet to run sixty-seven years, and the shorter one fifty-three years at the time the new contracts were signed. The Commission and the company finally agreed upon a basis of forty-nine years for all subway lines, both old and new.

The Commission regards this agreement as one of great benefit to the City, for it is now apparent that the leases made for the operation of the existing subway twelve years ago were unduly favorable to the operating company, for the reason that they provided for no sharing of profits with the City and allowed the company all profits from operation over and above the fixed rental, which was confined to the annual interest charges of the bonds issued by the City for the construction of the subway, plus 1 per cent. per annum for a sinking fund. The construction bonds issued at different times carried different rates of interest, some 3 1/2 per cent., some 4 per cent. and some higher. The rental for the fiscal year ended June 30, 1912, was $2,312,943. The company's profits from the operation of the road were more than double this amount.

The leases for the extension of existing elevated lines and for third-tracks on such lines will run for eighty-five years, but like the subway leases the lines will be subject to recapture by the City. The difference is accounted for by the fact that, while the subway leases end at a specified time when the operating company's rights to them will cease entirely, the existing elevated railroads are held under perpetual franchises granted in years past, before the State and the City adopted the policy of limiting such grants. The term of these leases, viz., eighty-five years, will run from the time the new elevated roads or portions thereof are put into operation.

The City to Share Profits.

In the operating contracts provision has been made for the sharing of profits with the City after the operating company has paid all necessary expenses and taken out the equivalent of its existing earnings on the old lines. This will be accomplished by pooling the revenues derived from the operation of all the lines (not including the Interborough elevated railroads and their extensions) and deducting therefrom each quarter year payments to be made on account of the operator and of the City in the following order:

Terms of the Lease.

1. To the City (in the Interborough contract only) rentals now required to be paid under Contract No. 1 and Contract No. 2, such rentals to continue through the life of the new contract; also (in case of both companies) such rentals actually payable by the company for the use of property in connection with the system, such as are not included in operating expenses.

2. Taxes and governmental charges of every description against each company in connection with the system.

3. All expenses, exclusive of maintenance, actually and necessarily incurred by either lessee in the operation of its system.

4. Twelve per cent. of the quarter's revenue for maintenance, exclusive of depreciation. "Maintenance" shall include repair and replacement of tracks, but not the replacement of any principal part of the structure and equipment. If the maintenance cost in any quarter year shall be less than 12 per cent. of the revenue, the unexpended balance shall go into the depreciation funds and if any excess occurs, it may be withdrawn from such funds.

5. (Interborough contract). For the first year of operation an amount equal to five per cent. of the revenue for depreciation of such portions as are not repaired or replaced through expenditures for maintenance. Two depreciation funds are established, one for the existing subway, and one for the new lines, and they will be under the control of the Depreciation Fund Board. Depreciation for future years to be agreed upon.

5. (Brooklyn contract). For the first year of temporary operation an amount equal to 3 per cent. of the year's revenue for depreciation of such portion of roads and equipment as are not repaired or replaced through expenditures for maintenance. This amount for each year will be paid into three depreciation funds, "Depreciation fund for the railroad and equipment," "Depreciation fund for the plant and property of the extensions and additional tracks," and "Depreciation fund for existing railroads." Such funds shall be under the control of the Depreciation Fund Board. Depreciation for future years to be agreed upon.

The Depreciation Fund Board is to consist of three members, one to be chosen by the company, one by the Commission and the third by both jointly, or in case of failure to agree, by the Chief Judge or an Associate Judge of the Court of Appeals, or by the President of the Chamber of Commerce.

6. (Interborough contract). One-quarter of the sum of $6,335,000 to be retained by the company "as representing the average annual income from the operation of the existing railroads."

6. (Brooklyn contract). One-quarter of the sum of $3,500,000 to go to the company as representing the average annual income from the operation of the existing railroads during the two years prior to the beginning of initial operation, out of which the lessee shall pay interest charges on obligations representing the capital investment (preceding the date of this contract) on the existing railroads.

7. One-quarter of an amount equal to 6 per cent. of the company's contribution toward the cost of construction and equipment for initial operation. Out of this payment the company must set aside amounts sufficient, with interest and accretions, to amortize within the terms of the lease such contribution and cost.

8. If additional equipment is provided an amount to be retained by the company equal to one-quarter of the annual interest payable by it upon the cost of such additional equipment; together with a sum equal to 1/2 of 1 per cent. for the amortization of such cost.

9. (Interborough contract). If the company shall share the cost of construction of additions to the Dual System, an amount equal to one-quarter of the annual interest payable by the company upon its share of such cost, together with 1/2 of 1 per cent. for amortization.

9. (Brooklyn contract). To be paid to the City an amount equal to one-quarter of the annual interest payable by the City upon its share of the cost of construction and 1/2 of 1 per cent. of the City's share of such cost.

10. (Interborough contract). An amount to be paid to the City equal to 1/2 of 8.76 per cent. of that portion of the cost of construction paid by the City.

11. An amount to be paid to the City equal to one-quarter of the annual interest actually payable by it upon its share of the cost of construction of additional lines, together with 1/2 of 1 per cent. for amortization.

12. One per cent. of the revenue to be paid into a separate fund under control of the Depreciation Fund Board to be invested and reinvested to provide a contingent reserve fund. When such fund equals 1 per cent. of the cost of construction and equipment, payments to it shall be suspended and interest on it shall be included in the revenue. If it falls below 1 per cent., payments shall be resumed until it again equals 1 per cent. This fund shall be used to meet deficits in operation and for other purposes.

13. The amount remaining after making the foregoing deductions shall be divided equally between the City and the company.

Commission to Prepare Contracts.

For all new lines to be owned by the City of New York the Public Service Commission is to prepare the construction contracts and specifications which will be generally similar to the Lexington Avenue contracts. After the form of contract, specifications and contract drawings for lines toward the cost of which either company contributes have been adopted, the Commission before advertising for bids "shall transmit a copy of the same to the lessee and within ten days after such receipt, or such further time as the Commission may allow, the lessee shall return the same to the Commission with its criticisms or suggestions. The Commission shall thereupon consider any such criticisms and suggestions and its decision shall be final and binding upon the lessee. Proposals for making such contracts shall then be invited by the Commission in the form and manner required by Section 36 of the Rapid Transit Act."

The Commission is to award the contracts but is not to be limited to the selection of the lowest bidder and it may reject all bids and readvertise. After a contract is awarded, approved by the Board of Estimate and Apportionment and executed by the contractor, the Commission transmits it in triplicate to either company, which becomes a party to the contract for the purpose of disbursing part of its contribution toward construction. The company has ten days in which to sign and return the contract to the Commission, which then executes it on behalf of the City. The Commission undertakes the sole supervision and direction of the work. Periodically, but not more often than once a month, the Chief Engineer shall estimate the value of the work done and the amount which shall be paid the contractor. The Commission will then prepare a voucher for the company's proportion of the amounts due the contractor, and send the same to the company for payment. Within thirty days thereafter the company shall pay this amount directly to the contractor.

Of the total contribution by the Interborough Company for construction, $3,000,000 is to be allowed for the Steinway Tunnel, the title to which the company is to procure and transfer to the City of New York. Upon the vesting of title in the City, the company shall be deemed to have contributed $3,000,000. The amount of money already expended by the City in construction shall be deemed to be part of the City's contribution. The company is to pay all taxes due on the tunnel.

As the Brooklyn company will bear the cost of constructing the connection at Canal Street between the Broadway and Fourth Avenue Subways, and as the City has already contracted for that part of it at the intersection of Broadway and Canal Street, it is provided that the remainder shall be constructed as extra work under the contracts already made by the City. The Commission's Chief Engineer shall determine the difference in cost between the Canal Street work without such physical connection and the work with such connection, together with any real estate or interest therein required by such connection, and the amount of such additional cost, together with such interest as may have been paid by the City, shall forthwith be paid to the City by the company upon the demand of the Commission.

It is provided in addition that the Brooklyn company shall so reconstruct its existing lines as to adapt them for operation in connection with the new subways. These adaptations include the elevation or depression, in whole or part, of the Sea Beach line so as to avoid grade crossings, and the construction of additional tracks where necessary; the construction of two additional tracks to the Brighton Beach line between Church Avenue and Malbone Street, and the elevation of existing tracks and the construction of two additional tracks between Neptune Avenue and the terminal at Coney Island; two-track elevated connection from Myrtle Avenue line near Wyckoff Avenue to a point about 1,000 feet east of Fresh Pond Road; connection of Myrtle Avenue elevated tracks with Broadway elevated tracks; construction of adequate terminal facilities at Coney Island connecting the Brighton Beach line, as reconstructed west of 5th Street, with the Sea Beach line, as reconstructed near Surf Avenue and Stillwell Avenues; and the extension of platforms, increase of station facilities on existing lines, and the strengthening of those lines. Plans for the reconstruction of existing lines must be approved by the Commission.

As security each company deposited with the Comptroller of the City $1,000,000 in securities. When one-quarter of the money to be contributed by the company has been expended, the Comptroller shall release to the company one-quarter of this deposit, and the other one-quarters as the company's contribution is applied. Each company also filed a bond for contribution, equipment, maintenance and operation, in the sum of $1,000,000 with approved sureties.

Arbitration is provided for in case differences arise between the City and either company. Each side is to name one arbitrator and the third is to be named by the Chief Judge of the Court of Appeals, or in his failure to act, by any of the Associate Judges of the Court of Appeals in order of seniority, or in their failure to act by the President of the Chamber of Commerce. It is provided that no claim shall be made by either company against any member or members of the Public Service Commission or of the Board of Estimate and Apportionment personally by reason of the contract.

Complete City Control.

Ample provisions are made for securing to the City the necessary control over expenditures by either company in the construction, equipment, maintenance and operation of the lines. This control is provided because "the City's returns from its investment in the railroad and its exercise of its right to take over the railroad as provided in the lease will be affected by the amount of the lessee's expenditures." Supervision by the Commission is agreed to and each company is required to provide facilities for such inspections as the Commission may wish to make. It must keep proper accounts and permit their examination and submit to the Commission for approval any contract, agreement, mortgage or undertaking having to do with its contribution toward the cost of construction or equipment. Any contract, agreement or undertaking having to do with maintenance or operation of the railroad or of the existing railroads extending for more than one year or involving an expenditure of more than $50,000 must be entered into subject to the approval of the commission. No contract affecting maintenance or operation shall be for more than five years, except in the case of mortgages, assignments, leases, trackage agreements, power and advertising contracts, or modifications of original contracts. Systems of accounting and the method of keeping accounts may be prescribed by the Commission, as well as the form of vouchers and payrolls to be used by the company. In expenditures made in connection with maintenance and operation, the Commission may object to any item as improper or unreasonable, and the company shall hold the same in suspense account until it is adjudicated. If the Commission and either company fail to agree as to such items, a determination shall be obtained either by arbitration or by the court. "The most thorough and minute inspection" by the Commission and its engineers is expressly provided for.

The contract requires that each company shall provide equipment at its own expense and, when accepted by the Commission, title to it shall vest in the City. The company is permitted to improve, reconstruct or change its power houses if necessary to provide adequate power for the operation of the road. All equipment must be of the best character "known to the art of urban railway operation." The Commission may order the company to begin providing equipment which shall be ready to put any portion of the road into immediate operation as soon as completed.

The Brooklyn company is given the privilege for the first ten years of securing its electric motive power from outside sources pending the construction of the necessary power houses and substations.

When Operation Begins.

When the Commission shall declare any part of the railroad ready, the company shall equip the same and operate it. Temporary operation to be on the same terms as are provided for the operation of extensions. Each company agrees to operate the road "according to the highest standards of railway operation and with due regard to the safety of the passengers and employees thereof, and of all other persons." Free transfers shall be given as required and approved by the Commission at common or connecting points. Each company may carry freight, mail and express matter; provided that it shall not interfere with the passenger service. No part of the railroad or stations or other appurtenances thereof shall be used for advertising purposes, except that the company may post necessary bulletins. No trade or traffic, other than required for the operation of the road, shall be permitted, except such sale of newspapers and periodicals as may be permitted by the Commission. Each company shall, under regulations prescribed by the Commission, advertise for proposals for the privilege of selling newspapers and periodicals at stations in such manner as to permit of separate contracts for each news stand.

Fare to Coney Island.

The Brooklyn company is required to exchange transfers at 86th Street, Brooklyn, between the new system and the existing surface railroads now operating on Third Avenue and Fifth Avenue between 86th Street and Fort Hamilton. The company also will endeavor to secure authority for the extension of such surface railroads to a point near 86th Street and Fourth Avenue where a more convenient point of transfer can be installed. The company also agrees to undertake to make arrangements with the Hudson and Manhattan Railroad Company for free transfers at 34th Street, Manhattan, to and from the Grand Central Station. Carriage of freight, mail and express matter is allowed if it shall not interfere with passenger traffic. The fare is limited to five cents, provided that the company may continue to charge ten cents for the fare to Coney Island and other points "where such ten cent fare is now allowed, until the time when trains may be operated for continuous trips over wholly connected portions of the railroad" from the Municipal Building, in the Borough of Manhattan, to Coney Island.

Temporary Operation of Steinway Tunnel.

In the Interborough contract, provision is made for the temporary equipment and operation of the Steinway Tunnel pending its reconstruction and completion, and for the giving of free transfers at 42nd Street and Park Avenue between the Steinway Tunnel and the subway. Temporary equipment may be of single cars as approved by the Commission, and the cost is to be included as part of the cost of equipment under the contract.

Operation of Extensions.

Each company agrees to equip, maintain and operate any extensions which the Commission shall determine should be operated as part of the Dual System. If the company accepts an extension it shall be operated as a component part of the system according to the foregoing terms. If the company shall not accept an extension, it shall operate it upon the following terms:

From the gross receipts, consisting of all ticket sales and other earnings at stations on the extension, and the additional advertising due to the operation of the extension, deductions each quarter year shall be made as follows:

1. All expenses for operation, administration and maintenance, including damages for accidents and taxes upon such extensions and the extensions' proportion of other expenses in the ratio of ticket sales on the extension to ticket sales on the rest of the system.

2. To the company one-quarter of the annual interest payable by it upon the cost of additional equipment belonging to the extensions, together with 1/2 of 1 per cent. for amortization.

3. To the City, one-quarter of the annual interest paid by it on the cost of construction of the extension, together with 1/2 of 1 per cent. for amortization.

4. To the City, one-quarter of the annual interest paid by it upon the cost of construction of additions to the extensions, together with 1/2 of 1 per cent. for amortization.

If in any quarter year the revenue from the extension is insufficient to pay operating expenses and interest on the equipment, the company may deduct the amount of such deficit from the revenue before the amounts payable to the City are paid. Such deductions are to be charged against the payments due the City under the lease of the original system, but such deficits shall not be cumulative. If there is a deficit after one year in the amount necessary to pay operating expenses and interest on cost of equipment, and if the remaining amount of payments due the City from the original system is insufficient to cover such deficit and it is not made up from any other source, the lease of the extension shall cease, the company may withdraw from its operation, and the City shall take and pay for the additional equipment for such extension. If the revenue from the extension is sufficient to meet the deductions named, such extension shall become part of the original system and be operated as such.

The question of interest upon $40,000,000, borrowed by the Brooklyn Rapid Transit Company, and whether such interest from October 1, 1912, the date of the loan, should be included as part of the cost of construction, was settled by inserting in the contract provisions including such interest in the cost of construction, but providing that the excess of such interest over the amount properly chargeable shall be repaid into the revenue by the company from its 50 per cent. of the surplus profits. The effect of this is that interest on such excess will be paid to the company out of the earnings of the system until such time as the company begins to share equally with the City in surplus profits, out of which the company will repay it at the rate of 1/15 of its share each year.

In the Interborough contract there is a provision for the exchange of legs of the present subway if the City should at any time desire to take over a complete east side line or a complete west side line without taking over the entire system.

The contracts for the extensions and third-tracking of existing elevated roads are embodied in separate certificates to each company. The terms of these certificates include payments to the City for the rights granted.









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