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Nicole Gelinas
Financial Follies at Ground Zero
Or are they political follies?
22 March 2006

Four and a half years after 9/11, New York remains stuck at Ground Zero. Last year, the problem was architecture: the NYPD determined that the Freedom Tower wouldn’t meet post-9/11 security needs. That problem is allegedly fixed, but now the problem is, purportedly, finances: Mayor Bloomberg insists that Larry Silverstein, the private-sector developer with the right and obligation to rebuild the World Trade Center site, can’t afford to do so, and the Port Authority of New York and New Jersey (the bi-state agency that owns the site) seems to agree. But when it comes to Ground Zero, finance is only a cheap stand-in for cynical politics, and Bloomberg, the supposed non-politician, is playing a tough game.

Contractually, of course, Ground Zero isn’t the mayor’s business: an agreement between the Port Authority and Silverstein governs it. In July 2001, the Port Authority awarded the World Trade Center to Silverstein under a 99-year lease. “I have pushed hard to privatize the management and operation of the World Trade Center because I believe that government is at its best when it focuses on its core mission. Today, as we make history, we can say: Mission accomplished,” Governor Pataki said at the time.

Why privatize the Twin Towers? First off, being one of New York’s largest commercial landlords was never part of the Port Authority’s core mission of overseeing public-sector infrastructure like ports, bridges, and tunnels. Second, the de facto sale was a good deal, financially, for both the Port and for Silverstein. Silverstein paid the bi-state agency for the right to do what the inefficient Port Authority couldn’t do at the World Trade Center: bring operating costs down and earn a decent profit.

Like all leases, this one outlined who would do what in the event that something went wrong: Silverstein, not the Port Authority, was responsible for maintaining the WTC and would be responsible for all necessary repairs and reconstruction. And after 9/11, the authority didn’t attempt to extricate itself from the lease: it has continued to collect its monthly $10 million rent from the developer. Shortly after the attack, Silverstein generously agreed to allow a new public-sector authority, the state- and city-run Lower Manhattan Development Corporation, to direct the rebuilding process.

After years of architectural beauty contests and public input, all parties—including Mayor Bloomberg—signed off on the current plan in November 2004. Under the plan, Silverstein is to use his insurance proceeds and outside financing to build the iconic Freedom Tower as well as four other towers, replacing 10 million square feet of destroyed office space.

To complete the towers after he runs out of insurance money, Silverstein has some financial tools at his disposal—or, at least, he should. After 9/11, Congress approved $8 billion in “Liberty Bonds” to provide private-sector builders with cheap interest rates so that they, not the government, could spur downtown’s reconstruction. The city and state have awarded most of those bonds, but nearly $3.4 billion remains, with the mayor controlling one half and the governor the other.

But so far, Mayor Bloomberg hasn’t used the Liberty Bonds to aid rational private-sector recovery downtown. He has awarded $114 million of these valuable, and finite, resources to developer and political darling Bruce Ratner for an office tower in Brooklyn. He has approved another $650 million in Liberty Bond financing for a Durst-owned tower in Midtown. Neither of these projects fulfills Congress’s mandate to rebuild Lower Manhattan. Worse, both projects will actively compete with downtown. (Pataki has gotten a lot of flack for approving nearly $1.7 billion in Liberty Bonds for Goldman Sachs—but at least Goldman is building downtown.)

But now, cynically, Bloomberg will use the Liberty Bonds not only to compete with downtown but actively to thwart its recovery by refusing to award his half of the remaining bonds to Silverstein.

Bloomberg claims his opposition to the current World Trade Center plan is in part due to cold, hard finances, and in part to promote wise planning downtown. First, he argues that the WTC project is financially unviable, and that Silverstein will run out of money once he has built one or two towers. Second, he has suggested that downtown doesn’t need five office towers at Ground Zero but instead requires a “mixed-use” complex with some residential space.

The Port Authority, after months of institutional brooding, apparently agrees with the mayor, or at least sees an opportunity to regain its power at the World Trade Center: it has forced Silverstein back into talks, with an aim of building the Freedom Tower and possibly one other commercial tower itself. The governor has helped push Silverstein back to the table by saying that he wouldn’t award his half of the bonds to the developer until everyone settles on a plan.

The mayor has put Silverstein in an impossible position. Legally, the developer has the right to rebuild, but financially, he needs the Liberty Bonds to do so. And here’s the terrible irony, which Silverstein surely understands: rebuilding the WTC under the current lease is only financially impossible if Bloomberg makes it financially impossible by withholding those bonds.

It will cost $7.4 billion for Silverstein to rebuild the World Trade Center and maintain his lease. He’s got $3.1 billion in insurance money left—so that leaves $4.3 billion in costs. Just like any other developer, Silverstein and his potential lenders must determine if the project is worth more than its cost. That is: over the remainder of the lease, will the WTC bring in enough in rents to repay this $4.3 billion investment and earn a profit?

Part of the answer depends on future commercial rents downtown. Bloomberg says he believes rents will never rise above their pre-9/11 levels (after inflation), while Silverstein thinks they’ll rise to today’s Midtown levels, particularly after downtown’s transit hub is finished. After operating costs and taxes (but before interest costs), this leaves Silverstein between $300 million and $400 million in today’s dollars each year for about 80 years, from the time he gets all five towers leased to the time the lease ends.

Here is where Bloomberg’s intransigence matters. With all of the Liberty Bonds—because interest rates would be so low (about 6.5 percent)—we can estimate Silverstein’s future income from the towers to be worth $5.7 and $7.5 billion in today’s dollars, depending on future rents. At these values, the project is economical. Lenders would invest in the project, so it wouldn’t run out of money, as Bloomberg claims it will.

If Silverstein wins only half of the Liberty Bonds, the finances become murky. The deal wouldn’t be economical under the current plan unless rents rose quickly, so it might fall short of lenders. With no Liberty Bonds, the WTC project is not economical; it’s worth less than its cost.

With the Liberty Bonds, the economics of the World Trade Center look even better if the Port Authority simply commits to rent space at the Freedom Tower, and allows Silverstein to build the four most valuable towers for corporate clients. As for Bloomberg’s “mixed-use” argument: downtown is already becoming a residential community, as building after building, ill-suited for modern office use, converts into condos. What the area needs is modern office space to replace towers lost to conversion.

Bloomberg, in effect, is acting as a self-fulfilling prophet downtown. And once his cloak of financial and urban planning falls away, it’s hard to see how he is acting in good faith. Remember, this is the same mayor whose ill-conceived scheme for encouraging speculative real-estate development on Manhattan’s Far West Side (without benefit of downtown’s transit assets) was thwarted by Assembly Speaker Sheldon Silver last year. Silver, of course, represents Lower Manhattan.

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More by Nicole Gelinas:
Choosing Citi Bike
Too Soon for Answers in Harlem
West Side Story
More . . .
This story was cited in:
Gotham Gazette
noLandGrab
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