Will They ever Rebuild Ground Zero?

Julia Vitullo-Martin, March 2006

The disputes at Ground Zero have become a circus of the surreal.

Since September 11, 2001, leaseholder Larry Silverstein has been paying the Port Authority for his destroyed property. Why has he continued to pay?

Surely the destruction of the towers presented a prima facie case for abandoning or renegotiating the 99-year lease that had been signed just six weeks before 9/11. Either side was justified in walking away. The government entities could have bought Silverstein out, settled quickly on what they wanted built on the site, and issued an RFP to developers, as is routinely done, thus bringing in someone new. They had the political authority—and could have garnered the legal power—to free themselves of Silverstein, had they wanted.

But apparently they didn't want to. Rightly or wrongly, the Port Authority, the state of New York, and the city are stuck with Silverstein.

Now they're trying to get rid of him—or at least demanding far more money from his company and all sorts of give-backs or payoffs, including $100 million for a 9/11 memorial.

Some demands are simply bizarre. One of the Port's most recent objections to Silverstein, according to the New York Post, was his refusal to help finance a $6 billion rail tunnel under the Hudson. A tunnel to New Jersey? This may be the ultimate in the new art of Community Benefit Agreements extracted from developers.

Earlier, Senator Chuck Schumer had proposed a compromise. The Port Authority would move into the Freedom Tower (which, for reasons of its own, it doesn't want to do), thereby steamrolling Silverstein into starting construction, in exchange for having a guaranteed rent-paying tenant. Schumer also wanted Silverstein Properties to agree to begin construction on all four towers within 60 days of their building sites being readied, and to reduce its estimated development fees of $100 million by at least half.

The high development fees prompted the state's top economic development official, Charles Gargano, to call Silverstein greedy. Silverstein's alleged demand for another $l billion in rent reductions, insurance allocations, and concessions incited Governor Pataki to declare that Silverstein had "betrayed the public's trust and that of all New Yorkers."

Now, with no deal in sight, Silverstein is being asked to turn over $1 billion of the remaining $2.9 billion in insurance money, in exchange for a 44% reduction in rent for three towers. He would also give up development rights on the Freedom Tower, which he has long not wanted to build, as well as a fifth, possibly residential, tower.

WHAT'S WRONG WITH SILVERSTEIN?

The most serious argument for trying to dislodge Silverstein belongs to Mayor Bloomberg, who says he will run out of money before finishing construction. The implication is that, like many a speculative developer before him, he will declare bankruptcy, leaving a big mess for someone else (the city or the state) to clean up.

This argument is plausible. First, Silverstein has no major commercial tenant at 7 WTC, though he can point fairly convincingly to a Chinese trade group that has agreed to a term sheet. Second, he needs to rent 7 WTC at absolutely top dollar—$54 per square foot, which is higher than any other downtown commercial building. The elegant World Financial Center across the street rents for $43—and it isn't surrounded by construction filth. Nor does it overlook the deplorably untouched Fiterman Hall, owned by the City University and frozen in the same bombed-out appearance since September 12, 2001.

If Silverstein can't make money on 7 WTC, why should he be entrusted with building the other towers? As the Manhattan Institute's Nicole Gelinas notes in the New York Post, if Silverstein can't make money on new Ground Zero towers, no one can. He's the only one with $3 billion in insurance money, and therefore the only one able to build a $7.3 billion project for $4.3 billion. (The Port offered to build the Freedom Tower, but only in exchange for $2.9 billion from his insurance settlement.)

Of course, what Silverstein's not yet getting—and what a more amenable developer—could get, is $3.4 billion in Liberty bonds. The bonds, half to be distributed by the city (Mayor Bloomberg) and the other half by the state (Governor Pataki), would make the project financially feasible. With the bonds, Silverstein can make a go of it. Without the bonds, neither he nor any other developer will succeed.

IS THERE A DOWNTOWN OFFICE MARKET?

Perhaps it’s true, as Mayor Bloomberg seems to be arguing, that Downtown New York is simply not ready for an additional 10 million square feet in office space. This is a subject on which informed people can disagree.

The Independent Budget Office, for example, had predicted a glum future for office employment in New York, until it was urged by Manhattan Borough President Scott Stringer to analyze new data. In mid-March IBO concluded that while between 2000 and 2003 New York had lost 128,600 office jobs or 10.2% of its peak of 1,262,600 jobs, it regained 29,200 office jobs between 2003 and 2005. In 2005, office employment stood at 92.1% of its 2000 peak level. Downtown’s crucial securities employment (all offices) meanwhile stood at 87.4% of its 2000 peak—not back to where it was, but on its way.

Demand for downtown office jobs will surely be stoked by the tax incentives available to firms taking or renewing leases. The especially powerful incentives at Ground Zero include:

• A permanent full exemption from the commercial rent tax (a 3.9% savings of annual rent)
• A 10-year exemption from sales tax on office furniture, equipment, and construction materials for tenant improvements
• A $3,000 tax credit for 12 years per every relocating employee

In addition, New York State will provide rental subsidies ranging from $3.80 to $5 per square foot.

In general, IBO concludes, there are reasons to be optimistic about the downtown office market. The large price differential with midtown, generous incentives, and better neighborhood amenities make newer Class A buildings, with large floor plates and technological infrastructure, more competitive with similar, but increasingly scarce, buildings in midtown. That "large price differential" is a potential warning sign, however, since Silverstein is assuming that over time he will be able to reap midtown-level rents.

WHAT’S NEXT

Lamenting the lack of progress at Ground Zero in September 2003, the BBC called it one of the most important development sites in the world. Apparently this attitude is not shared in Albany, where many of the most important decisions are being made.

The buck stops with Governor Pataki. His state of New York co-owns the property. He's the one who set up the planning process that produced the current master plan, within which Silverstein is trying to work. Pataki's the one, and perhaps the only one, pushing for the Freedom Tower not only to be built first, but to be built as designed by Daniel Libeskind. Pataki's the one who supported Silverstein for years, until abruptly trying to fire him in mid-March. Pataki's the one who has to force or cajole agreement to get construction going. The only way he can likely do that, it's increasingly clear, is by working out a contract with Silverstein that’s acceptable to the Port’s New Jersey members.

As William J. Stern wrote in another context, in City Journal, in 1995: "C'mon, Governor Pataki, Lead."