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New York Post.

DOOMING DOWNTOWN
March 24, 2006

By Nicole Gelinas

WE'RE now 41/2 years past 9/11, yet New York remains stuck at Ground Zero. The problem is, purportedly, finances: Mayor Bloomberg insists that developer Larry Silverstein, who owns the right to rebuild the World Trade Center, can't afford to do so.

But when it comes to Ground Zero, finance is a cheap stand-in for cynical politics, Bloomberg-style.

Contractually, Ground Zero isn't even the mayor's business. The site is owned by the Port Authority, which awarded the World Trade Center to Silverstein under a 99-year lease signed before 9/11.

Shortly after the attack, Silverstein agreed to let a new public-sector authority direct the rebuilding process. In November 2004, all parties - including Bloomberg - signed off on a plan for Silverstein to use his insurance proceeds and outside financing to build the Freedom Tower and four other towers at the site.

To finish the towers once he's out of insurance money, Silverstein has a financial tool at his disposal - at least, he should. After 9/11, Congress approved $8 billion in "Liberty Bonds" to provide private-sector builders with cheap financing to spur Downtown's reconstruction. Nearly $3.4 billion in these bonds remains, with the mayor and the governor each controlling half.

Yet Bloomberg so far hasn't used the Liberty Bonds to aid Downtown's recovery. He awarded $114 million to developer Bruce Ratner for a Brooklyn office tower, and approved $650 million for a Durst-owned tower in Midtown. Neither project fulfills Congress' mandate - in fact, each competes with Downtown. (Gov. Pataki took flak for approving $1.7 billion in Liberty Bonds for Goldman Sachs - but Goldman's building Downtown.)

And now Bloomberg is using his control of Liberty Bonds to actively thwart Downtown's recovery, by refusing to award his half of the remaining bonds to Silverstein.

The mayor claims he opposes the World Trade Center plan because the project is financially unviable: Silverstein, he argues, will run out of money once he has built one or two towers.

The Port Authority agrees - or at least sees a chance to regain its power at the World Trade Center. Eyeing a takeover of the Freedom Tower, and perhaps one other, the PA has forced Silverstein back into talks. (Pataki helped by saying that he won't award his half of the bonds to Silverstein until the PA is satisfied.)

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: Rebuilding the WTC under the current lease is only financially impossible if Bloomberg makes it financially impossible by withholding the Liberty Bonds.

It will cost $4.3 billion for Silverstein to rebuild the World Trade Center and maintain his lease once insurance is exhausted. Like any developer, Silverstein (and his potential lenders) must determine if the project is worth more than its cost: 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 won't rise above pre-9/11 levels (after inflation), while Silverstein thinks they'll rise to today's Midtown levels.

Either way, Silverstein's looking at earning $300 million to $400 million (in today's dollars) a year, after operating costs and taxes (but before interest costs), for about 80 years - that is, from the time he gets all five towers built to the time the lease ends.

Here is where Bloomberg's intransigence matters. If New York actually uses its 9/11 rebuilding money at Ground Zero, and Silverstein gets all the Liberty Bonds (with their low interest rate of about 6.5 percent), his future income from the towers would be worth $5.7 billion to $7.5 billion in today's dollars. At those values, the project is economical even if rents never rise to Midtown levels. Lenders would invest in the project, so it wouldn't run out of money, as Bloomberg claims it will.

But if Silverstein wins only half of the Liberty Bonds, the finances become murky. The deal wouldn't be economical unless rents rose quickly, so it might fall short of lenders.

With no Liberty Bonds, the WTC project is not economical unless rents rise stratospherically, because interest costs would consume too much of the project's future rents.

Bloomberg, by withholding the Liberty Bonds, is acting not as a responsible steward of the city's rebuilding resources, but as a self-fulfilling prophet of Downtown doom. It's hard to see how he is acting in good faith.

Remember, this is the mayor whose scheme for encouraging real-estate development on Manhattan's Far West Side (without benefit of Downtown's transit assets) was thwarted by Assembly Speaker Sheldon Silver - who represents Lower Manhattan.

Nicole Gelinas, a Chartered Financial Analyst, is a contributing editor to City Journal. Adapted from city-journal.org.

©2006 New York Post

 


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