Pataki and Whitman Make Peace at Port But Not With the Mayor

On June 2, in a paneled board room on the 67th floor of the city’s tallest building, the board of commissioners of the Port Authority of New York and New Jersey did something remarkable. It voted. Unanimously.

To applause from the high-level staff members who had gathered in the Port Authority’s World Trade Center headquarters to watch, the 12-member board approved an agreement between New York Governor George Pataki and New Jersey Governor Christine Todd Whitman, ending a 17-month interstate war of recriminations and tabled motions.

Within days, the reinvigorated agency was putting the finishing touches on a few projects near to the hearts of Mr. Pataki and his chief advocate on the board, Empire State Development Corporation head Charles Gargano: the privatization of the World Trade Center and the leasing of air rights above the Port Authority Bus Terminal to private developers, who plan, improbably enough, to build a 35-story office tower they call 7 Times Square above the once-squalid mega depot. But the two long-contemplated projects, having negotiated the choppy seas separating New York and New Jersey’s governors, haven’t found safe harbor yet. To get there, they’re going to have to navigate around the Port Authority’s most implacable enemy, Mayor Rudolph Giuliani.

Port Authority board members, including board chairman and Whitman appointee Lewis Eisenberg, an investment banker, and Bradford J. Race, Mr. Pataki’s chief of staff, said they anticipated a round of negotiations with the city, leading to a tax break that would smooth the way for the two developments. But Deputy Mayor Anthony Coles said the Mayor’s position was that there would be “no negotiation,” and that the city would sue, if necessary, to recover all its taxes.

Despite the public pronouncements of peace after this month’s agreement, it’s clear that deep divisions remain within the Port Authority, over the World Trade Center project in particular. Mr. Pataki, who has publicly committed to returning the building to the tax rolls, wants the privatization to move forward quickly. State officials still doubt whether Ms. Whitman, as well as the Port Authority’s staff, really want the Authority’s crown jewel and big moneymaker-it took in a $148 million profit last year-sold off.

“New Jersey and some of the Port Authority people want to see this become as cumbersome as possible,” one state official said.

For Mr. Giuliani, the situation is a sweet reversal of his usual routine of railing powerlessly against unaccountable bureaucrats in both states-Port Pirates, in tabloidspeak-who, he believes, divert billions in investment away from the city. His calls for the dissolution of the 1921 compact between the states, like his efforts to wrest away Kennedy and LaGuardia Airports from Port Authority control, have played well in the newspapers, but have had little real impact.

Now that the Port Authority wants to do real estate deals in New York City, however, Mr. Giuliani can flex a bit more political muscle. “He can still be a fly in the ointment in any Port Authority real estate deal, insisting on full real estate taxes,” said one former Giuliani administration official.

The prospect of a Republican Mayor scuttling deals to privatize 10 million square feet of publicly subsidized office space and build a shiny western bookend to Times Square is ironic, to say the least.

The Mayor’s dispute with the Port Authority is a morass of tax-law arcana, but it boils down to this: As a governmental organ, the Port Authority currently pays no taxes on its enormous city landholdings. Instead, it has negotiated a yearly contribution to the city, representing a fraction of the real estate’s worth. In the case of the World Trade Center, the Port Authority pays the city $25 million a year. If the building were in private hands, according to Mr. Coles, the owner would pay around $100 million in taxes.

“Once the Port Authority transfers [the World Trade Center] to a private owner through a sale or lease, the city’s view is that it will be assessed at the full real property tax,” Mr. Coles said. The same principle, he said, goes for the bus terminal tower.

See You in Court

The Port Authority, understandably, is leaving open the possibility of negotiations. There is an open legal question, the Authority believes, over whether a building run by a private developer under a long-term lease, but still technically owned by the Authority, would be taxable.

In other cases where public buildings have been privatized, such as the World Financial Center, private developers have arranged for a “payment in lieu of taxes”-or a “PILOT” in real estate argot-which increases over time until it eventually reaches the building’s assessed value.

Such a tax break would be a lucrative inducement to developers wary of the high price the Port Authority might demand for the World Trade Center. It might also help the developers of 7 Times Square offer lower rents to the anchor tenant they need to attract in order to build. Susan Fine, a senior vice president at the Lawrence Ruben Company who is coordinating the development, said she could not comment on whether the company is seeking a tax break from the city. “We’re going to work with the city and state of New York to develop a competitive building,” Ms. Fine said.

When asked about the World Trade Center, Allen Morrison, a spokesman for the Port Authority, said that the Authority’s bidding guidelines “make no representation one way or another to the bidders regarding the tax or PILOT issue.” Several people involved with the project predicted the Authority is putting off the tax issue until it settles on a developer. Mr. Eisenberg said there would likely be negotiations later on.

“We see no reason, if we have cooperative discussions with the parties involved, why these projects will not move forward, as other projects have moved in the past,” Mr. Eisenberg said.

Mr. Race said that while the Governor’s office supports Mayor Giuliani’s efforts to increase the tax base, “whether at the end of the day there’s some negotiations between the city, the Port Authority and the new owner, that remains to be worked out.”

No it doesn’t, said Mr. Coles.

“This is not an issue of negotiation for us,” Mr. Coles said. “The simple fact is that once the Port Authority transfers the [World Trade Center] … if it’s not put back on the tax rolls someone’s getting out of paying the tax, and then the city will go to court.” Again, he said, the same goes for 7 Times Square.

It would seem, then, that peace is not quite at hand at the Port Authority, despite the deal the two Governors cut earlier in the month.

In fact, the dispute between Mr. Pataki and Ms. Whitman typifies relations between the two states over the allocation of Port Authority resources, with each state believing it was getting a raw deal in the compact that governs commerce and development within a 25-mile circle around the Statue of Liberty. Goaded in part by Mr. Giuliani-“the Mayor laid the groundwork for the recognition by everyone that the Port Authority is not friendly to New York City,” said Charles Millard, the former head of the city’s Economic Development Corporation-Mr. Pataki’s appointees began questioning why, for instance, the $1 fare for the Port Authority’s trans-Hudson tubes, predominantly used by New Jersey commuters, had not increased in more than a decade. Or why the Port Authority was investing millions in Newark’s airport, diverting traffic away from Kennedy and LaGuardia.

Mr. Pataki raised the issue of privatizing the World Trade Center, too, an idea that had been kicking around almost from the time the towers opened in 1973. In 1997, a study by the investment firm J.P. Morgan recommended a divestiture, saying the authority could reap a $1.1 billion windfall.

The prospect worried members of the New Jersey delegation, though, who saw little advantage to returning the building to New York’s tax rolls and who were concerned about the loss of rents. The revenue stream from the World Trade Center has helped subsidize the PATH lines. The Authority’s professional staff also opposed privatization, regarding the twin towers as a symbol of the Authority’s glory days (the 67th floor views aren’t so bad, either).

“Yes, it’s a skyscraper, yes, it’s a commercial office building, but it’s also a symbol of pride for the Port Authority that shows the world what magnificent projects the Authority is capable of,” said Angus Kress Gillespie, a Rutgers professor and author of Twin Towers: The Life of New York City’s World Trade Center . “To the Port Authority it seems like a stab in the back. Everyone wants the Port Authority to shoulder the projects that lose money, but divest themselves of the projects that make money, like the World Trade Center, so I think they feel betrayed.”

Mr. Pataki, however, prevailed when the board voted in September 1998 to pursue a 99-year lease of the building. More than 30 potential investors qualified to bid on the property-including Steven Roth’s Vornado Realty Trust, Mortimer Zuckerman’s Boston Properties, Tishman Speyer and Donald Trump.

The idea of developing the air rights over the bus terminal also has been under discussion for some time. In fact, the terminal was constructed with a foundation capable of supporting a tower even taller than the 35 stories in the current design. But every time plans moved forward, the real estate market tanked.

The project finally made it out to bid in 1998. Vornado and the Ruben Company won with a steel-and-glass architectural design by Skidmore, Owings and Merrill that has done the unthinkable, according to those who have seen it. The design actually makes the bus terminal attractive.

The developers are paying $90 million up front, plus agreeing to finance $20 million in terminal renovations, for the development rights-revenue the authority says will help offset the $60 million a year subsidy it requires to keep the depot running. All told, the project is expected to cost $400 million, according to the Port Authority-$200 million of it for construction alone.

Then came the logjam.

In January 1999, angry about the supposed inequity in Authority investment, Mr. Pataki directed New York’s six Authority board members to block a deal with shipper Sealand Maersk to run a major cargo terminal in Elizabeth, N.J. Ms. Whitman, who desperately wanted the Sealand Maersk deal, responded by blocking major New York initiatives, including the World Trade Center and bus terminal projects. For the next 17 months, the board met only sporadically; the two Republican Governors stopped talking and even stopped using each other’s first names in their correspondence.

Chopper Comes in Handy

Months of negotiations between Mr. Eisenberg, the board chairman, and Mr. Gargano, the vice chairman, finally yielded a breakthrough in early May. The two negotiators, according to an account in the Newark-based Star-Ledger , boarded the authority’s seven-seat, $1.9 million helicopter-much maligned by those who see it as a symptom of the agency’s waste-to meet and brief Ms. Whitman at Toms River High School, where she was conducting a town hall meeting.

A month later, in a meeting lasting barely two minutes, the board unanimously approved a 15-point agreement between the two states. Ms. Whitman got her lease deal with the shipper. Mr. Pataki got a commitment of $250 million in investments in New York, and $287 million more to finance the “train to the plane” running to LaGuardia airport. In addition, the board very likely will raise the PATH fare and proceed with the development projects for which Mr. Pataki has been pushing.

The agreement with the 7 Times Square developers was approved that same day. Authority staff members are putting the finishing touches on bidding guidelines for the World Trade Center privatization, which are to be sent out by the end of the month, said Mr. Morrison, the agency’s spokesman.

It’s difficult to measure how much the delay hurt the Authority’s efforts to complete the projects. A headline on a Wall Street Journal piece about the World Trade Center, “How Not To Sell The Best Known Office Complex,” can’t have helped, but as some point out, the market for office space actually went higher in the months the board was at an impasse. The value of the lease has been estimated at between $1.5 billion to $2 billion, but, Mr. Eisenberg cautioned, “whatever price was talked about two to three months ago could be substantially different when the decision is made.”

The 7 Times Square developers, meanwhile, never stopped showing their building designs to the handful of large-scale office tenants currently in the market for space, including Deutsche Bank, the Canadian Imperial Bank of Commerce, and the accounting firm Price Waterhouse Coopers.

Bruce Mosler, an executive at the brokerage firm Cushman and Wakefield who is working with the developers, said that now that an agreement between the developers and the authority is ready to be signed, he “would be surprised if in the next 60 to 90 days there aren’t serious discussions going on with [potential tenants].”

Meanwhile, the real estate deals remain just one theater in the Mayor’s multifront war against the Port Authority. Just last month, Mayor Giuliani hired a British firm to monitor the Port Authority’s administration of the airports, a prelude, his advisers indicated, to a move to force the Port Authority to negotiate its way out of its airport leases, which expire in 2015. (The authority operates the airports on land leased from the city.) Port Authority officials question the legality of the move.

While neither side considers the issues to be directly related, Mr. Eisenberg said that a larger settlement of city-Port Authority disputes “certainly is a possibility.”

“What I can say,” Mr. Eisenberg said, “is that I think it is in the best interest of the people of the region for both states and city to negotiate rather than to do battle.”

The idea of Mr. Giuliani sitting down to talk with the Port Pirates would have been laughable just a few months ago. Then again, if Mr. Giuliani can visit with Manhattan Borough President C. Virginia Fields and kibitz with Public Advocate Mark Green, surely anything is possible.