Silverstein, Port Sued City In Fall Over W.T.C. Taxes

The Port Authority and developer Larry Silverstein have filed a

lawsuit against the city in response to the city’s attempt to collect nearly

$100 million in real-estate taxes on the destroyed World Trade Center complex.

The lawsuit caps a long-running feud between the Port Authority and former

Mayor Rudolph Giuliani, whose administration contended that the office complex

should have been taxed like private property once it was leased to a group of

investors led by Mr. Silverstein in July.

The dispute outlived the Trade Center and Mr. Giuliani’s term.

Now it threatens to complicate Mayor Michael Bloomberg’s efforts to play a lead

role in the redevelopment of the 16-acre site.

Filed without fanfare in State Supreme Court in Manhattan last

November, and kept quiet at a time when all the parties are publicly vowing to

cooperate, the lawsuit pits three of the main players in lower Manhattan’s

redevelopment against one another.

The Port Authority, which owns the site, and Mr. Silverstein, who

has plans to rebuild the complex, are asking a judge to rescind the city’s

$95.6 million tax bill and declare the property tax-exempt.

The lawsuit places Mr. Bloomberg in a particularly difficult

predicament. If he abandons the claim on the complex, which was moved onto the

city’s tax rolls after the lease with Mr. Silverstein was signed, he could find

himself with a new hole in the city’s already-battered finances. It could also

damage the city’s chances of collecting taxes on any future redevelopment.

Then again, pursuing the taxes could antagonize the Port

Authority and Mr. Silverstein at a crucial juncture in the redevelopment

project. And winning the lawsuit could deal a blow to plans to build another

large office complex on the site. A tax exemption would allow Mr. Silverstein

to rent out office space at rates cheaper than those in surrounding buildings.

Daniel Doctoroff, the new deputy mayor for economic development

and rebuilding, said that he’d met recently with Port Authority officials, but

that the administration had not yet decided whether it would continue to try

collecting the taxes.

“This [dispute] existed prior to Jan. 1,” when Mr. Bloomberg took

office, Mr. Doctoroff said. “I think it’s something we’re still in the process

of evaluating.”

Unlike Mr. Giuliani, who often used the Port Authority as a

rhetorical punching bag, Mr. Bloomberg can ill afford to anger the bistate

agency. As the site’s landlord, the Port Authority is bound to have a large say

in how the site is rebuilt. Half of its board is appointed by Governor George

Pataki. One board member, state development czar Charles Gargano, also oversees

the Lower Manhattan Development Corporation, the authority created to design

and fund downtown’s redevelopment.

“It’s obviously a very long and complicated relationship between

the city, the state, New Jersey and the Port Authority,” Mr. Doctoroff said.

“Our commitment is to try and work with them to come up with a mutually

beneficial solution.”

Former Giuliani administration officials, including former

Corporation Counsel Michael Hess and former Finance Commissioner Andrew

Eristoff, did not return calls for comment.

“This seems to be part of this historical schism between the

Giuliani administration and the Port Authority,” said Jack Sinagra, the new

chairman of the Port Authority board. “I think we’re going to make a

concentrated effort to have a better relationship starting from scratch with

the Bloomberg administration. But time will tell.”

The relationship between the

agency and the city could hardly get any worse than it was when Mr. Giuliani

was Mayor. Mr. Giuliani claimed that the authority favored New Jersey and

cheated New York in any number of ways, and he called it “an out-of-control bureaucracy.”

He also sometimes pursued strategies that seemed devised primarily to provoke

Port Authority officials, as when he used photos of the city’s airports taken

from a helicopter to demonstrate the agency’s laggardly pace at plowing runways

after a snowstorm. He tried to hire a private consultant to manage the

airports, which the Port Authority runs under a lease from the city. In 1996,

he released a plan to kill the authority once and for all by dissolving the

1921 compact between New York and New Jersey that created it.

“Giuliani appeared on the stage at a point in history when he had

nothing to lose by baiting the Port Authority,” said Angus Kress Gillespie, a

professor at Rutgers University and author of Twin Towers: The Life of New York City’s World Trade Center .

“Baiting the Port Authority plays well with the New York City voters, and the

Port Authority can’t very well strike back. Having so many facilities in New

York City, it’s kind of held hostage to the teasing and baiting of the Mayor.”

Now, “with the destruction of the Twin Towers, you might say the

tables are turned. It’s a little more incumbent on the city to be nice to the

Port Authority in the hopes that some [commercial development] will be put back

in place.”

The Port Authority never paid taxes on the World Trade Center

because the city, under long-established constitutional law, has no authority

to tax another governmental body. But the Port Authority always paid the city a

fluctuating amount, called a “payment in lieu of taxes” (or PILOT), based on

the assessed value of other buildings in the area. Last year, the Port

Authority paid the city about $31.5 million.

When the Port Authority announced plans to lease the World Trade

Center to a private developer, city officials immediately announced that they

would tax the complex like any other privately owned building.

“This is not an issue of negotiation for us,” then–Deputy Mayor

Anthony Coles told The Observer in

June of 2000. “If it’s not put back on the tax rolls, then someone is getting

out of paying the tax, and then the city will go to court.”

The tax issue bedeviled the Port Authority as it tried to auction

the property. One bidder, Vornado Realty Trust’s Steven Roth, backed out of the

deal after the city threatened the tax hike.

The Port Authority closed the 99-year, $3.2 billion lease deal

with Mr. Silverstein, its second choice, after agreeing to fight the city’s tax

bill and pledging to pick up the difference between the PILOT and the $100

million in taxes if it lost the case.

Welcome to the Tax

Rolls

Mr. Giuliani did not attend the July 24 ceremony at the World

Trade Center plaza, at which Mr. Silverstein signed the lease and received a

two-foot-long set of ceremonial keys to the complex. The next day, Mr. Eristoff

put out a press release “welcom[ing] the World Trade Center to the tax rolls.”

The day after that, Mr. Eristoff sent letters to Neil Levin, then–executive

director of the Port Authority, as well as Mr. Silverstein and one of his

financial backers, Westfield America, informing them that they owed $95.6

million.

The tax issue didn’t disappear on Sept. 11. On Oct. 5, the city’s

finance department sent delinquency notices to the Port Authority and Mr.

Silverstein, charging them 18 percent interest on their past-due tax bills. James

Moses, a finance department spokesman, declined to say why the city continued

to pursue the taxes after the Trade Center was destroyed. “All matters

regarding the World Trade Center litigation are under review by the new

administration, so it’s not appropriate for Department of Finance to comment.”

The Port Authority and Mr. Silverstein filed suit on Nov. 21,

alleging that the city acted “in excess of their authority and jurisdiction” in

levying the taxes. They claim that the World Trade Center remained the property

of the Port Authority even after it was leased to Mr. Silverstein, and was

therefore not subject to city taxation.

Even if a judge finds that the property is not exempt, the

lawsuit asks that the assessment be lowered to reflect the fact that the

complex no longer exists.

“It’s not like this was something we wanted to do,” said William

Martini, a former New Jersey Congressman and Port Authority board member. “I

think we had to protect our rights. I think we all hope that this will be

worked out with the city, along with all other issues [surrounding]

redevelopment of the site.”

Attorneys for the Port Authority, Mr. Silverstein and Westfield

declined to comment on the suit, as did a Port Authority spokesman.

Mr. Doctoroff said he’s hoping the two sides will “reach out to

each other and establish a new relationship.”

That may be easier said than done. City officials-and not just

Mr. Giuliani-have long coveted the money that would come from taxing the World

Trade Center. Former City Council Speaker Peter Vallone advocated using the

money to establish an affordable housing trust. But the kitty is shrinking

fast. Mr. Giuliani’s June budget anticipated collecting $74 million in taxes on

the complex in 2002 and $108 million in 2003, according to the Independent

Budget Office. In December, that number was revised down to $28.7

million-essentially the amount of the PILOT-which the Port Authority agreed to

pay Dec. 31.

Next year, the Port Authority could try to reduce the payment to

next to nothing, since the complex itself is gone. “I’m not sure at this point”

how much the agency will pay, said David Rubenstein, deputy director of the

city’s Office of Management and Budget.

In addition, giving up a claim to the taxes could mean that the

city would miss out on a potential future windfall if Mr. Silverstein succeeds

in his efforts to build a new $7.2 billion office complex on the site.

Forsaking the claim could

once again put Mr. Bloomberg in the unenviable position of undoing one of Mr.

Giuliani’s policies. The new Mayor has already backed off from his

predecessor’s last-minute agreements to fund a pair of baseball stadiums for

the Mets and Yankees, citing the poor state of the city’s finances. He has also

announced his preference for some sort of commercial development for the

disaster site. Mr. Giuliani, by contrast, wants all the land reserved for a

memorial.

Perhaps most importantly, the

dispute belies public pronouncements of harmony among those parties-developers,

elected officials and, yes, even bureaucrats-who will determine how lower

Manhattan is redeveloped. It is the first, but surely not the last, rift among

them. For Mr. Bloomberg, who has little formal power in the process-Mr.

Giuliani appointed the city’s four representatives on the redevelopment

authority’s board-the lawsuit may be an early test of whether he can advocate

for the city while keeping his informal seat at the decision-making table.

The tax issue “is really part of the overall resolution and our

goal of redeveloping lower Manhattan,” Mr. Martini said.