Silverstein Plan Ready for Site; Payout on Hold

Larry Silverstein has come so far, so fast.

When he vowed, in the immediate aftermath of Sept. 11, to begin

rebuilding the World Trade Center within a year, most thought it just a bit of

patriotic bluster. When he announced plans to break ground on a new building at

7 World Trade Center in June, Mayor Michael Bloomberg and some state officials

overseeing the re-development project begged him to slow down.

But Mr. Silverstein kept pushing, and now he stands of the verge

of victory. His plans for a taller, skinnier skyscraper, built with an $861

million payout on the plot where 7 World Trade once stood, have won the

assent-grudging, in some cases-of key decision-makers, including John

Whitehead, chairman of the Lower Manhattan Development Corporation.

“People seem to think that Larry has the insurance money, he has

the backing of the people who control the insurance money, and whether they

like it or not, he’s going to put the building up,” said real-estate attorney

Joshua Mermelstein.

Yet all may not be what it seems. Insurance industry insiders say

that the one crucial component Mr. Silverstein needs in order to rebuild-the

insurance proceeds-may not be a certainty. Mr. Silverstein’s insurance company,

Industrial Risk Insurers, refuses to say whether or when it will pay out. The

mysterious circumstances of the building’s fiery collapse late on the afternoon

of Sept. 11-investigators point to diesel fuel tanks, installed over Fire

Department objections to provide power for Mayor Rudolph Giuliani’s emergency

command center, as a probable culprit-have come under scrutiny, according to an

attorney close to the insurance situation. And insurance-law experts consider a

legal fight over the hundreds of millions a near inevitability.

“When you have large stakes like this, unless the policy is

crystal clear, you’re going to have litigation,” said Yale University lawn

professor George Priest.

The brewing dispute is significant because Mr. Silverstein has

portrayed the 7 World Trade Center redevelopment as a lay-up-a project that

could easily be completed while the developer fights a nasty lawsuit over more

than $6 billion in insurance on the rest of the complex.

A lawsuit over the 7 World Trade Center insurance could cost Mr.

Silverstein dearly, whether he wins or loses. Delay is his worst enemy.

Mr. Silverstein has been putting relentless pressure on state

officials to go along with his speeded-up timetable for redeveloping 7 World

Trade Center. Charles Gargano, the state’s economic-development czar, publicly

endorsed Mr. Silverstein’s plans in a February speech, saying that, among other

things, it was important to quickly replace an electrical substation located

under the building. But Mr. Gargano later told at least one associate that the

endorsement was meant to send another message to Mr. Silverstein: put up or

shut up.

A long stall in collecting the insurance money could undermine

Mr. Silverstein’s position-or even lead to his ouster from the project.

“If [the time table] slips a little bit, nobody will care,” said

one state official. “If we’re talking about it slipping a full calendar year

from this June, I think people may reassess.”

Seven World Trade Center was supposed to be the easy one. Several

factors convinced Mr. Silverstein to redevelop that building first. For one

thing, he built it, and had operated it for years before he acquired a lease on

the rest of the complex last July. It has a simpler ownership structure and a

separate mortgage, from the Blackstone Group. And no one died there on Sept.

11.

In recent weeks, state officials-who have sometimes been annoyed

by Mr. Silverstein’s aggressive attitude-finally capitulated to his calls to

begin rebuilding 7 World Trade even before a plan for the rest of the site is

completed. Mr. Silverstein has been showing city and state officials a revamped

design, which would allow him to meet community demands that the skyscraper not

cut off Greenwich Street. The sketches, done by architect David Childs of

Skidmore, Owings and Merrill, show a 700-foot-tall, 1.6-million-square-foot

building, a source close to the planning said. The slimmer design is actually

about 300,000 square feet smaller than the old building. Details of the design

were first reported in the Architectural

Record .

“It looks like he’ll be able to do that,” said Madelyn Wils,

chairwoman of Community Board 1 and a member of the board of the Lower

Manhattan Development Corporation.

Mr. Silverstein is reportedly negotiating to lower his yearly

lease payments to the Port Authority on the ground beneath the site because of

the reduced square footage. The Port Authority is widely expected to approve

the project soon.

About the only party that hasn’t gotten on board, it seems, is

Mr. Silverstein’s insurance company. In a recent interview, an I.R.I. spokesman

refused to say whether the company would pay the $861 million claim according

to Mr. Silverstein’s June timetable.

“The claim has been made,” said Dean Davison, a spokesman for

I.R.I. “It is being reviewed and processed.”

“I think we’re going through the normal [insurance] adjustment

process,” said Marc Wolinsky, an attorney for Mr. Silverstein.

An attorney close to the insurance situation, however, said that

I.R.I. was examining the collapse of the building, and particularly the diesel

tanks’ likely role in feeding the fire. “It’s being looked at,” he said.

A Fascinating Mystery

It’s not hard to understand why. The collapse of 7 World Trade

Center, though understandably overshadowed by the horrific falls of the Twin

Towers earlier in the day, has proven a fascinating mystery to the engineers

studying it, and has been the subject of a series of stories in The New York Times . No modern skyscraper

of its size had ever collapsed due to fire before Sept. 11. Investigators

studying the collapse say a number of diesel tanks located above ground level

are the prime suspects in feeding the out-of-control blaze. They were installed

in 1998 to provide emergency power to Mr. Giuliani’s much-maligned (and, as it

turned out, terribly located) emergency command center on the building’s 23rd

floor.

According to city fire codes, such tanks are supposed to be at or

below ground level and encased in concrete. The command center’s 6,000-gallon

tank was suspended between the first and second floors of the building. Other,

smaller tanks were located on the fifth, seventh and eighth floors. A Fire

Department memo obtained by The Times

warned of a possible “disaster” due to the placement of the command center

tank. But the Fire Department had limited leverage because the bunker was

located on property owned by the Port Authority, which claims that as an

independent government agency, it is not subject to city fire codes, a Fire

Department source said.

Mr. Silverstein operated the building at the time the tanks were

installed. Subsequently, in June 2000, he took out a new insurance policy on

the building with I.R.I. An insurance-company engineer toured the building

before the policy was completed, a Silverstein source said.

“I.R.I. knew about the generators and the arrangements in the

building before they underwrote the coverage,” the source said, adding that

“all the work was done in conformity with Port Authority code requirements.”

Such diesel tanks, he said, are commonplace in office buildings.

Mr. Davison declined to comment on whether I.R.I. was examining

the circumstances of the building’s fall. The company has hired Alan Miller, a

Boston insurance-law specialist, to handle the case, he said. Mr. Miller, who

is also representing an insurance company suing Mr. Silverstein in a case related

to the larger complex, likewise declined comment.

If the circumstances leading to the placement of the tanks are

“unheard of or extremely rare,” said New York University law professor Mark

Geistfeld, “it doesn’t bode well [for Mr.

Silverstein], since it sounds like the diesel fuel was the cause of the

collapse.”

Yet others said the legal question might boil down to “what did

the insurance company know, and when did it know it?”

“I think if the policy postdates the tanks, it could be tough on

the insurer,” Mr. Priest said.

But he and other legal experts agreed that the case doesn’t need

to be airtight for the insurance company to sue.

“If they’ve got $100 million

on the line,” Mr. Geistfeld said, “and there’s a 1 percent chance of winning,

it’s worth spending a million dollars on legal fees.”

And there’s a lot more than $100 million riding on this.