The redevelopment of the World Trade Center, probably New York City’s most high-profile development, has hardly been exempt from the effects of a lending market gone dry in this greatest of recessions. Yet to date, the official project timeline, where developer Larry Silverstein is contractually obligated to build three office towers with 7.5 million square feet in all, has remained unchanged, as he must deliver all three towers in five years.
That’s starting to change.
Mr. Silverstein is actively—and quietly, for now—trying to forge a new path to building the towers, and officials hope to reach an agreement in coming weeks. In recent months, Mr. Silverstein has engaged the Port Authority, owner of the trade center site, in renegotiations of a hard-fought master development agreement that was signed in 2006, complete with a detailed schedule of lease payments that escalate up from $78.7 million a year, and a provision that if he does not complete all three towers by 2014, he would default on his lease and the Port Authority could claim ownership of all three.
If history is any guide, a renegotiation could be a bruising public battle, as the 77-year-old developer faces off against a public sector with which he has had less than cordial relations.
According to multiple people familiar with discussions, Mr. Silverstein has approached officials with a plan for the Port Authority to back the financing of his towers, essentially mortgaging the agency’s assets to help build them. A financing drought has made it all but impossible for his Silverstein Properties to borrow money to build all three towers, two of which have no tenants. As a public agency with a constant revenue stream, the Port Authority, however, has far greater ability to borrow.
Such an act would transfer tremendous risk to the public sector—the three towers are expected to cost about $6 billion, with insurance money covering a portion—though would presumably allow the towers to be built nearer to schedule, which could be argued is a public good given the project’s high-profile and symbolic significance in Lower Manhattan.
The Port Authority is now discussing with Mr. Silverstein the concept to back loans for the towers, though not for all three, according to a government official familiar with discussions. And the timeline for coming up with a plan is an ambitious one: The Port Authority hopes to craft an agreement with Mr. Silverstein in the next few weeks, multiple people said. In that time frame, the Port Authority is expecting to hand over the excavated sites for Tower 2 and Tower 3, and Mr. Silverstein is obligated to start construction at that time, according to the 2006 agreement.
THUS FAR, the negotiations have been decidedly private, a stark contrast to the lease renegotiation of three years ago. Mayor Bloomberg and others then pushed for the Port Authority to take the Freedom Tower away from Mr. Silverstein. While Mr. Silverstein ultimately relented some control, the fight was bruising, fought in public and through the media, as Mr. Silverstein was denounced as a greedy landlord.
Mr. Silverstein responded at the time that his end goal was the same as the government’s: “to get these buildings built.”
Officials have been hoping to avoid the same sort of flare-up this time around.
“We’re continuing to discuss with SPI how to best meet a changed market while ensuring the WTC site is rebuilt,” a Port Authority spokesman, Steve Sigmund, said in a statement. “The conversations between the Port Authority and SPI will remain between the two negotiating parties.”
Approaching the renegotiations, good options are few for the Port Authority, a public agency funded mainly by bridge and tunnel tolls and airport landing fees.
At the heart of the issue is rent. The agency is expecting a constant flow of lease payments from Mr. Silverstein, along with money from retail that will be at the base of Mr. Silverstein’s towers. While the safest move from an office-space-market perspective would be to wait at least a few years to build anything, the Port Authority is counting on Mr. Silverstein’s $79 million a year in rent—rent that Mr. Silverstein would likely be loath to hand over without any income-producing towers.
The Port Authority has openly discussed slowing the construction of Mr. Silverstein’s towers, and suggested that the developer could build out the buildings’ retail-heavy bases. Mr. Silverstein has spoken against this plan, casting doubt on the ability to attract high-end retailers to locations that would be working construction sites when the towers are eventually built.
If the Port Authority were to back financing for some or all of Mr. Silverstein’s towers, it would effectively be borrowing hundreds of millions of new dollars, limiting its ability to borrow for its other projects, which include an $8.7 billion new rail tunnel under the Hudson River and improvements to area airports. And if Mr. Silverstein’s towers stay unfilled and the loan payments go unmet, it would be the Port Authority that would feel the great sting of default.
MR. SILVERSTEIN does have a few things going in his favor, at least compared to other developers that had planned massive office developments before the recession. He and the Port Authority together received some $4.55 billion in insurance money as a result of the Sept. 11 attacks, some of which would be put into the new towers. He has no debt or equity right now on the site, and the rent is being paid with that insurance money. Further, the Port Authority has faced a delay in delivering him a completely excavated site for Towers 2 and 3, and as a result has owed Mr. Silverstein about $90 million to date, more than abating his rent. He also can sell $2.6 billion in tax-exempt Liberty Bonds, though he would have to find a lender for that money.
Still, even with the insurance money and government commitments to take two-thirds of Tower 4’s office space, the general consensus is that he would be unable to find banks willing to lend enough to build all three towers, particularly—and this is a case he is sure to make—because the Port Authority is woefully behind schedule in building some of the surrounding infrastructure, including a PATH station that is not slated for completion until at least 2013, up from 2009. An incomplete site makes the task to find a tenant that much harder.
Whether the Port Authority and Mr. Silverstein can keep things cordial as they try to hash out an agreement is an open question, as he has a track record of sparring with the agency, regardless of who is in charge there. Just this past January, testifying at a State Assembly hearing, Mr. Silverstein accused executive director Chris Ward of failing to live up to his rhetoric about openness with the project, speaking minutes after Mr. Ward spoke of frequent “stakeholder” meetings.
Mr. Ward’s “description of regularly held meetings did not jive with my impression of what was in fact happening,” Mr. Silverstein said at the hearing.
With regard to negotiations, Mr. Silverstein’s tenacity is legend. At his 7 World Trade Center, at least two major lease negotiations have collapsed—with the Chinese firm Beijing Vantone and the law firm Cleary Gottlieb—as Mr. Silverstein stood his ground on financial points, according to people involved. The tactic proved relatively effective, at least in the boom times: He’s subsequently won rents once unfathomable in much of that building, which has proved a major financial boon for downtown even with some 300,000 square feet still unfilled.
Of course, stakes are quite a bit higher in a renegotiation of the World Trade Center agreement than they are for a lease, particularly given the numerous actors involved, and the political attention paid to the site. Both Governor David Paterson and Governor Jon Corzine oversee the Port Authority, and major changes would need to be approved by Mayor Bloomberg, who is running for reelection and has had strong opinions in the past.