What’s the Public Benefit of Silverstein’s Trade Center Towers?

worldtc nee  collage Whats the Public Benefit of Silversteins Trade Center Towers?

Once again, the rebuilding of the World Trade Center is caught in a public fight. 

Developer Larry Silverstein and the Port Authority are sparring over a renegotiation of a development agreement for the site, as the economic crisis and lending drought have rendered impossible the existing timetable, which called for the three towers to be privately financed and built by 2014. The debate has flared in public and through the media, and if the Port Authority (which owns the site) and Mr. Silverstein (who plans to develop all three towers) fail to find common ground, the entire site could face further delays.

But beyond the specific questions the two sides are tussling over (one or two towers now; should there be a development fee; how much financing will the Port Authority put up), there is a more basic question at the heart of the dispute: Is the near-term completion of the three skyscrapers a public good? And if the answer is yes, just how much is it worth?

Back when the initial rebuilding agreement was crafted in the aftermath of Sept. 11, 2001, and again when it was renegotiated in 2006, the key implicit assumption behind it was a very robust economy. While the Port Authority would build the Freedom Tower, the privately built Towers 2, 3 and 4 would either need anchor tenants or banks willing to finance speculative towers if they were to get built on time, a difficult thing to come by in bad economic times.

No anchor tenants or banks materialized, keeping the buildings unbuilt under the current plans.

Without intervention of some sort by the public sector, or some other party willing to put up billions, the three towers will stay on paper for some time to come. For policymakers at the Port Authority and related arms of government, whether or not that intervention–in the form of backing the towers' financing or otherwise subsidizing them–is justified is a question of how much public benefit there is from building them.

An argument in favor of public financing (and one Mr. Silverstein's camp has been making, to a certain degree) could go this way: a rebuilt World Trade Center is important as a symbol, not just in terms of recovering from a terrorist attack that happened seven and a half years ago, but in terms of demonstrating Lower Manhattan's long-term resilance as a business district. For years, under multiple governors, state officials pledged to the public that the entire site would be completed in coming years, and the three private towers were a central part of that. 

And from a financial point of view, it could be argued that lenders have tightened up to the point of irrationality, that a high demand for office space is bound to come back; perhaps not in the next year or two, but certainly by 2013. Therefore, it would not only be prudent but a good investment for the public sector (in this case, the Port Authority) to invest in the towers. Silverstein Properties is pushing this line, saying that the Port Authority's lack of willingness to finance the towers suggests great pessimism about the city's future.

The argument against public financing is generally a financial one, going something like this: The government built the original World Trade Center towers, with their 7 million-plus square feet, well before there was a demand for all that space downtown, needing to subsidize the towers for decades. To build all three towers now–when the New York City economy doesn't appear to have yet hit bottom, and talk of a financial services rebound seems incredibly premature–would be to repeat the mistakes of the past.

If the towers fail to be successful, the Port Authority would be on the hook for the billions in financing (all three buildings are expected to cost somewhere around $6 billion total), putting a huge drain on public finances, and a drain on the broader real estate market. And given the uncertainty in the market and the extraordinary trepidation on the part of banks to lend for even projects that have tenants, why would it make sense to put up speculative buildings with over 7 million square feet of space? Is the symbolism of completion and a bet on the future really worth multiple billions of dollars in public money, particularly when the most symbolic tower on the site, the Freedom Tower, is already going up?

And at least given the market today, the economic future doesn't look great: A Port Authorit-commissioned study (done in the heat of negotiations, for the purpose of negotiations, it should be noted), projected that if just two towers were built now, the larger of the two would not be fully leased until 2025, after which it would make sense to build the third.

Further, whatever public benefit there is would have to be weighed against the size of the Port Authority's budget (it has a 10-year capital plan of about $30 billion) and the other priorities within it. If it were to finance multiple towers, it would have to cut out other programs. Is a rebuilt World Trade Center worth more than a new rail tunnel under the Hudson River, for instance? And upgrades to the area's airports?

The reality lies somewhere in the middle, though just where, exactly, is the subject of much debate (and perhaps litigation, if talks don't go well). Mr. Silverstein's proposal to the Port Authority called for the agency to finance two of his three buildings, leaving the third to sit idle. And the Port Authority seems to be saying that there is some public benefit worth funding, as it proposed to finance one building, Tower 4 (though the agency is a tenant in that building, and would take in money from the rent). But for the Port Authority, the jump to a second tower–a larger tower with 2.8 million square feet and no tenants at all–would likely cost more than double what it is proposing in its plan, and thus the agency seems to be drawing a hard line at financing one tower.