The Cold War Resumes

Larry Silverstein just issued an angry retort to the city’s analysis on why he should be bought out of the World Trade Center deal. Choice line: “What the city (and the Port Authority) propose is a Soviet-style confiscation” (italics his).

Both the city and Silverstein now seem to be saying that the Libeskind site plan is bad for business. Silverstein calls the best two buildings on the site Towers 3 and 4, which are right over the PATH terminal. Unfortunately, Towers 3 and 4 are smaller than the Freedom Tower and Tower 2, and the building plan called for them to be built later.

Meanwhile, the city’s Power Point presentation states that there are “emotional issues with Freedom Tower” as an explanation for “questionable occupancy demand.” Finally, someone says this out loud.

The full release after the jump.

Matthew Schuerman


NEW YORK, February 9, 2006 – Silverstein Properties wishes to set the record straight on what it considers to be a series of misleading and at times outright wrong statements from City officials and offices over the past weeks, including the NYC Economic Development Corporation’s “summary of financial analysis.”

While directed at Silverstein Properties, these unfortunate statements hurt all of Downtown. They obscure the significant progress that has been made in this, the largest and most complicated building project in our Nation’s history. They add to a general sense of confusion and lack of vision for Downtown that hurts residents and small businesses, and scares away prospective tenants.

Silverstein Properties believes in Downtown as a world-class business, residential and retail district. Silverstein Properties believes in a 24/7 mixed-use community with – at its heart – a magnificent, rebuilt World Trade Center. While it is Silverstein Properties’ desire to simply get on with the rebuilding as soon as possible, these destructive charges must be addressed.

City Claim: Silverstein will run out of money.

Reality: The City’s analysis assumes the City and the State will not provide any Liberty Bonds to the World Trade Center rebuilding – even though the U.S. Congress provided these low-interest, tax-exempt bonds for the express purpose of restoring what New York City lost in the terrorist attacks, and even though Governor Pataki has already committed $1.7 billion of Liberty Bonds to the WTC project. The City has authorized Liberty Bonds for office towers in Midtown, luxury apartment buildings during a residential boom, and even a power plant in Queens. If the City refuses to release the same financing for the office towers destroyed on 9/11, it is the City – not Silverstein – that is preventing the project from being completed.

City Claim: The Downtown market will not support the rents necessary.

Reality: The City takes a grimly negative view of Downtown’s future by expecting new state-of-the-art WTC buildings will command rents of only $35-$40 per square foot. This assumes the business environment will actually deteriorate over the next few years despite unprecedented infusions of private capital and federal dollars for Downtown. Further, the City’s projected rent levels are at least 30 percent below the initial leases secured at 7 World Trade Center, and lower than recent deals at 20-year old buildings across West Street.

City Claim: After a hypothetical default, Silverstein will walk away with $500 Million+.

Reality: The claimed windfall is nonexistent. Three-quarters of the so-called “profits” projected in the City analysis are illusory – not cash in Mr. Silverstein’s pocket, but the hypothetical “value” of the buildings when they are leased. Under the City’s default scenario, however, the “value” of the Freedom Tower and the second tower would actually be zero because the rental market would have to be as low as the City’s pessimistic projections. If the value of the first two buildings has been created, it means that the Downtown office market is solid and buildings 3 and 4 are financable, as Silverstein predicts. In this scenario, Silverstein would have no reason to walk away.

Further, Mr. Silverstein demonstrated his financial commitment by long ago agreeing to allocate business interruption insurance (on top of property insurance) to the rebuilding effort. He also proposed to devote all net cash flow from completed buildings into the construction of later buildings. Unlike the City and the Port Authority, Mr. Silverstein is treating the World Trade Center as a single, continuous project, not five separate buildings.

City Claim: In 2001, Silverstein Opted to Underinsure the Project.

Reality: Silverstein Properties took out the largest amount of insurance ever obtained for any single project when it leased the World Trade Center in 2001. That package was more than twice as much as the Port Authority maintained for all of its properties combined, including the entire WTC, three airports, the PATH and all of its bridges and tunnels. No one, not the insurance industry, not government and not law enforcement, foresaw the unprecedented scale of damage on 9/11.

City Claim: WTC Build-out will be accelerated if Silverstein yields towers three and four.

Reality: The notion that increased government involvement will speed things up does not pass the smell test. Mr. Silverstein has completed the one building that required no government approvals (7 World Trade Center) prior to being able to start construction on those buildings that do require City and State action. In addition, construction of towers 3 and 4 cannot begin until the government (specifically, the Port Authority) completes the excavation and construction of the new slurry wall (“bathtub”). Government schedules call for completion in mid-2008, and Mr. Silverstein has vowed to begin construction immediately thereafter. Further, any other developer who came in after Silverstein would likely proceed more slowly than Silverstein. Without insurance proceeds, that developer would have to borrow more money and raise equity that would require a substantial return on investment. Such a developer is unlikely to start construction before tenant commitments are in hand, which would further delay build-out.

City Claim: $66 per square foot rent is required for the project to break even.

Reality: Silverstein’s analysis, conducted with experts at Morgan Stanley, assumes an average rent of roughly $50 per square foot (in 2006 dollars) in order to achieve full build-out on schedule. The City inaccurately assumes that the first two buildings are responsible for paying the entire ground rent on the full 10 million square feet. If ground rent payable to the Port Authority is divided among the buildings on a pro-rata per square foot basis, the break-even rent would drop by at least $16 per sq. ft. Once this inaccuracy in the analysis is corrected, the total revised break-even (even using the City’s other pessimistic assumptions) would be $50 per square foot, which is lower than the initial leases on 7 World Trade Center. This suggests the probability of success is much higher than the City is showing.

City Claim: The Port Authority’s proposed “deal” is fair to – and will benefit – the public and Larry Silverstein.

Reality: There is nothing “fair” about taking the two best sites and giving one to government and the other to an outside developer. What the City (and the Port Authority) propose is a

Soviet-style confiscation. Larry Silverstein has cooperated in a four-year process of planning and re-planning the site, though it delayed rebuilding. He even re-designed the Freedom Tower when government miscommunication led to a change in the security standard. And, most important, he has continued to pay approximately $10 million in rent to the Port Authority every month since 9/11, even though the buildings that he leased are gone. The Cold War Resumes