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High-stakes talks reach climax on 9/11 anniversary.

Most anniversaries of 9/11 have come with their fair share of questions over progress rebuilding the World Trade Center, but this one, the eighth since the site's destruction, arrives with more than most.

In October, the Port Authority and WTC developer Larry Silverstein are set to enter arbitration in a dispute that has the potential to uproot the previously arranged development plan for the site.

As one would expect, the stakes are high for both sides.

For the Port Authority, as much as $3 billion is on the line, the amount of ground rent that Silverstein says he has paid the authority since he leased the site in 2001--just weeks before it was destroyed--and that he is seeking reimbursement for because of the authority's delays.

A ruling in the authority's favor could dash Silverstein's vision of erecting soaring skyscrapers at what is the heart of Lower Manhattan and one of the densest subway junctures in the city.

Worse yet for Silverstein, if he isn't able to secure a sizeable repayment and the economic downturn continues to bar his access to the private financing and the tenant leasing commitments he needs to build the towers on his own, his stake at the site could very well wilt on the vine.

Silverstein announced earlier this month that he would initiate arbitration with the Port Authority after he was unable to reach a deal for the authority to guarantee the financing for Tower 2, one of three office towers Silverstein is planning to build at the WTC site.

In that potential arrangement, which was discussed in a series of private talks hosted by Mayor Michael Bloomberg and attended by the site's various stakeholders, including the governors of both New York and New Jersey, Silverstein agreed to postpone work for the other large speculative skyscraper he wants to build, Tower 3, until the private lending markets rebound.

Work on Tower 4, the third Silverstein building, has already begun, its financing made possible by large leasing commitments by the Port Authority and New York City government tenants.

Because Silverstein's Tower 2, on the other hand, would be entirely speculative, at a time when most office tenants appear to be shedding, not taking space, authority officials repeatedly refused to put up the more than the billion dollars they were being asked to extend.

The talks organized by Bloomberg petered out by midsummer, much to the city's frustration.

A top official on the mayor's economic development team told Real Estate Weekly at the time that the authority was exaggerating the financial risk that the deal posed to its balance sheet and had been inflexible during the bargaining.

The authority's tight-fistedness perhaps comes into better focus however given the revenue declines it announced for the first half of the year, the result of falling tolls and PATH ridership due to the recession.

Also, costs have swelled for projects it is handling at the WTC site, including a PATH hub designed by the Spanish architect Santiago Calatrava, which many experts feel has risen from an original estimate of $2.5 billion to over $4 billion.

For his part, Silverstein says that if he wins the arbitration case, he will pour the proceeds into his buildings. The amount he is seeking, if granted in full, according to his representatives, would be enough to finance the construction of both Tower 2 and Tower 3.

According to an expert familiar with the site, one of the chief cruxes in Silverstein's arbitration case could be his ability to convince the three-member panel of the importance of building the two gargantuan towers at a time when many real estate experts believe the buildings can't be profitable in the near term and may very well work to depress the downtown office market by creating a glut of excess space.

One approach Silverstein may use to combat this, is to show that the billions in ground rent that he says he has handed over were made from insurance payments he won for the attacks of 9/11; money whose rightful purpose, all the stakeholders at the site had once agreed, was to rebuild what had been lost and restore Lower Manhattan's--and the site's--commercial vitality. Such a long-reaching goal should transcend the cyclic shifts of the economy, Silverstein would argue.

"I'm kind of torn," said an expert familiar with the site, summing up the conundrum. "I see a little bit on both sides. There is a moral obligation to make sure it gets built again. I mean the current plan doesn't even envision the same amount of space that was destroyed. But on the other hand, Silverstein shouldn't be asking for the authority or the governor to take on a speculative private venture that even the private sector isn't willing to do."

Others say that the case will swing on a strict interpretation of the WTC's master development agreement, which the Port Authority and Silverstein reached in 2006 to unlock a long period of inactivity on the site and chart what projects and infrastructure would be built and according to what deadlines.

"They're going to look at that document like it was the U.S. Constitution," one source said.

One construction executive who is familiar with arbitration and has worked at the WTC site but is not involved in the current case suggested that a decision among the arbitrators to look to the development agreement for what compensatory damages are due could prove problematic for Silverstein.

"The site delivery was tied to a $300,000 per day penalty," the executive said, referring to the daily compensation that Silverstein received from the authority for more than a year for its delays handing over various among the three development parcels for the office towers.

"The rest of the agreement, when they have to deliver specific infrastructure, I'm not sure that there is any penalty. That's pretty compelling to me at first blush."

Silverstein will of course argue that that penalty--which the authority stopped paying in late August after it finally turned over the last remaining among the parcels it was behind schedule in excavating--by no means represents the full compensation due.

Representing Silverstein in arbitration is Wachtell Lipton, the same high-powered firm that won him a tricky judgment in his case against the WTC insurers in the years after 9/11, a decision that found the event constituted not one attack as the insurers insisted, but two, triggering a double payout. The case netted Silverstein $2.2 billion, instead of $1.1 billion, on top of a prior $3.5 billion award he had secured.

According to the 2006 agreement, Silverstein and the Port Authority formed a deal to split those proceeds. The watershed of cash seemed to provide ample funding to rebuild the site.

In the time since, that has changed.

Last year, Gov. David Paterson appointed Chris Ward as the new executive director of the Port Authority and Ward soon announced that the site was marred with delays and over budget. Late last summer, Ward released a plan that revised the site's time frame and costs, while also including measures that the authority was taking to mitigate the problems.


Conspicuously, Ward's plan didn't include any relaxed deadlines for Silverstein's towers, an extension that would appear necessary. According to the 2006 agreement, Silverstein has to complete all three of his towers by 2014 or risk defaulting on his ground lease agreement.


Prominent among Silverstein's claims is that the Port Authority's delays preparing surrounding infrastructure tied to the towers' construction as well as handing over the towers' development parcels caused him to miss better economic times when financing could have been raised privately.

Ward has bitterly contended with that suggestion, stating not without some rationale, at a New York City Council meeting in recent weeks that "Silverstein didn't miss the market, the market missed Silverstein" and that even had the authority turned over the parcels for Tower 2 and Tower 3 on time late last year, the credit crisis would nonetheless have still been a crippling impediment.

But there may be a more persuasive argument along the same lines.

The 2006 maser development agreement was not made public, but it's possible that it envisioned or implied that Silverstein's ground rent, which he paid for years after the attacks when progress at the site was in a deep freeze, was just another way of divvying up the 9/11 insurance proceeds.

If that is the case, then Port Authority delays would seem to adjust the split in its own favor, simply because Silverstein would have to shell out more ground rent to the authority while he waits to build his towers than had been previously anticipated or arranged.

Silverstein's approach may really then be to try to win back just that portion of the ground rent, perhaps receive a pause in having to pay rent going forward for a set period and also extend his deadlines to erect the two buildings, the conditions he would appear to need in order to hold on and wait out a turnaround in the economy and a loosening of the credit markets so he can build his towers himself.
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Comment:High-stakes talks reach climax on 9/11 anniversary.
Author:Geiger, Daniel
Publication:Real Estate Weekly
Date:Sep 9, 2009
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