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Commentary By Nicole Gelinas

WTC Rebuilding Wrongs: Mike's Guess VS. Larry's

Cities, Public Safety Policing, Crime Control

THE future of Ground Zero comes down to this: Does the out look for Lower Manhattan as a major business hub over the rest of this century justify a $4 billion investment today? Developer Larry Silverstein says it does; Mayor Bloomberg says it doesn't.

Who's right - and does it matter?

First off, Bloomberg has no direct control over the World Trade Center site, which is owned by the Port Authority of New York and New Jersey and leased by Silverstein's company. But the mayor's opinion does matter. Why? Bloomberg is withholding $1.7 billion in tax-exempt Liberty Bonds authorized by Congress for reconstruction until he's happy with the plan for Ground Zero. And the Port Authority has followed the mayor by itself signaling a desire to revisit its deal with Silverstein. Gov. Pataki has said that Silverstein and the Port Authority must resolve their differences by today - or he'll withhold the other $1.7 billion in these cheap bonds.

Silverstein's plan for what he'd do with the bond money is straightforward: He says he wants to use those funds, along with his own insurance money from the 9/11 attack, to rebuild 10 million square feet of office space in four new towers at Ground Zero - thereby fulfilling the obligations of the 99-year lease he signed with the Port Authority six weeks before 9/11.

The mayor's objection is equally straightforward: Bloomberg says he's studied the economics of Silverstein's blueprint, and determined that the plan is impossible.

Bloomberg claims that it is a financial certainty that Silverstein will run out of money after building just two towers, and walk away from the rest of the project - irrevocably harming Downtown's recovery. Since this walkout is inevitable, argues the mayor, the city must use the one tool at its disposal (its control over half the Liberty Bonds) to try to force the Port Authority and Silverstein to restructure their lease now to prevent that from happening.

The mayor has released cash-flow charts and graphs to support his claim; Silverstein disputes that analysis. But the math is really all smoke and mirrors. The dispute comes down to the same question that must be answered in any real-estate venture, or any investment, for that matter: How much will the project cost, and is it worth that much?

Bloomberg and Silverstein agree it will cost a developer more than $7 billion to construct four new towers at Ground Zero while keeping up with the current terms of the Port Authority lease. (And the cost rises every day that we sit around arguing, as construction costs outpace inflation.)

But - and an important but - Silverstein has at least $3 billion in insurance money at his disposal to build new towers: free money. Thus, it will cost $4 billion for Silverstein - no one else - to build and rent out four new office towers at Ground Zero while maintaining his lease.

So the difference of opinion comes down to this: Does the outlook for commercial real-estate Downtown justify this $4 billion investment today? Silverstein says yes. The mayor says no.

Silverstein is unabashedly bullish; he believes that, once the project is complete, he'll be able to command the robust prices now seen in Midtown (adjusted for inflation) at Ground Zero. If he's right, his buildings will recoup the $4 billion investment.

Bloomberg, conversely, believes that Downtown prices won't ever climb above their pre-9/11 level. Under his implicit projections, new office towers at Ground Zero will never be worth the huge investment needed today.

No one doubts that Silverstein is optimistic. Today, Downtown rents are about one-third less than Midtown rents. But he's not insane. As a new report by the city's Independent Budget Office notes, "there are reasons to be optimistic concerning the downtown office market."

Why? Much of the new WTC will be complete just when a massive new transit hub is about to open up Downtown; the state and the feds devoted billions to that hub to make Downtown competitive. Plus, Silverstein and his tenants will benefit from tax subsidies in place to help Lower Manhattan recover from 9/11.

Silverstein also assumes, and not without reason, that New York in general will continue to grow over the span of his long-term lease, adding new people who will work at new jobs in new office towers.

No one can guarantee that Silverstein is right, but his assumptions don't strain credulity. Like any developer, he's building today based on his own assessment of the market tomorrow. That's how private developers and their investment partners make or lose bundles of cash every single day.

If New York's economy does grow, the city will be thankful that Silverstein was optimistic: In the late '90s, a dearth of office space helped push some new area jobs out of the city.

Moreover, even if Bloomberg is right about Ground Zero, the suggested solutions are no better than the problem.

One "solution" is to have the PA break its lease with Silverstein, and give some space at Ground Zero to another developer to build apartments and/or a hotel.

It's not likely that such a venture would be based on market fundamentals, as affordable-housing proponents would clamor for a piece of this project. But even if the project were to rent or sell at 100 percent market rates, it is just as speculative for Bloomberg to project residential real-estate prices five years out as it is for him to project commercial real-estate prices.

Some PA officials bandy a different "answer" to Bloomberg's "problem": Have the PA take back the rights to two towers, to build one itself and award one to another developer. But if it's uneconomical for Silverstein to build those towers, it will be uneconomical for any developer, including the PA, to do so.

Further, if the PA, under pressure from Bloomberg, were to structure a more generous lease with a new developer for part of Ground Zero - which it would have to do, or nobody would bite - then it would likely have to do the same for Silverstein. This would throw hundreds of millions of dollars of the PA's own revenues into doubt - to solve a problem whose existence can't even be proven for another half-decade.