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Next Challenge in Lower Manhattan Is Rebuilding

Questions of who gets what from whom could draw out the WTC's redevelopment.

Hope endures, however slim, that rescue workers in Lower Manhattan will pull someone out of the World Trade Center rubble alive. Beyond those hopes, however, are hard questions about what to rebuild at the site and how to pay for it.

Larry Silverstein, president of Silverstein Properties, which recently purchased the $3.2 billion leasing rights to the World Trade Center from the Port Authority, wants to build a four-building complex and a memorial to the victims of the tragedy on the site. And the mayoral candidates have begun to voice their own opinions about what should replace the twin towers. Some say something bigger and better must follow, to show the city is unbowed by the terrorists.

It will take time to sort out, particularly with Silverstein, the city government and the insurance companies already in financial straits. Some worry that wrangling over insurance claims, funding and rebuilding rights could lead to a protracted legal battle. But it is possible to piece together the outline of how the reconstruction effort might go.

Sources say Silverstein and his partners may be able to claim up to $3 billion in damages from property insurance, although it depends on whether the two jet plane crashes can be qualified as separate events. And though insurance companies have said repeatedly in recent days that they won't exercise war exclusions for the terrorist attacks, insurance experts say many of the estimated $40 billion or more in claims will ultimately fall to reinsurers, who might be less generous.

"A lot of how these claims will be handled will probably be dictated by reinsurance companies, which are mostly in Europe," said Richard Lewis, a member of the Port Authorities Insurance Industry Group. "With claims of up to $3 billion out there, few companies are going to want to put that much on the line. Regardless of what domestic insurers say, they are under less public pressure and may try to use the war exclusion."

Meanwhile, around $800 million of Silverstein's insurance money will have to be funneled to the group's lenders, GMAC Commercial Mortgage, a unit of

General Motors

, according to Alan Pomerantz, real estate lawyer for Weil Gotshal Manges. "Even though the ground lease doesn't terminate, the fact that the buildings have burned down makes the mortgage due," he said.

If Silverstein and his partners do get $3 billion in property insurance, they would have $2.2 billion left over to rebuild. Considering that the cost of building in Manhattan is around $300-$400 a square foot, he and his partners might have the money to build a complex about half the size of the World Trade Center, which totaled near 12 million square feet.

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But even $2.2 billion may be an optimistic estimate. Silverstein and the Port Authority will likely face lawsuits from businesses in surrounding buildings and from businesses that were housed in the trade center, which could cut further into insurance proceeds.

Pressed for Time

In the meantime, the City of New York is losing $100 million in tax revenues on the office space each year, and Silverstein and his partners have to find a way to come up with $116 million a year in rent payments.

Whether or not Silverstein and Westfield American, which operated the retail space below the towers, are allowed to rebuild, depends in large part on whether those rent payments can be made. Neither Silverstein nor the Port Authority returned calls requesting comment. Under their 99-year leasehold agreement, Silverstein's partnership owes the Port Authority $116 million a year for the first five years and $138 million a year for the next five.

While the annual rent payments may be covered by "rent interruption" insurance, this kind of policy tends to be short term and could terminate long before Silverstein begins collecting rent again. Also, a smaller building complex wouldn't bring in the same kind of revenue.

If Silverstein defaults on rent, the Port Authority will probably take control of the building. That would give city government full control over what gets built on the site. But the government is bound to have significant control anyway, particularly if it becomes involved in financing.

"From a pure legal documentation point of a view they have no control," says Pomerantz. "But from a practical standpoint, that magnitude of a project needs government cooperation. The subways go through there. It's a public space."

Whether the federal government or the City of New York provide financial support for a rebuilding effort and in what way remains unclear. Some $20 billion has already been earmarked for disaster recovery in New York City, but city government sources say they are still a long way from determining who gets what.

Pomerantz suggested tax deferrals, tax exempt bonds, subsidies or loan guarantees might be extended to the builders. "It's basically one instrument versus another. Loan guarantees provide good credit at a cheaper interest right. It's all about sourcing money at a cheaper rate," Pomerantz added. The government might also pressure the banks to offer builders cheap loans.

Limited Precedent

Past disasters provide few clues to how the government's involvement will work. The biggest dollar comparisons are Hurricane Andrew, which cost $19.2 billion, and the Los Angeles earthquake of 1994, in which damages rose to $16.3 billion. But neither of those events affected a single property. The damages were more diffuse and the disputes less public.

In any case, it will be in the interest of the city and its next mayor to get any conflict over the site resolved quickly and quietly. "Whoever is getting elected runs again in four years," says Jeff Brotman, real estate lawyer and professor of accounting at University of Pennsylvania Law School. "The race starts in three. That's probably about the timeline in which they will have to show some progress. The new mayor will be judged in no small measure by how he deals with the aftermath of this tragedy."