Steve Cuozzo

Steve Cuozzo

Real Estate

Blocking 3 World Trade Center deal a bad idea

Downtown is Manhattan’s most dramatically resurgent commercial district, home to spectacular new construction and near-frenzied leasing as company after company relocates there from Midtown.

But the hard-earned, charging-rhino momentum could be cut down in its tracks by short-sighted resistance to restructuring a financing agreement between the Port Authority and Larry Silverstein for 3 World Trade Center. The planned 80-story skyscraper has risen to a 7-story “podium” height. Silverstein has already signed major global media company GroupM to a more than half-million-square-foot lease worth $800 million over 20 years.

But in a constricted lending market, he hasn’t yet secured a construction loan for the tower portion of the 2.5 million-square-foot, $2.8 billion project — so the PA and the developer are working out a deal that will make it easier for Silverstein to borrow while simultaneously bring the cash-strapped PA more revenue, both short- and long-term.

Hoping to block the deal — which is to be voted on by the PA board as early as Wednesday — PA commissioner Ken Lipper invoked the dreaded “G”-word.

That of course means “glut,” as in this statement he made to the New York Times on Monday:

“The idea of giving a $1.2 billion subsidy to a private developer at a time when the market downtown is in a state of glut defies the public interest and the economic interest.”

Lipper fears a restructured deal with Silverstein might jeopardize the agency’s credit rating. He’s a well-regarded real estate and public-sector professional. There’s nothing wrong with him watching out for the embattled PA’s bottom line.

But it’s impossible to see how the agency could benefit from turning back the clock at the WTC to the go-nowhere years after 9/11. The PA since then has invested a fortune in helping to create a new complex attuned to 21st Century business needs, a strategy that’s already drawn Condé Nast from uptown.

What signal would be sent now by an unfinished, empty, 7-story stump amidst nearly completed 1 and 4 WTC and the Santiago Calatrava-designed Transportation Hub?

PA vice-chairman Scott Rechler — like Lipper, an appointee of Gov. Andrew Cuomo — is also a distinguished real estate pro. And his position that the deal Silverstein wants is a boon to the PA seems more attuned to the realities of the WTC site.

What’s wrong with Lipper’s premise? Just about everything.

For starters, the “subsidy” Silverstein wants isn’t a dime out of the PA’s pocket. The PA has successfully restructured several major WTC deals in the past few years, including with site retail operator Westfield America, and the one it’s considering with Silverstein is as much in its own interests as were the others.

It would replace a previous $600 million “backstop” for Silverstein at 3 WTC — a combination of PA, city and state contributions toward construction and to subsidize interest and operating expenses — with a credit enhancement in the form of a $1.2 billion PA guarantee of the senior portion of a construction loan.

It would not be a gift, but a sensible trade-off for significant concessions by the developer. One concession is increasing the equity he must put in — to $450 million from $300 million.

Also, if the tower isn’t built to its full height, the agency stands to lose a fortune on ground rent to be paid in perpetuity. Sources said Silverstein currently pays only around $5 million a year, but the rent will double when construction begins and rise to $25 million when the project is completed.

Failure to build above the podium would also cost the PA $130.6 million it’s due to collect from retail mall operator Westfield America, which last year bought out the PA’s stake in all of the WTC’s store space. Westfield is obligated to pay “upon delivery” of 3 WTC’s 180,000 square feet of retail — but not if the tower above is in limbo.

As for Lipper’s “glut,” it’s a crock. The downtown leasing market enjoyed a banner 2013. Today’s reasonable 12.2 percent “availability” rate is due mainly to counting leases due to expire in the next 12 months. Actual vacancy is a mere 10.7 percent, according to CBRE.

In the past five years, former Midtown tenants have claimed 7 million square feet downtown. Of last year’s 6 million square feet of leasing, half was accounted for by relocations from uptown. Four new leases of more than 200,000 square feet each were signed in the last quarter of 2013 alone.

The GroupM deal’s the icing on the cake, but it would be a catastrophe for downtown, and for the whole WTC, if the firm can’t move to 3 WTC because it wasn’t built.

In a letter to PA executive director Pat Foye on Monday, Downtown Alliance chairman Robert Douglass and president Jessica Lappin warned that if GroupM can’t move to 3 WTC, “it could discourage potential tenants or brokers from investing in complex and sizable transactions at the site in the future.”

GroupM couldn’t simply switch to 1 WTC (owned by the PA and the Durst Organization) or to Silverstein’s 4 WTC. GroupM chose 3 WTC specifically for its enormous floor plates and infrastructure to support them. If it can’t go there, it will seek out another new tower built to its exacting specifications at Hudson Yards or Manhattan West uptown.

GroupM’s dependence on 3 WTC illustrates how the tower won’t compete with the other two at all, the Times’ assertion to the contrary. Already more than half-leased, 1 WTC will likely be full within a year. And while 4 WTC has yet to land a private-sector tenant, it surely will by the time 3 WTC can be completed nearly four years from now, in late 2017.

Cuomo’s office didn’t respond to a request for comment.

Reps for the PA and for Silverstein declined to comment.

Rechler and Lipper could not be reached.