The Silverstein group purchased the lease on the World Trade Center for
$3.2 billion. With two claims for the maximum amount of the policy,
the total potential payout is $7.1 billion, leaving a hefty windfall profit
As we write the insurance payments are not going to reach $7.1 billion. The
current situation is $4.6 billion at a maximum, although this may be
subject to change (up or down) as a result of court rulings.
And of course this isn't profit for Silverstein. The money is being
provided for him to rebuild the WTC complex, and it turns out that's quite
expensive ($6.3 billion in April 2006, see here).
$4.6 billion in insurance money,
$6.3 billion in costs? Not such a great deal, then. What’s more,
don’t imagine the insurance companies have handed over all of this
money. As we write (June 2006) there are other problems:
Only a month after developer
Larry Silverstein predicted it might happen, six World Trade Center
insurance companies are making noises about whether they're going to fork
over roughly $770 million in insurance proceeds meant to help rebuild the
On Friday, Mayor Michael Bloomberg gave the insurers a clear message – pay
“Nobody's going to walk away from billions of dollars, and they're not
going to get away with not paying,” said the mayor.
The companies are pointing to a tentative agreement reached between
Silverstein and the Port Authority in April divvying up ownership of the
site's planned buildings, including the Freedom Tower, which would go to
the Port Authority.
The insurers say since Silverstein would no longer own all the buildings at
the site, they might no longer be responsible for paying the claims he was
due as owner.
There have been other costs,
Silverstein Properties and the
Port Authority continue to be guided by a lease each signed six weeks
before the Sept. 11, 2001, attacks. The lease stipulates that should the
complex be destroyed, Silverstein must continue to pay the $120 million a
year rent in order to maintain the right to rebuild. Mr. Silverstein has
tried to persuade the Port Authority that his closely held company is
capable of rebuilding while meeting its massive rent payments. The rent is
currently being paid from insurance proceeds, draining the amount available
$120 million dollars a year? So
in the three years between the attacks and that article being written,
Silverstein has paid out over $360 million on rent alone (and a three-year
court battle implies substantial legal fees, too).
That was a 2004 article, but problems continued. Here’s part of a Time
article from May 2006:
The original World Trade Center,
completed in 1973, suffered under a similar real estate climate. "The
argument back then was that downtown was losing to midtown," says
Susan Fainstein, professor of urban planning at Columbia University.
"They thought by building this impressive complex, it would make
downtown a competitor. But so much space came up at once, and there just
wasn't the demand to fill it." New York State even moved some offices
there to help keep the rent rolls filled. The latest plans for ground zero
call for the same 10 million sq. ft. of office space as the original World
Trade Center, but the site's potential as a repeat target may repel
business. "People don't want to work in a building with a bull's-eye
on it," says Fainstein. "It doesn't matter if it's built like
Even if he does find the tenants, Silverstein's methodical plan for
development--one building at a time--has maddened his critics, convincing
them that he simply does not have the cash to build out the site. The April
agreement gives him about 60% of the $3.3 billion in public funding made
available from Liberty Bonds to finish the site. He also has a $4.6 billion
insurance settlement--it was ruled that the towers were hit by two separate
attacks--although that is under appeal.
There may be issues getting
tenants, then, but at least he has 60% of the liberty bonds, taking him up
to around $6.6 billion. Is that the profit? This article doesn’t
seem to think it’s a windfall, and others agree. Here’s a March 2006
analysis from the New York Post, for instance (this is a lengthy excerpt
but we’ve snipped more, so it’s best if you follow the link and read the
Nearly $3.4 billion in these
bonds remains, with the mayor and the governor each controlling half...
The mayor has put Silverstein in an impossible position. Legally, the
developer has the right to rebuild. But financially, he needs the Liberty
Bonds to do so...
It will cost $4.3 billion for Silverstein to rebuild the World Trade Center
and maintain his lease once insurance is exhausted. Like any developer,
Silverstein (and his potential lenders) must determine if the project is
worth more than its cost: Over the remainder of the lease, will the WTC
bring in enough in rents to repay this $4.3 billion investment and earn a
Part of the answer depends on future commercial rents Downtown. Bloomberg
says he believes rents won't rise above pre-9/11 levels (after inflation),
while Silverstein thinks they'll rise to today's Midtown levels.
Either way, Silverstein's looking at earning $300 million to $400 million
(in today's dollars) a year, after operating costs and taxes (but before
interest costs), for about 80 years - that is, from the time he gets all
five towers built to the time the lease ends.
Here is where Bloomberg's intransigence matters. If New York actually uses
its 9/11 rebuilding money at Ground Zero, and Silverstein gets all the
Liberty Bonds (with their low interest rate of about 6.5 percent), his
future income from the towers would be worth $5.7 billion to $7.5 billion
in today's dollars. At those values, the project is economical even if
rents never rise to Midtown levels. Lenders would invest in the project, so
it wouldn't run out of money, as Bloomberg claims it will.
But if Silverstein wins only half of the Liberty Bonds, the finances become
murky. The deal wouldn't be economical unless rents rose quickly, so it
might fall short of lenders.
With no Liberty Bonds, the WTC project is not economical unless rents rise
stratospherically, because interest costs would consume too much of the
project's future rents.
http://www.nypost.com/postopinion/opedcolumnists/61352.htm [broken, try...]
So this author says that
Silverstein requires $4.3 billion more than the insurance money will
provide, and so recommended he gets all the $3.4 billion Liberty
Bonds. Actually he only got 60%, which pushes the deal closer to the
“murky” side, as described here. Is this true? We don’t know:
there’s a shortage of clear figures showing exactly who has to spend
what. However, it does show that, even with the extra Government cash,
not everyone believes Silverstein’s made big money here.
And those who want to believe Silverstein still had foreknowledge of the
attacks, might want to consider this:
In its court papers, Swiss Re
shows how Silverstein first tried to buy just $1.5 billion in property
damage and business-interruption coverage. When his lenders objected, he
discussed buying a $5 billion policy. Ultimately, he settled on the $3.5
billion figure, which was less than the likely cost of rebuilding.
If this is true, then it appears
that Silverstein tried to purchase as little insurance as possible,
presumably to save money. He was talked up by his insurers, but still
chose a figure well short of what he could have obtained. And that’s
not the only problem. Pay particular attention to the last paragraph
we’re quoting here:
After trying unsuccessfully to
negotiate a lower bill, the biggest insurer of the World Trade Center went
public with a conflict yesterday. The insurer, Swiss Re, sued to limit how
much it will pay to half of what the buildings' managers are asking.
The real estate executive whose companies hold a 99-year lease on the
property, Larry A. Silverstein, has said he will seek $7 billion from
insurers. He argues that each of the two hijacked airliners that crashed
into the towers constituted a separate attack covered by $3.5 billion in
Swiss Re, the insurer liable for the largest share of the claims, formally
balked at that figure yesterday. It asked the Federal District Court in
Manhattan to determine that it and the other insurers would be liable for
only $3.5 billion because both crashes amounted to a single insurable
The dispute involves Mr. Silverstein, who took over management of the World
Trade Center just weeks before the attack; his lenders, who have committed
many billions of dollars more than Mr. Silverstein and now have an
investment collateralized by a set of buildings lying in rubble; the Port
Authority of New York and New Jersey, the owners of the land that issued
the lease, now suffering a disruption of income from the notes it holds from
Mr. Silverstein; and Swiss Re, the reinsurance company providing more than
a fifth of the overall insurance coverage for the trade center.
Complicating the picture is the fact that there was no insurance policy yet
issued on the properties when they were destroyed. Since the Port Authority
transferred management of the properties to a group of investors led by Mr.
Silverstein shortly before the attack, the insurance policy was under
negotiation at the time the buildings collapsed and final wording had not
been completed. The insurers have agreed to be bound by the ''binder''
agreements on the coverage although differences of opinion emerged
yesterday about their interpretation.
Not only had Silverstein insured
for too small an amount, he’d also failed to complete policy negotiations
before the attacks occurred. As a result he’s been involved with legal
fights with the insurers for years, and can only claim $4.6 billion instead
of the $7 billion (with even that subject to appeal as of January 2007) he
might have got if they’d all agreed to the same document. Does any of
this really sound like the actions of a man who knew what would happen on