Jury Rules WTC Destruction Was Two Separate Events
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NEW YORK — A federal jury ruled Monday that the Sept. 11 attack on the World Trade Center was two occurrences for insurance purposes, meaning leaseholder Larry Silverstein stands to collect up to $2.2 billion from nine insurers.
The verdict in U.S. District Court in Manhattan was the latest twist in Mr. Silverstein's efforts to turn his $3.5 billion insurance policy on the trade center complex into a $7 billion payout.
The verdict Monday in the second trial to address the issue applied to nine insurers who covered the trade center for a total of $1.1 billion. Mr. Silverstein lost at the first trial earlier this year, which applied to 13 insurers.
The jury was asked to rule specifically whether the terrorism could be considered one or two events for nine of the trade center's 24 insurance companies. Judge Michael Mukasey thanked the jury for reaching a verdict on a complicated case.
Regardless of the insurance payout, Mr. Silverstein and redevelopment officials have promised to rebuild the trade center complex in the next decade, including 10 million square feet of office space, a memorial and cultural buildings.
The insurance companies involved in the case were: Travelers Indemnity Co., Industrial Risk Insurers, Royal Indemnity Co., Allianz Insurance Co., Tokio Marine and Fire Insurance Co., Twin City Fire Insurance Co., Tig Insurance Co., Westfield WTC LLC and Zurich American Insurance Co.
In her closing argument, lawyer Carolyn H. Williams argued on behalf of the companies that the hijacked planes were like guided missiles and that the insurance payout should not depend on whether terrorists used "one or two or 10 or 100 weapons."
On behalf of Mr. Silverstein, attorney Bernard Nussbaum said there was precedent in the insurance industry to find the terrorism was two events. A California case concluded that four separate insurance events occurred when an arsonist set four separate fires, including two six minutes apart in courthouses 200 yards apart.
Uncertainties Soar At Ground Zero
Freedom Tower Is Under Way, But Financing Plan Is Lacking For Rebuilding of Entire Site
ALEX FRANGOS / Wall Street Journal 20oct04
NEW YORK — Last July 4, at Ground Zero, the cornerstone of the Freedom Tower was laid. Now, construction contracts are being handed out, and the earth is starting to move. When completed, the office skyscraper is planned to rise 1,776 feet into the air, which would make it the tallest building in the Western Hemisphere.
But whether the grand scheme for the complex, which is meant to include four other office towers, will be fully realized is uncertain. A plan to finance the project — estimated to cost more than $9 billion — is caught up in deep disagreements between Larry A. Silverstein, president of Silverstein Properties Inc., which is the developer of the office buildings, and the project's public owner, the Port Authority of New York and New Jersey.
"We're about to invest several billion dollars in a real-estate project, and we don't have a commitment at all from the developer about how we are going to be treated," says a Port Authority official, who spoke on condition of anonymity, saying he feared political retribution. The agency, which runs airports, tunnels, bridges and commercial ports, counts on the rent from the World Trade Center for about 5% of its $2 billion-plus yearly operating budget.
Mr. Silverstein refused repeated requests for comment.
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 for rebuilding.
In the fall of 2001, Mr. Silverstein sued his insurers arguing that the attacks on the two towers constituted two events, requiring double payouts on the $3.5 billion policy. The first phase of the case, ended in May, found that the majority of the insurers who share the policy are excluded from that line of argument and owe a single payment. That decision, now being appealed, left a $6 billion gap between the cost of the entire project and the cash available.
A second phase, now under way in New York federal court, involves nine insurers that were found to be open to the two-event interpretation. The jury will determine if the attacks constituted two insurable events. If the jury rules in Mr. Silverstein's favor, those nine insurers could end up paying twice the $1.1 billion in coverage they represent.
Pending the continuing litigation, between $3.6 billion and $4.6 billion will have been paid out by the insurers. But around $1.5 billion of that insurance money already has been spent on paying off creditors, legal fees in the insurance case, and the Port Authority's rent.
If Silverstein Properties fails to come up with the financing, the Port Authority could force a negotiated settlement that would require Silverstein to return some of the development rights for the remaining office towers to the agency in return for a reduction in what it pays the Port Authority each year in rent. The Port Authority could then resell those rights to other developers. Even if that happens, the construction of the towers would depend on the developers' ability to attract paying tenants, generally a precondition to secure commercial financing.
In July, Silverstein and its advisers at Morgan Stanley presented a business plan to the Port Authority on how it would finance the buildings while paying rent. The plan involves using the remaining insurance money to build the Freedom Tower, filling it with paying tenants, then borrowing against that asset to erect the next tower. Silverstein would repeat that arrangement until all five towers are built. Those at the Port Authority who have seen the plan say Silverstein uses aggressive assumptions about how quickly it can attract tenants and how much it will be able to charge.
Some Port Authority officials dispute whether Silverstein can afford to erect the Freedom Tower and the four other planned office buildings while continuing to pay the bi-state agency the rent it owes according to his July 2001 lease. That lease envisions a rent increase in August 2006 to $138 million a year.
The Port Authority and Silverstein are also battling over who will pay the $1 billion to $2 billion to construct the site's underground backbone, including delivery ramps, walkways and mechanical systems that will support both the office buildings and the site's cultural, memorial and transit functions. Those familiar with the negotiations say the sides are far from an agreement.
It's unclear when a deal could be hatched, but lack of an agreement isn't slowing the first phase of construction. There is enough insurance money and federal aid to build the first elements, including the Freedom Tower and the transit hub. But once that money is spent, the rest of the office towers' development will depend on Silverstein being able to attract tenants.
The first World Trade Center, completed in 1972, dumped millions of empty square feet of office space on a stagnant economy that couldn't absorb it. State agencies took much of the space at artificially low rents, creating a subsidy that hurt competing buildings. The result was a real-estate recession in downtown Manhattan and a financial drain on the Port Authority. It took almost three decades before the towers held enough market-rate tenants to make the complex a cash cow.
Today, some worry the current rebuilding plan will run into similar problems. "I'm puzzled about whether the Freedom Tower makes sense architecturally" to attract office tenants, says Richard Ravitch, a former chairman of the Metropolitan Transportation Authority and elder statesman of New York economic development, echoing sentiments of numerous real-estate experts, planners and people familiar with the scheme. "If rebuilding the economy of downtown is a high priority, then I don't think we are making all the intermediate decisions that are going to produce that result."
As a sign of the difficult task the development faces, at least one major tenant has passed on moving there. Goldman Sachs Group Inc. is building its own skyscraper — similarly sized in terms of square footage to the Freedom Tower — directly across the street instead. It is slated to open around the same time as the Freedom Tower, in 2009.
Goldman's reasons for not taking space in the Freedom Tower were complex, says a person familiar with the securities firm's thinking. It didn't want to subject employees to working at the site of two terrorist attacks, and the company avoids landmark addresses. Officials involved in wooing Goldman say the Freedom Tower's design kept Goldman away. Because it has a narrow base, a product of its highly symbolic architecture, it doesn't accommodate Goldman's need for wide-open trading floors.
New York Gov. George E. Pataki, who along with the governor of New Jersey selects the Port Authority's 12-member board, has strongly endorsed building the Freedom Tower and Silverstein's continuing role. Rebuilding officials and downtown Manhattan boosters point to the billions of dollars being spent to upgrade downtown's transit facilities as part of the overall plan.
"It's got to be an economic success story, that's what it's all about at the end of the day," says Kevin Rampe, president of the Lower Manhattan Development Corp., a city-state agency guiding the recovery. "Vacant buildings are not a community."
But there is no denying that the Freedom Tower is going up when acres of office space are set to flood the sluggish downtown market. Silverstein has failed to attract tenants to 7 World Trade Center, a 1.7-million-square-foot office building adjacent to the Freedom Tower plot that is slated to open in late 2005. Together, 7 World Trade Center and the Freedom Tower will give Mr. Silverstein's company 4.3 million square feet he needs to rent out — about as much space as was in one of the Twin Towers.
Profound shifts in the real-estate market also suggest that the trade center faces an uphill battle. Rae Rosen, senior economist at the Federal Reserve Bank of New York, says she doesn't see sufficient demand in financial-services job growth in the near term to fill the 30 million square feet of proposed office development in the region, including the 10 million at the trade center site. One issue she cites: "Major financial employers downtown tell us 'We can't afford to resist outsourcing of computer-programming jobs anymore. For every four jobs we add, we may do two here and two there. It's a ratio.'"
Another obstacle: The Freedom Tower's design, unlike that of most tall buildings, hasn't been guided by the regular rules of real-estate finance, but instead by the perceived need for a defiant symbol.
"Skyscrapers in general are all about economics," says Carol Willis, the founder of the Skyscraper Museum in New York. "This is different. It's not that economics haven't played any role at all. But this building transcends the simple equation — form follows finance." she says, though she remains optimistic that the building will be a success in the long run.
Freedom Tower's planned location on the site — farthest from subways and the heart of Wall Street — exemplifies how finances have taken a back seat. Architect Daniel Libeskind's plan, selected in February 2003, uses symbolic rationales to locate the tower, rather than real-estate common sense. The tower is next to the western foundation wall, which survived the attacks, to symbolize America's resolve. And its placement in relation to the four shorter buildings, creating a spiral, also holds meaning, reflecting the flowing robes of the nearby Statue of Liberty.
Silverstein's architects, Skidmore Owings & Merrill, at one point tried to move the tower to a more tenant-friendly location near the subways, but were rebuffed by Mr. Libeskind and others who supported his plan.
Some at the Port Authority have resigned themselves to the fact that the Freedom Tower may not be a revenue generator. "We've decided that the Freedom Tower is a symbol of rebuilding," an official says. "It's like building the Statue of Liberty. It's not an economic proposal. The Freedom Tower is a monument. That's what we're building." If the tenants don't materialize, the four other towers will likely not get built in the near future. In their place, the Port Authority has planned two-story placeholder buildings that would contain retail stores, a potential source of revenue for the agency.
—Kate Kelly contributed to this article.
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Coffer Qualms
More details on the plans for World Trade Center site development:
Transit Hub Theater Museum Retail/HotelSize* 500,000 250,000 250,000 Up to 1.6 million
Description 1 2 3 4
Price $2 billion $250-$300 million $250-$300 million Unknown
Financing Federal aid as part Private fundraising; Private fundraising;
Not determinedof post-9/11 assistance some public money may some public money may
be available be available
*Measured in square feet
www.mindfully.org/Reform/2004/Larry-Silverstein-WTC6dec04.htmSource: WSJ Research