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The story...

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 for Silverstein.

Our take...

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 site.

On Friday, Mayor Michael Bloomberg gave the insurers a clear message – pay up.

“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, too:

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.

$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 Fort Knox."

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.,9171,1191836-3,00.html

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 whole thing):

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 profit?

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. [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 insurance.

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 incident.

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 9/11?

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