[NYguy]

http://www.nytimes.com/2010/09/18/bu...er=rss&emc=rss

Sentiment Trumped Numbers in Ground Zero Skyscraper

September 17, 2010

With an expected completion date of 2013, 1 World Trade Center is the most expensive skyscraper ever constructed in the United States, with a price tag currently estimated at $3.3 billion. By contrast, the spanking new Bank of America Tower in Midtown Manhattan cost about $2 billion. That is pretty much the going rate for building new skyscrapers in New York City. Just to break even, 1 World Trade Center will require rents far higher than the going rate in Midtown, much less downtown New York, where the building is located and where rents are considerably lower.

A few weeks ago, the news leaked that the Port Authority was negotiating with Condé Nast to become a tenant in the building. Because Condé Nast is one of the most glamorous companies in New York, it would be a boost to the prospects of 1 World Trade Center to have it in the building. But it won’t be economical: the Port Authority told me that, assuming a deal goes through, Condé Nast would most likely be paying the current market rate for downtown space — that is, less than half what it needed to break even. It will also undoubtedly be locked into that rate for many years. Luring Condé Nast downtown is going to be expensive for the Port Authority.

Not surprisingly, the Port Authority disagrees with my analysis. It points to the fact that it has close to $1 billion in insurance proceeds that it is using to defray the cost of the building. And it says its break-even number is much lower than $130 a square foot.

“It is not going to get a typical developer’s rate of return,” conceded Rich Gladstone, the Port Authority’s point man on the project. “But it will be cash-flow positive.” He insisted that the commuters who pay their $8 a day to cross the George Washington Bridge would never have to support 1 World Trade Center. Of course that’s easy to say now, with the building still two years away from completion.

Still, the Port Authority made another recent move intended to ensure the success of the building. It sold a small piece of the equity in 1 World Trade Center — around 5 percent — to the Durst Organization, for a reported $100 million. It is a great deal for Durst, one of the biggest and savviest commercial developers in New York. (It built the Bank of America Tower, for instance.) Its investment values the building at $2 billion, far less than it cost to build, so if it rises in value, Durst gets the upside. And in return for its $100 million, Durst gets to manage the building for the Port Authority, an arrangement that will allow it to reap fees for everything from finding tenants to reconfiguring office space. It is also a deal filled with a certain, undeniable irony, which has not been lost on anybody in New York real estate circles.