The economics of One World Trade Center

By Felix Salmon
September 19, 2010
Joe Nocera for raising the issue of One World Trade Center's finances.

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Many thanks to Joe Nocera for raising the issue of One World Trade Center’s finances. It’s by far the tallest and most expensive building that New York has ever seen, and it’s no thing of beauty, either. Plus, there’s not nearly enough demand for new top-grade office space to justify building so much of it at this location and at this time. So what exactly is the Port Authority thinking?

All that said, the issue is much more complicated than Nocera makes out. For one thing, the 1,776-foot tower is really the last vestige of the once-lauded Daniel Libeskind master plan for the World Trade Center site; for another, the deal that gave it to the Port Authority was a highly complex one, done with developer Larry Silverstein, and so it’s a little bit simplistic to try to view One World Trade in a vacuum, as Nocera does.

Plus, Nocera’s very vague about sourcing his numbers: he says only that “my real estate sources say they believe that the Port Authority will need to charge $130 a square foot to break even on the building”, and then adds a pro-forma Port Authority denial.

It would be very useful to learn where that number comes from. Looking at the figures in the piece, the cost of the building is $3.3 billion, with $1 billion of that coming from insurance proceeds. I’m not sure exactly what Nocera means by “break even”, but he does talk earlier on in the piece about “any shortfall between the building’s annual rental income and its carrying costs”, so let’s think about it that way.

The building will end up with 2.6 million square feet; if the breakeven rate is $130 a square foot, then that implies its carrying costs will be $338 million a year. But it doesn’t cost anything like that for the Port Authority to borrow $2.3 billion. After all, the last time the Port Authority issued bonds, it paid an average interest rate of less than 4.5%. And 4.5% of $2.3 billion is barely more than $100 million a year — less than a third of the number implied by Nocera.

Or think about it in terms of a standard residential mortgage. Let’s say you wanted to take out a 30-year fixed-rate loan on a $3.3 billion home, putting $1 billion down. Right now, mortgage rates are 4.5%, which implies a monthly repayment of $11.65 million per month, or $140 million a year. OK, you’re not going to be able to borrow that kind of money from your local credit union, and I’m pretty sure that the note would be non-conforming in the eyes of Fannie and Freddie. But still, if you want to get $140 million a year from renting out a 2.6 million square foot building, then you only need to charge $54 a square foot: a far cry from Nocera’s $130 figure.

Yes, there will be high maintenance costs, especially given all the extra security. But at the same time, the Port Authority owns the land underneath the building outright, so there are no costs associated with that. And in the early years of the project, when the building isn’t fully rented out, the Port Authority will have to carry some of the costs of the empty space.

On the other hand, there are less quantifiable costs to having empty space in that part of the New York skyline which used to be home to the Twin Towers. One World Trade Center might never be as iconic as they were, but it will still be an instant landmark, and a vast improvement on the gaping hole that we’ve been living with these past nine years. If Nocera wants to make the case that its costs will end up being borne by commuters crossing the George Washington Bridge, he’s going to have to be a lot more specific about exactly how he’s calculating them.

5 comments

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Are we looking for an above-zero return on the $1 billion of equity?

Posted by johnhhaskell | Report as abusive

As Mr. Salmon points out, the issue is very complicated, but what made it all the more so is the bad faith of the government officials at state, national, and local levels who colluded to keep a far more appropriate and cost effective plan from consideration, when it would have saved billions of dollars and years of time.

Mr. Nocera’s piece was published two years to the day that we sat in Mr. Ward’s office, while Kenneth Gardner, the structural engineer who designed “Twin Towers II” explained to Mr. Ward the elegant logic of his mixed-use Twin Towers – how we could still restore the skyline’s authentic profile, while honoring the expressed will of the American people who are paying for it in every sense of the word.

He chose instead to use his publicly-paid position to put a sickly project on steroids, while willfully deceiving the public about the options for this publicly-owned and publicly-funded property. That is not idle talk. For instance, he said on national television in January of 2009 that $4 billion had been spent, but in December of 2009 an Arbitration Panel decision found that “the PA has invested or committed over $2.3 billion to redevelopment of the WTC site.” And of course, much of it had to be done regardless of the plan.

We cannot trust the Port Authority’s creative math. We can no longer save the billions, but we can still save the years it will take to fully build the dispiriting plan and while what we could have saved will be eaten up by the transition, at least we will have something worth having in the end. Also, when arriving at cost/benefit projections it is important to figure in the stagger difference in the projected profits that officials are kissing off by saddling us with such an uninspiring development.

But the greatest cost is to the spirit of the country as we explored last week on our website in “A War of Symbols.” Symbols mean what they mean, not what we say they mean. Walk into any city cemetery and you will see dozens of Freedom Towers. That’s not a matter of opinion. Obelisks are funereal and the last place our country should be building one is at Ground Zero.

We aren’t taking issue with the extravagant, morbid memorial, with the awful white noise of 56,000 gallons of water a minute mimicking the sound of the collapsing towers, or on the imagery of the giant drains. Because we want to keep the prospects focused. We can open the memorial on 2011 and raise the Twin Towers that will give it resonance and transcendence beside that memorial by 2014.

Most Americans – 92% in a national MSNBC poll last year – would not agree with the opinion that 1 WTC “might never be as iconic as [the Twin Towers] were, but it will still be an instant landmark, and a vast improvement on the gaping hole that we’ve been living with these past nine years.

State and local officials have forfeited their right to control this national treasure. The Twin Towers Alliance will soon formally petition the White House and Congress to give the World Trade Center a General Motors-style chance to come back to life. Then we can get 25,000 people working on capping the tower that is shaped like a tombstone, tearing out the beginnings of 4WTC – if the Yankees, Mets, and Giants can do it, so can we, when it matters so much to our confidence and standing – and get busy building the fully designed “Twin Towers II” in place of towers 2, 3, and 4.

The Twin Towers would be open within three years, topped by some of the most spectacular residential space in the world. The two states would have the benefit of the purchase price at a time when they are swimming in red ink. They would be relieved of the burden of developing the site, but would still be prime beneficiaries of its success. And the government would be paid back as soon as people across the country and around the world are given the opportunity to own shares in the real World Trade Center.

This is not a full-blown presentation, but the numbers work. The more closely one looks, the more impressive it gets. So we are not pinning our hopes on finding politicians who will show political courage, but merely on finding those who will recognize they have a duty to look into the numbers.

It is one thing to analyze the current project in a vacuum. It is completely another thing to put the two projects side by side. If they could have discredited “Twin Towers II” they would have done so a long time ago. So they decided to try to bury it instead. But as much as officials wish it were, It is not too late to do the right thing.

Posted by MLDonovan | Report as abusive

Discover the time line pictures from the Twin Towers till the Freedom Tower or One World Trade Center at http://www.fdammersfineart.com/ccms.1944 .2.1.html
by Frank Dammers

Posted by Dammers | Report as abusive

They should build the exact replica of the buildings that fell though. Then all of the new employees can have an eerie pretend to their lives in suits like they’re really sticking it to the losers who couldn’t fly straight (or sober).

Posted by adamt78 | Report as abusive

24 minutes ago Freedom tower is much better than twin towers,because there are four towers

,also Freedom tower is taller than twin towers.People should be excited.

WE LOVE FREEDOM TOWER AND NEW WORLD TRADE CENTER

Posted by Beeeeeed | Report as abusive