After the Fall, World Trade Center Rises as Memorial and Workplace

By ELIOT BROWN

On July 24, 2001, executives of the Port Authority of New York and New Jersey presented developer Larry Silverstein with the deal of his life, handing over the ceremonial keys to the World Trade Center. Mr. Silverstein had signed a 99-year, $3.2 billion lease on the Lower Manhattan complex.

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Two days after the Sept. 11 attack on the Twin Towers, Mr. Silverstein vowed to rebuild. What followed was one of the most fearsome real estate disputes of recent times. The political and financial battle drew in elected officials and insurance companies, delaying construction for years.

Today, the fighting is largely over, and construction is finally proceeding swiftly, with the Sept. 11 memorial opening to the public and the first office towers scheduled to be finished by 2013—though a final financial tally won't be possible for years and will depend largely on whether millions of square feet of office space are filled.

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As part of its settlement with Mr. Silverstein, who is now 80 years old, the Port Authority got ownership of the tallest office building on the site, the 1,776-foot One World Trade Center. But largely because of the high security in that building, its cost was more than $3 billion, making it the most expensive office tower in the U.S.

Meanwhile, Mr. Silverstein is positioned to reap big returns if the buildings under construction eventually fill up with tenants. His group owns one of the skyscrapers set to be finished in 2013 and has the rights to build two others. It put about $125 million of equity into the original deal and got all of that initial investment back as part of another settlement with the Port Authority and insurers.

There also have been numerous public incentives added to spur the towers' rise, including tax-free debt and government agreements to back the financing. Over the years, Mr. Silverstein's group has been paid millions of dollars in development fees.

The group is to have a good deal of its initial profits placed in escrow until much of the risk to the public has been reduced, based on a pact struck with city, state and Port Authority officials last year.

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If the office towers fail to draw tenants, the public sector—including the Port Authority and the federal government—will assume much of the risk. If the towers succeed commercially, it will share with Mr. Silverstein in the profits.

The public players have put their bill for reconstruction of the site at more than $11 billion, due in part to the soaring expense of the memorial, a transportation hub and other neighborhood infrastructure.

Along with the financial and political battles, the rebuilding posed extraordinary construction and engineering obstacles.

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Before work on any of the buildings could begin, the 16-acre pit had to be fortified with walls to keep out the Hudson River, making the basement known as the bathtub. Designed as something government officials have likened to a Rubik's cube, its tremendous complexity has added years to construction, as engineers have grappled with building around two working train lines, one of which was put on stilts and suspended in the air as workers excavated around it.

During the melee over reconstruction, many accused Mr. Silverstein of seeking personal gain from the tragedy. His defenders said if it had not been for his perseverance, downtown Manhattan wouldn't be replacing the commercial space it needs to stay viable.

Mr. Silverstein is credited with boosting optimism about Lower Manhattan's recovery, in part by rebuilding Seven World Trade Center, a tower he owned just north of the site that was also destroyed. The project, which opened in 2006, has been a financial success, as rents far exceeded what had been expected when reconstruction began.

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People walk past construction at the site of the World Trade Center site on Friday.

"I think getting Seven up and getting tenants in there gave a comfort to the business community that the site was in fact going to proceed as a great commercial site," said Kathryn Wylde, president of the Partnership for New York City, a group that represents large businesses.

But it isn't yet clear how the real estate market will respond, especially if today's economic troubles continue. The downtown Manhattan market is still hurting from the recession, and clouds still hang over the financial services industry, the neighborhood's biggest tenant.

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Banks that had initially forecast growth are laying off workers. Mr. Silverstein had been in talks with UBS AG to move offices from Stamford, Conn., to Three World Trade Center, but the company pulled out earlier this summer and agreed to stay in Stamford for another five years.

Mr. Silverstein's defenders point out that he managed to secure a handsome settlement from his insurance companies, winning $4.55 billion. Of that, about $3 billion has gone to the Port Authority. Mr. Silverstein's group is planning to use the balance for the equity contribution to its three buildings.

Janno Lieber, Mr. Silverstein's director of World Trade Center development, also notes that Mr. Silverstein originally bought rights to 10 million square feet of office space. Now, at most, he will have only 6.2 million square feet.

"We gave up a lot along the way—$3 billion in insurance, 40% of the development rights, two-thirds of the land and the right to collect hundreds of millions" of dollars in additional insurance claims, Mr. Lieber says.

Mr. Silverstein is among those who believe that downtown will make a strong comeback when the economy improves. If he's right, the World Trade Center development, one of the only new office projects in the city, stands to be one of the biggest beneficiaries.

"I think Larry will come out very well," said Charles Gargano, former Gov. George Pataki's top economic development official, who played a key role in the early years of the redevelopment. "The commercial real estate market is slow now, but in five years I'm sure will be better, and that's about the right timing."

Write to Eliot Brown at eliot.brown@wsj.com