REIT or trophy: what's WTC worth?

Real Estate Weekly, May 17, 1995 by Lois Weiss

For some folks this is deja vu, as a 1984 report made by Bear Stearns in the middle of the steam rolling market concluded the Port Authority should hold onto its 107-story skyscrapers and assorted supporting players. Now, ten years and one governor later, with privatization as the key word, a new round of investigation has begun.

Some of the city's top investment brokers wondered whether the complex is too much for any one investor and suggested the property might be turned into a securitized property such as a real estate investment trust (REIT) that would be traded on the stock exchange. This might be one way of collateralizing current bondholders while obtaining a cash infusion for the Port Authority. On the other hand, last Thursday's bankruptcy filing by the owners of Rockefeller Center, who pay their mortgage to a REIT, left some wondering if a one - entity REIT makes investment sense.

The WTC property itself consists of the twin towers, known as One and Two World Trade Center, the Commodities Exchange building at 4 WTC, the Dean Witter building at 5 WTC and Six World Trade, which is the U.S. Customhouse that merely pays operating expenses. Three WTC is the newly renovated Vista Hotel that connects Towers One and Two, but that will be marketed under a different arrangement. InterBank/Brener Hospitality Consultants helped the Port Authority to chose Eastdil and Knight, Frank & Rutley to market the hotel property. The properties are all currently held as one tax lot of 13,867,981 square feet.

What is for sale does not include Larry Silverstein's Seven World Trade Center, which is on a separate ground lease and tax lot.

The city's assessment roll carries the main WTC tax lot with a fair market value of $2.15 billion and unless it changes for the final roll to be released on May 25th, it should technically pay on an actual assessment of $967.5 million, that should translate to a tax of about $102 million. The WTC does not formally protest its taxes through the city's administrative system.

Under the agreement between the Port Authority and New York City, the city is supposed to receive a Payment in Lieu of Taxes (PILOT) of about $4 per rentable foot, or $40 million, less than half of the true tax liability. In reality, the WTC wasn't paying that much. While the Dept. of Finance attempted to re-adjust the payment last Fall to bring it closer to the $40 million, because of a number of not-for-profits based in the World Trade Center, the payment was re-adjusted by the Comptroller's office to $19 million for calendar year 1994. It goes up to about $25 million this year and could be negotiated higher. The formula is based on comparisons to other Downtown buildings and some of the space being warehoused by WTC for asbestos removal goes untaxed. Needless to say, a private owner might not get such a good deal.

Investment brokers were concerned they do not know the buildings' cash-flow or carry costs, nor when leases are due to expire.

According to George T. Rossi, general manager of the WTC, there is about 12 million square feet of office space. Other brokers estimate the Twin Towers themselves at having 4.5 million square feet each, and each floor is nearly an acre of column-free space.

"The basic thing is whether there will be a market, what the market is, and the ramifications of the sale, ' explained Rossi. "And if it were complicated - which it is - what finally happens?"

When the study was being made by Bear Stearns, certain tenants as well as prospects asked for certain lease assurances in the event of a sale. Brokers reported some leases were written not to the Port Authority, in fact, but to holding companies that could transfer the lease in the event of a sale.

A real estate executive who wished to remain anonymous said there are a variety of clauses that allow them to swap taxes from one form to another. They can move tenants and have a great deal of flexibility within the leases.

"A private sector landlord might exercise all those clauses, which would put the existing tenants in great jeopardy unless there was an owner of great integrity," the broker noted.

Rossi said aside from the warehoused space that totals somewhere between 200,000 and 300,000 square feet, the property is 91 percent occupied. Rents range from deals made when the complex opened in 1970 in the low teens to deals done at $55 a square-foot at the height in the market. The average rent, Rossi guesstimated, is around $30 a foot.

The Trade Center gross income is in excess of $320 million he said, while expenses approach $300 million. "We're trying to generate bottom line revenues in the $20 to $2.5 million range," Rossi said. "There's a reason why Bear Stearns said not to sell, and it was a much better market."

One investment broker, who asked not to be named, agreed, "It isn't outside the realm of any political organization to go upside and backward. Why would anybody want to do it now when you did it in '85 and it would have looked like shear brilliance to have sold it then. Buy low, sell high still makes a lot of sense to our investors."