Merrill Lynch Drops Plans for Move to 9/11 Site
Ashley Gilbertson for The New York Times
The World Trade Center site, shown in June, has been much discussed in the years
since the Sept. 11 attack, but so far there has been very little to show for it.
By CHARLES V. BAGLI
July 17, 2008
Merrill Lynch & Company, the financially ailing investment brokerage, has terminated talks with the Port Authority and the developer Larry A. Silverstein over moving its headquarters to one of the new office towers planned for ground zero. The company’s decision is a major setback for the Port Authority and Mr. Silverstein, who had hoped to revive commercial interest in the 16-acre site by luring Merrill as an anchor tenant for one of the four office towers to be built there.
Merrill was the first private company to express strong interest in any of the towers. Concerns about stirring memories of 9/11 and the long-term noise and construction at the site have discouraged other potential tenants, state officials say.
With no private tenants in sight, the economy teetering on recession and lenders reluctant to finance speculative office space, real estate executives and some officials of the Port Authority of New York and New Jersey say that Mr. Silverstein, who is required to build three of the four towers, may find it hard to raise money for construction.
The authority is responsible for the other office tower, the $3 billion Freedom Tower, now under construction at the southeast corner of Vesey and West Streets.
The new problems for Mr. Silverstein also set the stage for potentially acrimonious negotiations with the Port Authority, which owns the land, over his construction deadlines.
On June 30, the authority publicly acknowledged for the first time that the $16 billion effort to rebuild the World Trade Center was potentially years behind schedule and billions of dollars over budget. Three days later, Merrill formally notified the authority and the developer of its decision to terminate talks with Mr. Silverstein.
“It does seem to me that events have conspired to present Larry with a challenge,” said Michael T. Cohen, chairman of GVA Williams, a real estate broker.
After bargaining for months over tens of millions of dollars in concessions and tax breaks for a 71-story tower, Merrill said in its letter that “we are too far apart to continue the process. Accordingly, we wish to terminate further discussions of the proposed transaction.”
Selena Morris, a Merrill Lynch spokeswoman, declined to comment.
But Mr. Silverstein’s company and the Port Authority acknowledged that for the second time in a year, Merrill had opened and closed negotiations for a new headquarters for its 11,000 employees. “We wish Merrill Lynch great success and hope they decide to keep their headquarters in Lower Manhattan, their historic home, for many years,” said Janno Lieber, who oversees the trade center project for Silverstein Properties.
Merrill currently occupies 2.6 million square feet of space west of the trade center site, at the World Financial Center, where its lease expires in 2013. They have resumed negotiations with their current landlord, Brookfield Properties.
Some officials have continued what they describe as informal talks with Merrill in the hope of reviving the deal, perhaps with the company moving to ground zero in 2018 instead of 2013.
“While the Port Authority and Silverstein Properties continue discussions with Merrill Lynch, at this time we remain far apart on economic terms,” said Stephen Sigmund, a Port Authority spokesman.
But analysts and real estate executives say Merrill’s decision had more to do with its financial condition than with the terms of any deal or the delays at ground zero. The company is expected to announce on Thursday a big quarterly loss and billions of dollars in new write-downs in the value of its assets. After taking roughly $30 billion in write-downs earlier this year, the firm appears to have adopted a downsizing strategy, a mix of layoffs and the sale of some of its most important holdings, like a major stake in Bloomberg L.P.
Merrill has been casting about for a new headquarters for well over a year. Last October, the firm was on the verge of announcing that it would leave downtown for a new $4 billion skyscraper in Midtown, despite far less expensive options at the trade center site with one of Mr. Silverstein’s planned towers, or with its current landlord, when the firm became engulfed in the mortgage crisis. It canceled the move after reporting its first quarterly loss in six years and the first of billions of dollars in write-downs.
Merrill initially signaled that it would extend its lease at the World Financial Center for at least five years. But this spring, Merrill executives reopened negotiations with Mr. Silverstein and the Port Authority about building Tower 3 at the trade center site. The company’s executives bargained hard for a generous deal.
Eager to show some momentum for the office towers on the site, the authority ultimately reduced its price for a long-term lease of the land by about 25 percent to $510 million, from $690 million last year.
But the deal would have required Mr. Silverstein to sell his development rights to the building to Merrill, and his asking price, $340 million, was unacceptably high, according to Port Authority and Merrill executives who requested anonymity because they were not authorized to discuss the talks and did not want to pick a fight with Mr. Silverstein.
Merrill’s landlord, Brookfield Properties, argued that it was illogical for the authority to offer incentives to lure a tenant from one government project (the World Financial Center) to another (ground zero). But authority officials were convinced that Merrill’s deal would help entice other companies to the site and permit them to declare a victory at a time when the rebuilding effort has encountered delays.
In lieu of private sector tenants, city, state and federal agencies have committed to leasing 2.2 million square feet of the combined 10 million square feet of office space planned at the Freedom Tower and Mr. Silverstein’s towers.
JPMorgan Chase has a nonbinding agreement to build a tower south of ground zero, where the former Deutsche Bank Building is being demolished. But JPMorgan recently acquired Bear Stearns and it is unclear whether that project will proceed.
All of that has implications for Mr. Silverstein, who must build three towers with a total of 7.5 million square feet by 2013, at an estimated cost of over $6 billion, under his 2006 agreement with the authority, which owns the land. He has about $1.3 billion in insurance money and the ability to use tax-exempt Liberty Bonds, although they expire at the end of 2009.
Under the terms of his agreement with the Port Authority, Mr. Silverstein faces default on all three building sites if he fails to build even one of the towers on schedule.
“We are confident in the long-term viability of the office market at the site, and continue to make progress on construction and to operate under the existing development agreement,” Mr. Sigmund of the Port Authority said.
But executives who work with Mr. Silverstein complain that the Port Authority’s inability to complete other projects at ground zero, like the adjacent transit hub or the rebuilding of Greenwich Street, will make it hard for him to complete his buildings.
Some real estate and authority executives expect Mr. Silverstein to demand a rent discount, a deadline extension and, perhaps, the elimination of the so-called cross-default clause.
Mr. Lieber of Silverstein Properties said in a statement that his company “is focused on working with government to resolve the design and construction issues identified by the Port Authority in its recent report to the Governor, as well as ongoing uncertainties about the Port Authority’s schedule to complete vital site infrastructure. It is urgent that these issues be resolved in order to accelerate the rebuilding of the entire World Trade Center site.”
Copyright 2008 The New York Times Company