Government in Action

Couldn't be any corruption involved here at all, right? I mean, this is part of the 9/11 memorial? Nahhh, just another instance of government innocently funneling tax dollars into the coffers of developers, I'm sure. - Agencies May Overpay For Freedom Tower Space The federal government and New York state may be overpaying to move into the Freedom Tower, some commercial-property experts say.

The federal government's real-estate arm, the General Services Administration, said this week it has tentatively agreed to pay $59 a square foot for 16 floors in the yet-to-be-built skyscraper at the World Trade Center site when it opens in 2012. New York state government would pay the same rate for 11 floors.

A look at prices for comparable space shows the government is paying more than tenants in other Lower Manhattan buildings, even factoring in possible rent inflation over the five years it will take to build the Freedom Tower.

“I think it's high,” says Barry Gosin, chief executive of Newmark Knight Frank, a real-estate services firm, though he says any progress on the long-stymied rebuilding effort might be worth it. “At the end of the day, the benefit to the taxpayer might justify a premium investment by the state to get this project going.”

Others are more critical. “Are we getting the best bang for our buck?” asks Bettina Damiani of Good Jobs New York, a government-subsidy watchdog group. “There are a ton of public resources already going into the site to make it viable” for private business, she says. Among them: tax-exempt Liberty Bonds to finance the office towers, $2 billion in federal aid to build a transit hub, plus other state and Port Authority of New York and New Jersey money. “We have to ask: Are those viable subsidies if we have to use government entities to fill the towers?”

Average asking rents downtown were $35.18 in the second quarter, according to real-estate firm Cushman & Wakefield. “You've got a gap as high as $24 a square foot,” says Marisa Manley, president of Commercial Tenant Real Estate Representation Ltd., a New York real-estate firm. “So for a one-million-square-foot lease, you're looking at a potential $240 million subsidy over a 10-year-period. ... It's drawing away money from taxpayers. It's not a marketplace solution.”
The most recent comparable lease is one signed by Moody's Investors Service in August for the same amount of space as the federal government is taking in the Freedom Tower -- 600,000 square feet -- in the recently rebuilt 7 World Trade Center. It will pay $41.50 a square foot minus $3.80 in state and city incentives, reducing its effective rent to $37.70. It also will get 14 months of free rent and $50 a square foot in so-called tenant improvements, or inducements by the building's owner, Larry Silverstein, to outfit the space. In five years, around the time the Freedom Tower opens, the Moody's lease will increase to $46.50 a square foot.

Other recent deals in downtown Manhattan also are lower. Willis Group Holdings signed a lease in August for 205,000 square feet in One World Financial Center, across the street from Ground Zero, for $36.50 a square foot, increasing to $41.50 in 2011. BearingPoint Inc. signed a lease in August for 55,000 square feet in Three World Financial Center for $39.50 a square foot. In five years, that will kick up to $44.50.

Emily Baker, regional administrator for the GSA, says its real-estate consultants figured rents in 2012 for new custom space will be $80 a square foot. The federal agency likely moving to the Freedom Tower -- Customs and Border Protection -- has unique needs that can be accommodated by getting into the building early, such as holding cells for suspects, security screening and parking. “The requirements for the tenant buildout go far beyond just your Moody's cube farm,” Ms. Baker says.

The rent set for the Freedom Tower is an important benchmark. The Port Authority, which owns the land at Ground Zero, and the City of New York together are in intense negotiations to lease 1.2 million square feet in Tower 4, to be owned by Mr. Silverstein. (The Port Authority has refused to move into the Freedom Tower, which it will own and operate, citing employee fears after 84 coworkers were killed in the Sept. 11, 2001, attacks.)

People close to the negotiations for Tower 4 say the rent figure, while not finalized, is close to the one announced for the Freedom Tower. The two sides are working toward signing a term sheet by tomorrow's meeting of the Port Authority board of commissioners. The board is also expected to approve the design of the east side of the site, including Mr. Silverstein's three office towers and a mall-size collection of stores. Mike Shenot, managing director for Jones Lang LaSalle, the Port Authority's real-estate consultant, says the price reflects several factors, including increases in demand expected if the economy and job growth stay strong. “None of us have crystal balls. We're just trying to use good sound logic.”

Mr. Gosin of Newmark Knight Frank says there might be that kind of demand growth. But with the four office towers being built at the same time at the Trade Center site, plus a new headquarters for Goldman Sachs Group Inc., there will be “a big chunk of space” in 2011 and 2012. “It's a long way off. And you know how markets can turn.”

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This page contains a single entry by Seth A. published on September 20, 2006 6:43 PM.

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