The Port Authority of New York and New Jersey on Thursday approved a financing agreement on World Trade Center development that clears the way for the refunding of $2.59 billion of escrowed Liberty bonds next month.
The agreement with developer Silverstein Properties Inc. provides significant public support — including a five-year interest subsidy paid by the authority — for the development of two commercial towers at the site. The bi-state agency owns the property, which is leased by Silverstein.
The New York State Liberty Development Corp. sold the bonds in December on behalf of Silverstein subsidiaries to meet a year-end deadline to use the bonds. Proceeds from the LDC issuance were used to purchase U.S. Treasury securities and carry an Oct. 12 mandatory tender date. Slightly more than half of the bonds will be refunded as fixed-rate debt with the remainder being escrowed again.
“This agreement caps a two-year effort to restructure, rationalize, and, above all, provide a renewed level of certainty over the development of the World Trade Center site,” Port Authority executive director Chris Ward said in a press release. “It will make certain the entire site is rebuilt while sharing the risk among all stakeholders in a way that protects our limited public resources.”
The bonds were originally intended to finance three towers. They have the potential to finance two towers under the agreement, provided certain financial targets are met — otherwise, they can pay for only one.
Congress created the Liberty bond program following the terrorist attacks of Sept. 11, 2001, to help revitalize Lower Manhattan with an $8 billion allocation of private-activity bonds.
The LDC will refund $1.36 billion of bonds to provide the bulk of the financing for the two-million-square-foot Tower 4, which is currently under construction and scheduled to be finished in 2013. The bonds will be refunded as fixed-rate 40-year bonds with a 10-year call. Silverstein will also use $450 million of insurance proceeds to fund construction.
The Port Authority will subsidize Silverstein’s interest costs in excess of 3% during the first five years after the bonds’ issuance. Officials estimate that paying the difference between 3% and actual interest costs during that time will cost $136 million.
The authority will also act as a guarantor on the bonds, with some limitations. Some 60%, or 1.2 million square feet, of the building is pre-leased to New York City and the Port Authority for its headquarters. Should revenues from the remaining 40% of the building be insufficient to cover debt service, the port will pay bond holders the difference and recoup those payments from Silverstein with interest. Under certain conditions, Silverstein could replace the city as a tenant.
A refinancing terminates the agreement. The authority has the right to force a refunding after 15 years if it can be done at the same interest rate.
Public support for the $2.35 billion Tower 3 depends on Silverstein’s ability to meet certain conditions. The developer will initially build a podium for the tower using $404 million of insurance proceeds. The developer can then proceed with the remaining construction once 400,000 square feet of the 2.47-million-square-foot building is pre-leased and $300 million of equity or subordinated mezzanine debt is secured.
The project would use $1.24 billion of the Liberty bonds that were “re-escrowed.” Of those funds, $978 million would be used for construction and lease-up costs and $300 million could fund the mezzanine debt. The developer would also sell $401 million of taxable bonds. The New York City and the state would provide subsidies valued at $210 million. The city, state, and authority would backstop up to $390 million of cost overruns or revenue shortfalls on the building, which Silverstein would have to repay without interest.