If you thought building the $3.8 billion tower was a tall order, just try selling it

One World Trade Center sits at the heart of America’s most hallowed ground, a 1,776-foot-tall icon that concretely testifies to the city’s rebirth after Sept. 11, 2001.

But as an investment for its owner, the Port Authority of New York & New Jersey, it has been a bust.

Fifteen years after the terrorist attacks, the roughly 3-million-square-foot, $3.8 billion tower is still one-third empty. According to the Citizens Budget Commission, the tower netted the authority $13 million in revenue last year, a figure that equates to a meager 0.35% return on its investment—a rate that doesn’t even keep pace with inflation.

The Port Authority now has a plan to transform One World Trade Center from albatross to blue chip. Under pressure to return to its traditional focus on transportation, yet strapped for cash, the agency plans to sell what was originally called the Freedom Tower to the highest bidder—foreign or domestic—for a price executives believe could be as much as $5 billion. That would be the highest price ever paid for an office building in the U.S.

“Ownership of One World Trade is not a part of the Port Authority’s mission to advance transportation infrastructure in the region,” Port Authority Chairman John Degnan told Crain’s. “This asset will be monetized and the proceeds used for that core mission. The only question is how and when to proceed in a manner that ensures that the maximum return is yielded for reinvestment in facilities that do serve the agency’s core mission.”

The agency quietly declared in a 2014 report that it would divest itself of its real estate assets, including One World Trade Center. Some of its leaders believe the time to sell is now in order to capitalize on a hot market. They envision bringing the building to the auction block within the next year.

That time frame could easily be pushed back given the complexities and competing interests at the site, which is viewed as much as a public asset as it is a commercial one. Regardless of the timing, selling the building could be as complicated as constructing it was. No site elicits stronger emotions than the World Trade Center and to sell its signature tower, the Port Authority will likely have to steer past a host of objections, including from the agency’s own security force. The Port Authority police, who guard the site, and families of the 9/11 victims would likely oppose a sale of the property to wealthy investors from the Middle East. Concerns may even come from the federal government, whose tenants in One World Trade Center include U.S. Customs and Border Protection, the largest law enforcement agency of the Department of Homeland Security.

Likely bidders

“Large deals like this take on a life of their own,” said Giacomo Barbieri, head of northeast real estate investments for TIAA Global Asset Management, which manages $97 billion of real estate. “There are a lot of nuances that come into play that could stall a deal like this. One investment group may be concerned about the building’s vacancy [rate], while another might be sensitive to the terrorism risk and then another might be concerned about lining up all the debt to buy something like this.”

There are few investors with enough cash to buy trophy properties like 1 WTC—and fewer opportunities still. Since 2008, only 12 buildings have sold for more than $1 billion in the city. Barbieri said TIAA looks at every major property that hits the sales market in the city and would likely be a bidder for the tower. Similar institutional investors like CalPERS, which recorded the largest purchase so far this year with a $1.9 billion acquisition of 787 Seventh Ave., are seen as potential buyers since they are attracted to single assets where they can park large sums of money.

So are deep-pocketed foreign investors and overseas governments. In the wake of Britain’s vote to exit the European Union, many are looking to put their cash in a stable, income-producing asset. Foreign buyers have recently paid some of the biggest sums ever seen in the city to acquire high-profile properties—sometimes with political consequences. Anbang Insurance, a Beijing-based financial firm, purchased the Waldorf Astoria hotel two years ago for a record $1.9 billion, prompting U.S. leaders, including President Barack Obama, to no longer stay at the hotel.

“Do you think the U.S. government wouldn’t have concerns about the Chinese buying up the World Trade Center?” asked an executive at a Chinese real estate investment firm that has been active in the city. “People would be very suspicious of this kind of deal.”

Earlier this year, the Olayan Group, a Saudi Arabia–based investment company, purchased 550 Madison Ave., a vacant midtown office building that until recently was Sony’s U.S. headquarters, for $1.4 billion. The firm is a well-regarded global investor. But the idea of a buyer from the country that 15 of the 19 Sept. 11 hijackers hailed from could provoke public backlash that makes such a sale impossible.

“It’s unfortunate, but it may hit some sensitive nerves,” said Virginia Bauer, a former board member at the Port Authority who lost her husband, David, at the World Trade Center on 9/11 and who is a member of the board of directors for the 9/11 Memorial. “There are some that are always going to see the site in an emotional and sensitive and polarizing way.”

Large city landlords could partner with foreigners or try to buy the tower on their own. The pack would likely include Silverstein Properties, the developer of two other office towers at the WTC site; Brookfield Properties, which owns the large retail and office complex Brookfield Place just west of the WTC site; and the Related Cos., which in 2010 lost out to the Durst Organization for the chance to invest in and operate the tower alongside the Port Authority.

Bauer said she believes investment firms from around the world should be invited to participate in an auction and that selling to the highest bidder, whoever that might be, is paramount. “We can’t have restrictions on who buys the tower,” Bauer said. “What makes America and the city so attractive is our tolerance and respect for all.”

Bidders, however, would have to contend with the Durst Organization, the large New York City landlord that purchased a $100 million interest in One World Trade Center in 2010. That investment is scheduled to be converted into an ownership stake when the tower is projected to be fully leased in 2019. Durst has first dibs on matching a potential buyer’s offer and also has the right to block any deal before its ownership vests. That means that if a sale materialized in the next two years, Durst would likely have to be bought out before the Port Authority could complete the transaction.

Security concerns

Whoever seeks to buy the tower will have to contend with the issue of security. One World Trade Center remains a preeminent target for terrorists. Although the Port Authority does not disclose what it spends on security at the site, last year it cost $121 million to operate the property, a figure that includes public safety. An investor may be motivated to cut that expense, or offload it onto the public, to be able to generate the cash flow needed to pay the massive mortgage that the purchase will entail.

One way would be to scale back the number of costly Port Authority police officers patrolling the building and replace them with officers of the New York Police Department. Such a move, though, could inflame tensions between the two departments. The Port Authority police, which lost 37 officers in the Sept. 11 attacks, is in charge of security at the site, but the NYPD has for years wanted to wrest control of security at Ground Zero, where 23 of its own died.

“It’s an emotional thing for Port Authority police,” said a Port Authority police source. “We have gone through a lot with the attacks of 1993 and 2001. It’s our Gettysburg.”

Given all the potential obstacles, some agency executives are already pushing back against selling.

“It’s not realistic to talk about selling One World Trade Center, especially because the building will be worth more in the coming years as the site comes fully online,” a source at the Port said.

The executive said the agency would be better off starting the divestment process with smaller properties it owns, like the Red Hook container terminal in Brooklyn.

Waiting to fully lease the tower would have other advantages, in addition to giving the Port Authority much-needed revenue and a higher valuation for One World Trade Center. It could increase its borrowing capacity, allowing it to fund capital projects by using revenue from the leases to pay off the debt incurred.

But for those who say the agency has strayed for too long from its mission, the moment to sell is at hand. The building is only 70% leased, and it could be years before it is fully occupied. Stephen Berger, a former Port Authority executive director, said the agency had, in the past, fallen into the trap of delaying a sale only to miss the real estate market or mismanage the property.

“One World Trade ties them up mentally and financially. It’s a brain drain that has sucked a lot of juice out of that place over the last 15 years, unfortunately,” Berger said. “The Port doesn’t have the skills to be a competitive player in an aggressive real estate market. They need to get their dough and get out.”

View original article here by Crain´s New York Business by Daniel Geiger