Think You’ve Got Problems?

Next time you worry about lawsuits, fire, losing tenants, or any other disaster keep [tag-tec] Larry Silverstein [/tag-tec] in mind.

Silverstein, as we remember, bought control of the World Trade Center Complex just seven weeks before September 11th. That deal is still considered by many to be the most unlucky real estate transaction in American history.

 

 

Next time you worry about lawsuits, fire, losing tenants, or any other disaster keep [tag-tec] Larry Silverstein [/tag-tec] in mind.

Silverstein, as we remember, bought control of the World Trade Center Complex just seven weeks before September 11th. That deal is still considered by many to be the most unlucky real estate transaction in American history.

But the 74 year old New York entrepreneur remains undaunted. Amid almost crushing adversity, criticism, accusations, lawsuits, insurance fights, and public relations wars, he continues rebuilding. In fact, he has plans for his grandchildren to join the family business as soon as the eight and ten year olds are old enough.

Here’s a recap of the events leading up to September 11th.

1995 George Pataki becomes governor of New York and sets the goal of privatizing the World Trade Center. A property sale is deemed too complicated so officials decide to lease out control of the complex instead.

July, 2001 Silverstein wins the bid and leases the Twin Towers and Buildings #4 and #5 of the WTC Complex for 99 years from the Port Authority. He already owns Building #7.

He agrees to pay $3.2 billion. The deal is structured with $616 million to be paid initially and followed by annual payments of $115 million.

What Silverstein gets is control without ownership. He manages 430 tenants in 10 million square feet of office and retail space. Even before Sept 11th many investors consider the buildings white elephants. Silverstein sees potential primarily because of their location.

Tuesday, September 11, 2001 Silverstein is scheduled for an early meeting on the 88th floor of the south tower with the Port Authority. The meeting is postponed at the last minute and he is in his Park Avenue apartment watching T.V. with his wife when the first plane hits the north tower.

Silverstein immediately rushes to his office on Fifth Avenue and watches the second plane crash into the south tower. A woman employee manages to get to the office after descending 88 flights of stairs in the south tower and to safety at the Park Avenue office. Silverstein learns four members of his staff have been killed. The surviving employee describes him as being in worse shape than she was.

September 11, 2001, 5:30 P.M. Building #7, which Silverstein had built only 14 years earlier, completely collapses under mysterious circumstances. The building had been on fire but many believed it was salvagable. Many others think Silverstein ordered its demolition himself. What is even more controversial to this day is the fact that many records, including some from Enron, were lost forever because they were being stored in that building.

October,2006 Silverstein has refinanced using new OPM (Other People’s Money) First, he positions himself to get the new projects going. Then he brings in new investors with new capital. That’s after his famous battles with about nine insurers who were trying to renege on their risks. Building #7 is on its way toward completion and the others are on the drawing boards. That’s despite crippling opposition from the public and politicians.

If that’s not enough to keep the scrappy septuagenarian busy, he’s also doing some investing for the California State Teachers Retirement System. Since he fervently believes in the future of New York real estate, he’s putting their money in a 600,000 square foot building at Lexington and 51st for $400 million.

And he’s looking for more properties in the New York area, "where ever there’s an opportunity to improve on capital."

What can we learn from him?

Always insure for the total cost of reconstruction, not just for the property’s present appraised value

The first thing Silverstein did was to totally insure the World Trade Complex. Wise move. But that is usually one of the last things most [tag-self] investors [/tag-self] really think about. Sure, we insure, but do we insure enough? Most likely, not.

Silverstein aggressively insured. Why is that so important? Now we know why. But we’re always thinking in the back of our minds that it will never happen to us. Do we honestly think he ever thought September 11th would happen to any of his buildings?

He was prepared. Many of us aren’t. We don’t insure for reconstruction. Often we only insure for the appraised value of the property and sometimes not even for that. Maybe it’s time we did an insurance check-up.

Here’s what happened in Silverstein’s case. Wisely Silverstein spread the risks over about a dozen [tag-ice] insurers [/tag-ice]. That’s probably because he had to since the risks of such a large amount of commercial space was so expensive. It’s still not a bad idea if you can pull it off.

However, Silverstein was well prepared for the inevitable disputes that came later. The insurers agree to pay $3.55 billion for "the one incident". Silverstein was able to argue there were actually two incidents that caused the disaster since two planes were involved. By winning the argument he was awarded an extra $1 billion. That brought his collection for Sept 11th damages to around $5 billion.

Beware of this trap which Silverstein managed to avoid. Know how your insurance company really works. Know what to do in case you have to collect. This is probably one of the biggest traps investors get themselves into. There is very little difference in Silverstein’s case and anything a smaller investor has to deal with. His projects are much bigger with more zeros, but it’s still the same concept. The sooner you can collect, the sooner you can start rebuilding.

Silverstein had had his share of set-backs. The insurance settlements were not enough to handle his expenses. He continues to pay out millions per month in rent to the Port Authority even while the site is unoccupied. Finally, last April, he was forced to yield up some of his rights to rebuild.

Overall, after all the investment smoke has cleared, Silverstein has managed to hold onto the rights for Towers #2, #3, and #4. Not bad, considering the obstacles he has had to overcome.

Here’s a bonus tip. Don’t panic when things go terribly wrong

If Silverstein can stand up to the pressure he had to go through as the worst attack on American soil took place, we can get through our adversities. Silverstein had a good network of the Friends-in Need Reserve already built up. A close friendship with Mayor Bloomberg certainly didn’t hurt either.

Building your team is just as important as building your properties. How you maintain your team; your attorney, your CPA, your contractors, your plumber, your air conditioning experts, counts for money in the bank when troubling times hit.

So what is my message for whiners and pity party goers? Whatever the deal was you made that went bad, it probably couldn’t have been as unfortunate as getting the lease on the World Trade Center Complex seven weeks before September 11th. Silverstein is turning his misfortune around. How are you doing?

Technorati Tags: , , ,