The Washington Post

May 22, 2004 Saturday
 

SECTION: A Section; A01

LENGTH: 1768 words

HEADLINE: Ground Zero Funds Often Drifted Uptown;
Money Also Went to Luxury Apartments

BYLINE: Michael Powell and Michelle Garcia, Washington Post Staff Writers

DATELINE: NEW YORK

BODY:

Six months after the Sept. 11, 2001, terrorist attacks, Congress approved an $8 billion program to repair this city's damaged office towers, build apartment buildings and finance the rebirth of the financial district.

But two years later, city records show that much of the money, dubbed Liberty Bonds, has gone to developers of prime real estate in midtown Manhattan and Brooklyn and to builders of luxury housing.

Local and state officials -- over the objections of their own downtown development chief -- gave one developer $650 million from the Liberty Bonds to erect an office tower for the Bank of America near Times Square, miles from the shattered precincts of Ground Zero. According to city records, another developer got $113 million to build a tower for Bank of New York in Brooklyn. One of the few projects downtown has gone to actor and sometime developer Robert De Niro, who picked up nearly $39 million from the bonds in November to build a boutique hotel in Tribeca, directly north of Ground Zero.

Congress designated $1.6 billion of the Liberty Bonds for rental housing. Nearly all the money from those bonds has gone to prominent developers to build luxury apartment towers in the neighborhoods around Ground Zero, accelerating its transformation into one of New York's richest neighborhoods, the city records show.

Local political leaders, urban planners and neighborhood residents have sharply criticized these spending choices, saying that wealthy developers shouldn't need subsidies to build office towers in midtown -- where private construction is booming -- or luxury housing downtown. The new luxury towers will contain just a small percentage of apartments for the tens of thousands of moderate-income residents who live in Lower Manhattan.

"Explain to me why helping Bank of America build a tower on one of the most expensive pieces of property in the world is a good use of these moneys?" said state Sen. Liz Krueger, whose district encompasses 42nd Street at Sixth Avenue, where that tower is to rise. "We've gotten free federal money and, instead of building affordable housing, it's become a race between the most powerful groups in the city to claim it."

In the frenetic months that followed the terrorist attacks, Congress worked fast to assemble financing to rebuild the area around Ground Zero. In a rare move, Congress allowed private developers to receive proceeds for commercial projects from interest-free, tax-exempt bonds sold on the municipal bond market. While the Liberty Bonds were backed by the federal government, state and local officials selected the projects that would receive the money.

Congress put few conditions on the Liberty Bond program, but the program's advocates said the intention was clear -- and it was not for luxury apartments and commercial projects far from the site of the World Trade Center. In fact, the program stipulated that New York's governor and the city's mayor had to deem a downtown project "not feasible" before diverting money for use elsewhere in the city.

"We didn't put a lot of strings on the Liberty Bonds, but more should have gone for jobs and affordable housing," said U.S. Rep. Carolyn B. Maloney (D-N.Y.). "A lot of this money has been spent on projects that fit the letter of the law but not the spirit."

The city's Industrial Development Corp. was designated to hand out the commercial Liberty Bonds. The corporation's executive director, Barbara Basser-Bigio, said that city and state officials wanted to jump-start the broader city economy and that some of the projects would not have been built without the assistance. "Our top priority is to create office space," she said. "We are looking to stimulate the economy through the creation of jobs and enhance business districts throughout the city."

New York officials also say that critics are missing the urgency felt in the weeks after the attacks to retain businesses in the city, especially Lower Manhattan, which remains the nation's third-largest central business district.

"Downtown was hemorrhaging in those days," said Carl Weisbrod, a former top city development official and now president of the Alliance for Downtown New York. "It was critical to stabilize the residential and commercial communities."

The first recovery aid began to flow to New York in the weeks immediately after the terrorist attacks. The Bush administration tapped $3.5 billion in community development block grants, a federal program usually reserved for economic development in poor communities. Of this money, $300 million was quickly directed to a program to retain companies tempted to flee from downtown Manhattan. Auditing firm Deloitte & Touche got $17 million, Bank of Nova Scotia got $3 million, and Bank of New York received $40 million. American Express got $25 million even without threatening to leave its 3 World Financial Center home. Other federal money intended for small businesses ending up going to investment-house brokers and traders.

In March 2002, Congress started to move beyond this initial emergency patchwork and created the Liberty Bond program. (This week the Senate approved an extension of the Liberty Bond program, and the legislation is now headed to the House.)

City officials applauded, saying the bonds would spark the redevelopment of downtown. "The Liberty Bonds will rebuild, renew and enrich Lower Manhattan," Gov. George E. Pataki (R) said at the time.

Myriad agencies are involved in the effort. The Lower Manhattan Development Corp., a joint state-city agency, has taken the lead in the rebuilding but was given no power over the Liberty Bonds. Separate city and state development agencies -- including the city's Liberty Development Corp. and the New York City Industrial Development Agency -- sell the bonds and provide the proceeds to developers.

The corporations' records show the agencies gave $400 million from Liberty Bonds to World Trade Center leaseholder Larry A. Silverstein to rebuild an office tower near Ground Zero, which he is doing even though he has no prospective tenants. The state set aside money for a downtown convention center and gave funding to De Niro and his partners for their six-story, 83-room boutique hotel 10 blocks north of Ground Zero.

The commercial market downtown, however, continues to sputter. The vacancy rate today hovers at 15 percent, more than twice what it was four years ago.

By the middle of 2003, no other developers had stepped forward to build downtown, city officials said. Officials at the Lower Manhattan Development Corp. argued for holding the Liberty Bonds in reserve and waiting for the downtown market to pick up.

But city and state development officials who controlled the Liberty Bonds turned their eyes elsewhere and provided funding for the Bank of America building and the Bank of New York office tower.

Developer Bruce C. Ratner, who is constructing the bank building, has also received $243 million from Liberty Bonds for the construction of a tower for Pace University and New York University Downtown Hospital. Media tycoon Barry Diller received preliminary approval for $80 million to build the corporate headquarters for his company, IAC/InterActiveCorp., which includes Ticketmaster, in the Chelsea neighborhood.

John C. Whitehead, the chairman of the Lower Manhattan Development Corp., criticized those awards, saying that Congress did not intend the Liberty Bonds for the more prosperous precincts of midtown. He told the corporation board last year that the bonds eventually "will be needed for the World Trade Center site itself and the surrounding area."

The parceling out of $1.6 billion in Liberty Bonds to finance luxury housing has proved no less contentious. The downtown housing market slumped briefly after Sept. 11 but then swiftly rebounded. Today three-bedroom apartments near Ground Zero rent for $6,500 a month -- and sell for more than $1 million. Manhattan residential occupancy rates -- more than 95 percent -- are higher than before the terrorist attacks, according to real estate statistics.

Yet the state and city agencies that award the bonds -- the New York State Housing Finance Agency and New York City Housing Development Corp. -- awarded nearly all the residential Liberty Bonds to subsidize the rental market.

Common Cause New York reported that 30 percent of the state's residential share of Liberty Bond proceeds went to Leonard Litwin, who is a major campaign contributor to Pataki.

State housing officials said that political favoritism played no part in their decisions and that loans were handed out "on a first-come, first-served basis." Litwin, they say, had projects in the works and simply got in line when the Liberty Bonds came available.

"Market rents had gone down, and it was a market necessity," said Gary Jacob, a vice president of Glenwood Management Corp., Litwin's real estate firm.

Many urban planners doubt the economics of this argument, noting that Litwin put up a huge equity share in these projects, an indicator of his good financial health. But these planners save their most furious criticism for the state's Housing Finance Agency, which decided to waive its own guidelines requiring that developers who get public bonds set aside 20 percent of the apartments for families with low or moderate incomes.

Instead, they required that Liberty Bond developers designate just 5 percent of the apartments for families of moderate income, which is defined in the area as $80,000 a year for a family of three.

A year ago, Mayor Michael R. Bloomberg laid out his master plan for rebuilding Lower Manhattan, saying he wanted to preserve its economic and residential diversity. But Deputy Mayor Daniel L. Doctoroff, who has overseen much of the development, now says that goal is difficult to achieve.

"It's an admirable goal to have a mixed-income community, but maybe over time it's shifting," he said in an interview, adding that affordable housing in downtown Manhattan requires a deep subsidy. "Maybe this isn't the best use of scarce dollars," he continued. "We have to look at the trade-offs."

Surveys have shown that many residents want the federal recovery money used not just for affordable housing but also for economic development, schools and parks in downtown Manhattan.

"I constantly wonder what Congress will make of our lavish subsidies for some of the wealthiest neighborhoods in the country," said David Dyssegaard Kallick, an economist and senior analyst with the Fiscal Policy Institute, a think tank funded by foundations and labor. "It just seems shocking."