Privatization of the World Trade Center: Q & A with Jon Minikes
Jon Minikes is a private investor and consultant with more than 40 years of real estate expertise. From 1991 to 2001, he was the President and CEO of Milstein Brothers Realty Investors, a real estate investment firm which acts as a consultant and principal in entrepreneurial real property.
His work experience before joining Milstein Brothers Realty Investors included positions in real estate transaction and deal structuring roles within Sentinel Real Estate Corporation, Jones Lang Wootton, The Equitable Life Assurance Society of the United States, C.I. Planning Corporation, Uris Buildings Corporation, and as a practicing attorney at Cleary, Gottlieb, Steen and Hamilton. He is a member of the Cornell University Council, the Cornell Real Estate Council, and assists in the Cornell Program in Real Estate (PRE). Mr. Minikes graduated from Cornell University with an A.B. in 1960, received a J.D. from the Cornell Law School in 1962, and received an L.L.M. in International Law from the New York University School of Law in 1965.
We recently sat down with Minikes and discussed one of the most intriguing deals that he worked on during his long and successful career in New York City real estate: the privatization of the World Trade Center (WTC).
Q: Many people are unaware that the WTC was publicly owned, and then privatized just before the 9/11/01 attacks. Could you help give some background on the property?
A: It actually wasn’t owned publicly, it was governmentally owned. The Port Authority of New York and New Jersey, which owns the property, was actually a creature of Congress, the result of a compact between the State of New York and the State of New Jersey which was passed as an act of Congress. As a result the World Trade Center has some very interesting characteristics: it is a self-contained entity, not dissimilar to the Vatican, and it is not subject to New York City zoning; it is not served by New York City Police; absent an existing agreement there is no responsibility for the New York City Fire Department to serve it; New York City building codes do not apply to it; and it does not pay New York City real estate taxes. This applies to all Port Authority (PA) owned facilities, and it was incredibly important as we looked at privatizing the World Trade Center.
Q: You were hired by the Port Authority of NY, could you explain their role in the privatization of the WTC?
A: The Port Authority owned the WTC, and it was really a political decision by the states of New York and New Jersey to sell the buildings. The Port Authority is jointly controlled by the governors of New York and New Jersey. Each governor appoints members to the Board of Commissioners, which directs the PA.
The thinking behind the “sale” was that they wanted to, in effect, monetize the asset. It was sitting there on its books, and they thought that if they raised funds from the sale of the WTC they could further other missions. The gains achieved from the transaction would stay with the Port Authority rather than being passed on to the state governments since the Port Authority does projects in both New York and New Jersey, so in a secondary way a monetization benefits both states.
Q: Could you explain your role in the privatization and the problem you were hired to address?
A: When the Port Authority decided to go forward with the transaction, they went out and invited certain groups to submit proposals to represent them as their advisor in the privatization of the center. We, Douglas Elliman Realty Advisors, and Howard Milstein in particular, were close to JP Morgan, and we decided to join in a bid. JP Morgan, with their expertise and prestige, wanted to partner with us to bring in our entrepreneurial skills. We also brought on board Cushman & Wakefield, which was instrumental in all of the property aspects of the transaction, from property inspections to the leases affecting the center. The joint venture of JP Morgan, Douglas Elliman Realty Advisors and Cushman & Wakefield submitted its proposal to the Port Authority, were interviewed and, fortunately, selected as the advisor. As the advisor we were tasked with the challenge of finding the right bidder and structuring the best transaction possible, with the goal of freeing up the most capital for the Port Authority.
Q: What were some of the problems that came up as you began to work through this deal?
A: As we moved along and considered the transaction, we were presented with several unique challenges due to the distinct nature of the Port Authority. As I mentioned, the Port Authority does not pay New York City real estate taxes. The PA entered into an agreement with the City where it pays what we call PILOTs (payments in lieu of taxes). That payment was considerably less than what normal real estate taxes would be on the property. That was also true with agreements the PA entered into with the New York City Fire and Police Departments, although the Port Authority does have their own Police Department and fire fighters. These agreements, along with other issues, prompted the Port Authority to pursue a 99-year ground lease on the World Trade Center, which also enabled them to keep long term control of the site. In order to achieve the ground lease in the political arena it was critical to re-negotiate the PILOT agreement with the City of New York due to the below market real estate tax structure.
In addition, as we looked at maximizing the Port Authority’s objectives to free up capital and still maintain some control on the site, it became clear that a 99-year lease would be the only real option. In order to free up capital in this scenario, we felt that interested parties would need to make a substantial upfront payment together with base rents and participating percentage rents over the years. That was the focus of the transaction.
Many of the problems which arose involved how to handle the PILOT payments. The PILOT agreement reached with the City directly affected the bottom line, thereby altering how much money you could get from a prospective lessee of the property. This bid structure was outlined in the bid documents, and then we went out for the RFP [request for proposal] based on that.
One of the other intricacies was that, like having your first child going off to college, you see the benefits of the experience, but you still really want to maintain control of some sort. The Port Authority really did not want to give up control of many, many things so there were a lot of negotiations revolving around which leases the Port Authority, as ground lessor, could approve, and a whole range of other control issues which are not normal for a 99-year ground lease. In this case it was more of an active lessor role which led to some consternation on behalf of some of the bidders.
Q: Vornado, Boston Properties and Brookfield Properties were competing bidders. What made Silverstein stand out in the end? How long did the process take in total and did it meet its time projections?
A: The final companies which went down to the wire in the final bid were all substantial companies and any one of them could have completed the transaction. Silverstein Properties at the end of the day came in with the most satisfactory bid to the Port Authority.
It did not meet the time projections which we set out when we started. In retrospect, and in any major transaction of this nature, it is always hard to set deadlines, especially with the complexities and the moving parts involved here between all the players in the transaction. At the end of the day, the Port Authority is a political animal and is not divorced from what the governors of the two states think. From the time that we first put in a proposal to be the Port Authority’s advisor to the closing was four and a half years. It was a much longer process than we originally expected, as we originally thought that the deal would take two to three years.
Q: Due to the 9/11 attacks, did the deal have to be completely rewritten?
A: Obviously it was a material change in circumstances, but the one thing that did not change was the fact that Silverstein Properties had a 99-year lease on the property. Now everything else had to be negotiated. This also presented the issue of the insurance proceeds, which was a long drawn out question.
The fact that, even with the proceeds, there was not likely enough money to rebuild the center in its original form presented an issue. So, clearly there had to be a renegotiation between Silverstein Properties and the Port Authority. Also, as a strictly political matter, once a disaster like this occurs, the two States, the City, and the Port Authority all had a say as to what was built on the property.
Q: What are your feelings on the redevelopment of the World Trade Center property?
A: I think it is a symbol, and I am sure that it will be an appropriate symbol. If I were the czar of the property would I be doing what they are doing right now? Probably not, but I don’t know any two people who don’t have different views on what should be done there. Clearly a memorial of some sort is appropriate. I think that it is unfortunate in this political circumstance that it has taken 10 years for anything to occur there.
Q: From your experience in real estate dealings with high-powered New York real estate owners, including Donald Trump, the Milstein Family, Larry Silverstein and others, what attributes make people successful in New York real estate?
A: I think the common thread of successful people, whether it’s Howard Milstein, or Larry Silverstein, or Donald Trump, or any number of people that you could mention, is that all successful people have a vision and an idea of what they want to accomplish. Then they are firm in their purpose in taking that vision from A-Z, from beginning to end. As I have mentioned in seminar, the best way to approach any negotiation or transaction is to set achievable goals, prepare carefully, be firm in pursuit of those goals, and don’t count on goodwill. By that I mean always be aware of, and anticipate, the obstacles that can be thrown in your way in achieving your purpose. The more you anticipate, the more you will be prepared as problems crop up.