Sept. 11 (Bloomberg) -- Five years after the Sept. 11 attacks, the federal Liberty Bond program -- created to foster the revival of lower Manhattan with $8 billion of tax-exempt financing -- has largely achieved its goals, developers and government officials said.

``It was an unusual and easy way for the government to provide us with valuable incentives,'' said John Whitehead, former chairman of the Lower Manhattan Development Corp., the state-city entity that oversees rebuilding downtown.

Critics said the program subsidized luxury apartments while shortchanging affordable housing and gave away $650 million in financing for a Bank of America tower in midtown Manhattan that will compete with downtown space.

Liberty Bond legislation in March 2002 allowed New York state and city to sell tax-exempt securities to spur development. The authorization, which cost $1.2 billion in federal tax revenue, was in addition to the about $1.5 billion in tax-exempt bonds that New York can issue for private purposes each year under the U.S. Internal Revenue Code. Investors accept lower yields on such securities.

The biggest allocation of Liberty Bonds is the one most directly tied to the Sept. 11 destruction -- about $3 billion to developer Larry Silverstein to build four skyscrapers at the World Trade Center site, including $475 million for the completed 7 World Trade tower. The program also helped spark a residential building boom downtown, creating almost 4,500 new luxury apartments and spurring new retail businesses.

Wall Street Living

At 63 Wall Street, $132.5 million was used to convert the former Brown Brothers Harriman & Co. headquarters into a 476-unit luxury apartment building where one-bedroom units cost $2,700 a month. Tenants can play billiards or the grand piano in a lounge that was once the banking hall.

Further west, Goldman Sachs Group Inc., the most profitable Wall Street firm, is using $1.65 billion to finance a new 43- story, $2 billion headquarters.

While commercial development has been slower than residential, brokers said that Goldman's commitment has aided downtown's resurgence. The commercial vacancy rate has declined to 10.3 percent from about 13 percent in the first quarter of 2005, according to Jones Lang Lasalle, the largest U.S commercial real estate broker.

Midtown Tower

Even the bond program's supporters, including Whitehead, a former Goldman co-chairman, questioned the allocation of as much as $2 billion outside downtown, including $650 million of tax- exempt financing for a Bank of America tower on West 42nd Street.

``Bank of America, I mean, come on,'' said Julia Vitullo- Martin, a senior fellow at the Manhattan Institute, a think tank often critical of government spending. ``Not is it only prime real estate, but midtown is in direct competition with downtown.''

Charles Gargano, chairman of the Empire State Development Corp., defended the financing in an interview, saying Bank of America ``made a huge investment and a huge commitment to New York City.''

Most of the bonds funded projects in the so-called Liberty Zone, the district south of Canal Street, East Broadway and Grand Street that includes Ground Zero. Ultimately, 40 percent of all the bonds will go to Silverstein.

Governor George Pataki and Mayor Michael Bloomberg allocated $1.6 billion for 13 new residential buildings and conversions of commercial space to rental housing. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

More Residents

The residential population of lower Manhattan has increased 60 percent since the attacks to 37,000, and occupancy rates are over 95 percent, according to the Alliance for Downtown New York, a business group.

Subsidizing housing for the well-off shouldn't have been a priority, said Bettina Damiani, project director with Good Jobs New York, a labor-backed research group. Police officers, firefighters, and construction workers who were ``literally breaking their backs in the recovery effort were completely excluded,'' she said.

Damiani's criticism is misplaced, said Carl Weisbrod, executive vice president of Trinity Real Estate and former president of the downtown alliance.

Weisbrod credited the city for imposing a 3 percent fee on developers to finance affordable housing elsewhere in the city. Developers allocated Liberty Bonds from the state had to set aside 5 percent.

`Great Uncertainty'

The program's purpose wasn't to create affordable housing, he said. It was to trigger immediate investment, stabilize downtown's residential market and lay the groundwork for a thriving mixed-use district, a goal it achieved.

``At the time,'' Weisbrod said, ``there was great uncertainty about the future of lower Manhattan.''

Commercial real estate downtown had weakened considerably before the attacks, as companies such as Citigroup Inc., Lehman Brothers Holdings Inc. and Morgan Stanley left for midtown. That exodus made it even more important to keep Goldman in lower Manhattan after Sept. 11, Weisbrod said.

After Goldman scrapped an earlier deal in a dispute over security plans, the state increased its Liberty Bond offer by $650 million. Goldman also got $140 million in cash grants and tax breaks for its headquarters, due for completion in 2009.

``Goldman Sachs, at the end of the day, took great advantage of the fact they were wanted and needed downtown,'' said Madelyn Wils, former chairman of Community Board 1 and a current director at the Lower Manhattan Development Corp. ``They did what they do best, negotiate a great deal. Can't say I blame them.''

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

Last Updated: September 11, 2006 08:37 EDT