Are developers playing "chicken" with the market?

David Goldsmith

All Powerful Moderator
Staff member

Korean lender sues for $40M over Ceruzzi condo mezz loan​

Guarantors downplay suit, claim sales picking up at UES project​

When South Korea’s Meritz Securities put together a $350 million inventory loan for a Ceruzzi Properties condo tower last February, it seemed the company’s appetite for risk was growing.
The pandemic, which hit New York City a few weeks later, has certainly put risk appetites to the test. For the loan on the Centrale, in Midtown East, caution might have been warranted: A lawsuit alleges the $110 million mezzanine portion is in default.

The state-owned Industrial Bank of Korea, acting as trustee for the investment trust backing the debt, is seeking $40 million in damages.

According to a suit filed in Manhattan Supreme Court, Ceruzzi missed a $2.35 million interest payment in November. Following an acceleration and with default interest, IBK says the total amount owed is now more than $86 million, of which up to $40 million is subject to a payment guarantee.
“To date, no payment has been received and the full balance remains outstanding,” IBK’s lawyers wrote when the suit was filed in late January.

The guarantors of the debt, including executors of Lou Ceruzzi’s estate, downplayed the suit, issuing a statement calling it “a technical matter filed by the lender to preserve its rights as sales were slowed during 2020 due to the pandemic”. The property owner is not involved in the litigation, they noted.
“Recently, we have seen strong demand at the property, improved pricing and many units going under contract and closing,” the statement continued. “The company expects the suit will be resolved in the near future and for project sales to continue to rebound.”

IBK’s motion for summary judgment is set to be heard on April 9. Counsel for the lender did not respond to a request for comment
The 72-story, 124-unit luxury condo tower, at 138 East 50th Street between Lexington and Third avenues, was completed in 2019 with a $300 million construction loan from Madison Realty Capital. A duplex penthouse at the property hit the market with an asking price of $40 million that April.

When Ceruzzi closed on the inventory loan last year, it had “put 20 units into hard contract already,” according to a press release.
According to property records, 22 sales totaling $47.5 million have been recorded: six for $17.7 million in May, 11 for $18.6 million over the remainder of 2020, and five for $11.2 million this year.
The projected sellout for the tower is $525 million, an average of $4.2 million per unit, suggesting that the vast majority of sales so far have been for lower-priced units.
 

David Goldsmith

All Powerful Moderator
Staff member
Another project wrapping construction but hasn't launched sales yet.

 

David Goldsmith

All Powerful Moderator
Staff member
CIM, LIVWRK look to sell Dumbo rentals for $235M
Developers behind an amenity-packed residential project in Dumbo are looking to sell its rental portion for $235 million — the biggest offering of its kind so far this year in Brooklyn.
CIM Group and LIVWRK have put the 320-unit rental portion of their Front & York project on the market, according to an offering memo for the property.

The block of rentals is part of the 1.1 million-square-foot building at 85 Jay Street designed by architect Morris Adjmi. The development also includes 131,000 square feet of retail and 408 condominiums, which are not part of the offering.

But fitting with the luxury condo motif, the building is packed with high-end amenities that could be described as extravagant, even by the standards of one of Brooklyn’s most expensive neighborhoods.
The building includes more than 77,000 square feet of amenities including a luxury gym across three levels, a Kid’s Academy, a full-service salon and spa, a health-oriented cafe and the neighborhood’s largest indoor pool, according to the marketing memo.

The sellers are aiming for a price around $235 million, or about $374,000 per unit.
A spokesperson for CIM Group could not be reached for comment and a representative for LIVWRK declined to comment. The project is being marketed by Cushman & Wakefield’s Adam Spies and Doug Harmon, who declined to comment.
The developers topped out construction in September and the building is expected to get its temporary certificate of occupancy in the second quarter.

CIM and LIVWRK purchased the site, a former parking lot, for $345 million in 2016 with Kushner Companies from the Jehovah’s Witnesses. At the time, the investors were buying other properties in the neighborhood from the religious group that they renovated and leased as office space.
Kushner sold its stake to CIM and LIVWRK in 2018.

The condo portion’s projected sellout of $833 million made the project Brooklyn’s most expensive filing of 2019. The offering memo for the rental portion of the building said a new buyer could consider converting the rental units to for-sale condos.
 

David Goldsmith

All Powerful Moderator
Staff member

Mezz lender purchases 10 units at Gramercy condo​

Units sold for nearly $19M​

Mountbatten Equities has sold 10 units at its Gramercy Park condominium, Rutherford Place, to an entity that identifies itself as its mezzanine lender.
The buyer, a limited liability company called 305 Second Avenue Mezz Lender, bought the units for $18.64 million in early March, property records show. Alexander Zabik, the managing director and credit portfolio manager of private equity firm Pennybacker Capital, signed the deed for the LLC.

The deal works out to roughly $1.86 million per unit. Mountbatten is marketing the remaining apartments with Compass for between $825,000 to $3.195 million. It’s unclear how many units the developer still owns.

There’s been increasing interest in bulk condo buys among institutional investors, but completed transactions have been few and far between as many developers balk at the deep discounts would-be buyers are seeking.
The largest bulk deal to date is Elad Group’s $90 million sale of 70 units at its Hell’s Kitchen condo to Tishman Realty. Those units traded at a 40.5 percent discount compared to ones that are already in contract. Other deals have been done for less, such as GID Development’s $27 million sale of eight units at Waterline Square to a South American family. The developer reportedly gave the buyer a 7 percent discount.

Bulk sales, and even wholesale offerings shopped around by brokers, are typically kept quiet due to the widespread interpretation of such deals as symptomatic of deeper challenges for the developer and the project. Wholesale deals can also represent settlements among developers and investors, as was the case when the nation of Senegal shelled out $25 million to the developer of its Midtown tower last year, or in the case of Magnum Real Estate’s $33 million sale of 10 units to one its investors in 2019.

Neither Mountbatten nor Pennybacker responded to requests for comment, so the circumstances of this deal are unclear.
But Rutherford Place is not your average condo with lingering unsold units. The building is steeped in New York and celebrity history, and its sales effort has been ongoing for decades.
The 10-story building at 305 Second Avenue was built in 1902 by banker J.P. Morgan to be the city’s largest maternity hospital. It eventually became a general hospital and then, in the 1960s, a drug treatment center.

Mountbatten’s owners, Winthrop Chamberlin and Barnet Liberman, bought the building from Beth Israel Medical Center in the 1980s for $5.5 million and converted it into residential condos. But notably, the developers, who were also behind the Printing House condo conversion in West Village, didn’t make a concerted effort to sell any of its approximately 127 units for more than two decades.

Instead, the developers rented out most of the units to claim a variety of tax benefits, according to building records and an interview Liberman did with the New York Times. Over the years, the building became known for its star-studded rent roll, with former tenants that include comedian Dave Chappelle, producer Benny Medina, rapper and producers Sean “Diddy” Combs, and actors Penn Badgley, Wesley Snipes, Judd Nelson, Chris Farley, and Tom Cruise and his then-wife Mimi Rogers, per New York Magazine.

Mountbatten’s first concerted push to sell its units was in 2006 and then again in 2013, according to media reports at the time.
 

David Goldsmith

All Powerful Moderator
Staff member

The art of the (discounted) deal​

Rechler and Silverstein have been bargain shopping but opportunities in NYC remain scarce​

One of the biggest investment-sale bargains in New York since the beginning of the pandemic happened just last month. That’s when Scott Rechler’s RXR Realty acquired a 42 percent stake in hundreds of Manhattan rental units from Gary Barnett’s Extell Development. RXR valued the two buildings at $800 million, a 20 percent discount from their pre-Covid valuation of $1 billion.
But while the pandemic has emptied out New York offices and strained landlords, renters and homeowners, it hasn’t unleashed the flood of distress selling experts predicted early on. That’s in large part because banks have offered extensions to loan borrowers and government action has prevented mass foreclosures.
And Rechler said he’s now seeing “a tremendous amount of pent-up demand” in the market.
Sellers have also been reluctant to slash prices because they know investors have billions in dry powder.
“There is a ton of capital on the sidelines and sometimes too much capital creates a self-fulfilling prophecy of modest distress,” said Richard Mack, CEO of Mack Real Estate Group, a major investor and mezzanine lender on development projects.
There is certainly some stress, but lots of the rescue jobs are happening behind the scenes, in the form of debt and equity placements as opposed to outright sales.
“The biggest news is the activity [which] the market won’t readily see because it’s in the capital stack,” said Jay Neveloff, who chairs the real estate group at New York-based law firm Kramer Levin. “You will not see it, it will be under the kimono.”

Alternative lenders are also looking to find ways to either foreclose on defaulted properties or bring on new management to take over struggling projects.
CIM Group and Mack Real Estate — via their lending divisions — have sought to take over properties in default through a Uniform Commercial Code foreclosure, a process that bypasses state courts.
CIM did just that in February, when it foreclosed on the junior mezzanine positions tied to four of HFZ Capital Group’s Manhattan condo conversion projects. The move gave it control of prime development properties on which CIM claims it was owed about $90 million.
Mack could also take control of half of a Brooklyn luxury rental project, The Denizen, from troubled developer All Year Management through a UCC foreclosure. Silverstein Properties made a bid to pay $200 million for the other half of that project, which would be a substantial discount. All Year, led by Yoel Goldman, had valued that portion of the complex at $313 million pre-pandemic, according to an appraisal report on the Tel Aviv Stock Exchange.
In another project involving HFZ, hedge fund Children’s Investment Fund has sought to bring on Zeckendorf Development and Suffolk Construction to take control of the XI, a $2 billion hotel and condo project in Chelsea. Children’s had initially provided HFZ with a $1.25 billion loan to complete the Bjarke Ingels-designed development. In January Children’s filed suit, alleging HFZ was on the hook for at least $160 million in outstanding interest payments.

Holding on​

Owners who can are choosing to hold onto their properties until the market stabilizes and pricing becomes more clear, according to Jonathan Adelsberg, a partner in the real estate group at New York law firm Herrick Feinstein.
At that point, they can “assess the level of damage” the pandemic has had, Adelsberg added.
Estimates are that Covid will lead to $146 billion in pending and existing commercial real estate distressed debt, according to an end-of-year report from Real Capital Analytics.
“The bank accommodations are holding everything together,” said Lisa Knee, tax partner and co-leader of accounting firm EisnerAmper’s national real estate practice. But when banks start marking down their loans, more distress sales are likely to occur.
The current wait-and-see strategy is a slight departure from what followed the Great Recession.
RXR — which Rechler formed in 2007 — made a name for itself by buying massive commercial buildings in New York as the economy was just rising from the depths. In 2011, it acquired the 2.3 million-square-foot Starrett-Lehigh Building in West Chelsea for $900 million.
Two years later, RXR partnered with Walton Street Capital to buy a 1.2 million-square-foot 237 Park Avenue from Lehman Brothers Holdings paying $810 million. The Midtown office building was appraised at $1.3 billion in 2017, according to Trepp, which tracks mortgage-backed securities.
Today, some firms are looking to put money to work as a form of rescue capital, including in the struggling hospitality sector. Last month, Acore Capital said it had already raised $1 billion for its hotel fund to provide financing to hotel borrowers who are no longer being offered extensions with their lenders through preferred equity or mezzanine financing across the United States.
But Michael May, president of Silverstein’s real estate lending arm, said that injecting equity into troubled projects will not always help solve the problem.
“More often than not, unfortunately, the reason that the project is in the situation [it is] in is because the ownership is dysfunctional,” he said.
 
Top