ANALYSIS: Looming foreclosure for 111 West 57th Street appears to be maneuver to cut out equity partner - Debtwire

ANALYSIS: Looming foreclosure for 111 West 57th Street appears to be maneuver to cut out equity partner

11 September 2017 - 12:00 am

A “supertall” condominium building on New York City’s Billionaire’s Row is one step closer to foreclosure after a New York Supreme Court judge last week rejected a preliminary injunction to extend a stay preventing one lender from taking control of the project.

 

If the foreclosure proceeds, the project will be the first high-profile condo project in Manhattan to go belly-up during this real estate cycle. The equity partner suing to prevent it is vowing to appeal.

 

However, loan documents seen by Debtwire from the foreclosure proceedings make this anything but a standard foreclosure process.111 West 57th Street, dubbed Steinway Tower, is slated to hold 60 luxury condos, with asking prices starting at USD 16m. Facing higher-than-anticipated construction costs and a tepid market, developers JDS Development Group and Property Markets Group could now lose the high-profile project where the firms initially predicted sales would total USD 145bn. JDS and PMG declined to comment.

 

Sales at the tower were already delayed more than a year. Apollo Commercial Real Estate Finance, senior mezzanine lender on the project, said on its 2Q17 earnings call that sales have now commenced.

 

One equity partner, Connecticut-based REIT Ambase Corp., filed suit to prevent the foreclosure in July, arguing it would lose its USD 70m equity stake were it allowed to proceed. Ambase had received a temporary stay, but that was lifted last week, said Ambase’s attorney, Stephen Meister, a founding partner at Meister, Seelig & Fein.

 

The restraining order delayed the “strict foreclosure” by the junior mezzanine lender on the property, Spruce Capital Partners. In a strict foreclosure, public auction process is scrapped and the project is essentially “handed over” to the lender. The junior mezzanine piece of USD 25m is currently in technical default, allowing foreclosure, Meister said. But the fact that the mezzanine loan agreement even stipulated strict foreclosure in the event of default is unusual, a market source said.

 

The abrupt and swift process was allowed because of a rare provision in the mezzanine loan that allowed strict foreclosure in the event the note was “out of balance,” meaning over budget. Cost overruns at the building are allegedly in excess of USD 50m. Once out of balance, the loan payments accelerated, Meister said, further imperiling the building’s financial picture. However, loan amendments show that Apollo continued to fund its loan because of the sponsors’ purported assurances that they were about to score another mezzanine loan to keep the project afloat.

 

If the foreclosure moves forward, Spruce would either take over as sponsor for Steinway Tower–which designs by SHoP Architects have rising 82 stories to loom over Central Park South–or have to locate a developer to take it off its hands in a troubled market. While Spruce’s website boasts of two New York condo projects and several townhouse redevelopments, the developer is not a household name of JDS or PMG’s stature by any means. Spruce bought the junior mezz piece from Apollo during 2Q17, according to Apollo’s 2Q call. Spruce did not return a request for comment.
After Spruce picked up its junior note, which was carved out of the larger USD325m mezzanine piece, it intended to restructure and recapitalize the subordinate equity capital, as reported. At the time, Apollo Chief Executive Stuart Rothstein said Apollo was actively managing the asset and that Apollo’s mezzanine position now was at risk only if the project is not built. Apollo declined to comment.

 

Loan documents filed with the court also show a variety of provisions protecting the senior mezzanine lender and senior lender. For instance, in the amendment to the intercreditor agreement between Spruce and the other lenders, one provision allows Spruce to dissolve the current ownership and create a new special purpose vehicle, following foreclosure and the origination of a new junior mezz piece. It stipulates that the new lender can only be the senior lender, AIG, the senior mezz lender or a party both approve of. It also explicitly states that this provision is at Spruce’s sole request.

 

The market source said that was “a very unusual provision.”

 

Another amendment states that all parties—senior mezz lender, senior lender and junior mezz lender, but not an equity partner—agree to not “challenge in any form the validity of an event of default.” This provision is less rare, the market source said, but is more likely to be included in a workout document, not an intercreditor agreement.

 

The agreement seems to point to a path by which the sponsors and debt providers can essentially cut Ambase out of the deal, and that is how it’s been interpreted by attorneys briefed on the case, the market source said. “Word on the street is they did this to get rid of the equity lender,” namely Ambase, the market source added.

 

This is not the first time Ambase and the sponsors have landed in court.

 

Last year, Ambase filed suit against JDS and PMG, alleging that after securing the construction financing package the sponsors unfairly diluted Ambase’s equity, while allegedly not diluting that of other equity investors.

 

Ambase sought to retain its status as a majority stakeholder—it reportedly purchased its 59% interest in 2013 for USD 56m. The sponsor then accused Ambase of failing to meet capital calls that other investors had, a fact that Ambased disputed. Ambase also alleged that the construction financing was put together without its approval or consultation.

 

Apollo has reportedly sliced up its position in the tower repeatedly, diminishing its own exposure. In 4Q15, it sold USD 200m of its position to a fund it manages for the Qatari sovereign wealth fund, QAI, and USD 50m to Apollo debt funds not directly affiliated with the REIT, according to a report from The Real Deal. The portion sold to Spruce was carved out of the section funded by QAI.

 

The case comes amid troubling indicators for luxury residential condo sales in Manhattan, which have slumped since early 2016, and dropped even further recently. For the period between 28 August and 3 September 2017, luxury residences in contract in New York City—defined those with prices over USD 4m—totaled about USD 80m, according to the Olshan Report, an industry report that tracks luxury contracts. That is lowest total of any week this year. The week between 4 and 10 September marked the 11th-straight week in which fewer than 20 contracts were signed, which the report called “the weakest stretch since 2012.” While the recent dive could be attributed to a late summer slump, other figures point to overall malaise. In 2Q17, luxury residential properties spent 37 percent more time on the market than in 2Q16 and 34 percent more time on the market than in 1Q17, according to Douglas Elliman’s market report for that period.

 

Now, the fate of the lofty tower is unclear. But Meister said his client isn’t giving up. “Any attempt by Spruce to acquire the collateral by strict foreclosure, in my opinion, would be invalid,” he said. “Ambase was entitled to and did object and our appeal is pending.”

 

by Guelda Voien