All the Twists and Turns Behind Times Square Theater, Last Week’s Most Creative Deal of the Year Winner
Daniel Edward Rosen June 19, 2012, 10 a.m.
Marvel Comics kicked the tires for a proposed flagship store and theme restaurant based on the comic book publisher’s legion of mutant superheroes. Burger King considered changing the 1920s-vintage theater into “The World’s Largest Burger King.” Even the professional grapplers from the World Wrestling Federation envisioned the domed auditorium as a studio-slash-retail-slash-performance space, where wrestlers would fight as diners ate their suppers. Alas, like the other contenders, the WWF walked away.
And so it went for the brokers and potential tenants seeking to fill the old Times Square Theater, a space so pockmarked with hidden challenges, prohibitive rent requirements and aging infrastructure, that the quest to find a suitable tenant lurched on for an entire decade, from shortly after George W. Bush’s election as president to the second half of Barack Obama’s first term in office.
Considering the false starts and dashed hopes C. Bradley Mendelson and Alan Schmerzler faced while negotiating their drama-filled deal last year for 217 West 42nd Street, an award ceremony on par with the Tony’s wouldn’t have been out of the question.
“We ran into a recession, we ran into 9/11, there was a lot of stuff going on,” said Mr. Mendelson upon winning the Real Estate Board of New York’s coveted Most Creative Deal of the Year award last week at the 14th Annual Retail Awards at the 101 Club. “We actually should have gotten an award for keeping the agency for as long we did.”
Chase Welles, the REBNY retail committee chairman who bestowed the award, and who also announced the Key Foods lease at 55 Fulton Street as winner of the coveted Retail Deal That Most Significantly Benefits the Manhattan Retail Market prize, put it another way: “I just have to say that we read this submission, and it just kept going on and on, and the deal kept dying and coming back to life, and new investors—it was everything that you hate about the business that we’re in.”
The duo’s trials and tribulations began in earnest in 1994. The Times Square area of old was, at best, a morass of XXX-movie theaters and dive bars. But the area was on the cusp of reform, set forth by New York City and the state’s General Project Plan, which aimed to establish a stretch of theaters along 42nd Street between Broadway and Eighth Avenues as “irreplaceable architectural and historical assets.”
The New 42nd Street, a nonprofit group, received control of seven of the eight historic theaters in Times Square in 1990, including possession of 99-year master leases.
The New 42nd Street’s board gave Mr. Mendelson, then a broker for the Edward S. Gordon Company’s Retail Group, the assignment of leasing out the Times Square Theater. But the building, which had been vacant for a decade, had fallen into disrepair. It had been stripped of its HVAC, electrical wiring and plumbing, and the stage and proscenium setting made it a tricky space to convert into a nontheatrical use.
There were other challenges as well.
The New 42nd Street did not have the requisite funds to offer cash to sweeten the deal. The space itself, meanwhile, had received a “Historic Preservation Guideline Summary,” requiring that certain aspects of the theater—such as the parapet urns and ornate box seats—be restored.
“As a nonprofit organization, The New 42nd Street was not in a position to provide a tenant improvement allowance, which for a building in this condition, it wouldn’t have been unusual for a landlord to do that,” said Mr. Schmerzler. “The theater is a shell.”
Then there were the limitations set forth by the space’s master lease regarding the marketing of the space: it had to be a performance space. Permitted secondary uses included restaurant or retail.
Marvel Comics, the publisher who brought Spiderman and Hulk to life, considered the space, but an ill-timed bankruptcy in 1997 halted those plans. Burger King also looked, but was scared away by the theater’s rent requirements. And the WWF considered bringing Stone Cold Steve Austin and the Undertaker to what would have been something akin to dinner theater on steroids.
Alas, not even Hulk Hogan or his fellow WWF brawlers could pin down the deal.
By then, nine years had passed, and hope was beginning to fade. Enter Mark Ecko, the man behind a wildly popular line of edgy street wear that bears his last (and legally changed) name. In the summer of 2004, the retailer inked a lease, paid rent and embarked upon an ambitious renovation project that would transform the space into a flagship store with a “performance venue vibe.”
“Unfortunately, the changing winds of fashion, a change in Ecko’s financial position and a projected renovation cost of over $35 million all combined to result in Ecko defaulting on its lease,” Messrs. Schmerzler and Mendelson recount in their written submission to REBNY.
“What we learned was that the least expensive renovation of the building was to convert it back into a theater. The most expensive was to make it anything other than a theater,” said Mr. Schmerzler. “Which is why Ecko never opened.”
Cut to 2009. Mr. Mendelson is now with Cushman & Wakefield, working alongside Mr. Schmerzler. Once again, the responsibility of marketing and leasing the theater had fallen into his hands. With this second go-round, the duo emphasized the rare nature of the space they were marketing: the last undeveloped theater in Times Square, complete with “spectacular” storefront signage. But there was a hitch: the theater would be delivered as is—no electricity, no plumbing, the storefront boarded up—and the new tenant would have to pay all the brokerage commissions.
Enter Forbes Candlish, a man whose towering height and long, flowing gray hair give him an appearance as striking as his name. Mr. Candlish, a theater producer behind the Tony Award-winning Broadway revival of Hair, worked for Gary Goddard and Robert Kory, both of the Goddard Group.
“Gary Goddard is one of the original inventors of 3D film technology, and Gary designs the 3D attraction rides at, like, Busch Gardens, Six Flags,” Mr. Schmerzler remembered.
Mr. Candlish’s idea for the theater was ambitious: to transform it into a high-tech 3D/4D theater and performance space. The first production would be a combination of a 3D/4D compilation (coupled with live performance) of Broadway’s greatest hits throughout the years.
Despite the novelty of Mr. Candlish’s concept, the duo felt they had finally discovered their “needle in a haystack.” Mr. Kory signed a term sheet in March 2010, and then set out to secure licensing rights. Then the deal hit an expected snag: The trio discovered that the theater was located in an empowerment zone, qualifying them for tax breaks and financing programs, such as EB-5 financing and the New Market Tax Credits program.
“It became apparent that Robert would never agree to fully negotiate and sign a lease until he had shifted the focus of his financing [away] from debt … he wanted to retain more ownership of his project,” Mr. Mendelson said.
Meanwhile, The New 42nd Street had its doubts about the Candlish-Kory-Goddard project.
The three men, and their idea, were unproven tenants. Uncomfortable with the gambit, Messrs. Mendelson and Schmerzler were encouraged to continue to market the space.
A consortium of Hollywood producers and horror buffs, who had their own collection of macabre memorabilia, wanted to open up a horror museum and felt the theater would be perfect for its idea.
“The Horror Guys,” as Mendelson and Schmerzler called them, signed an offer sheet identical to the one Mr. Kory signed, and the Cushman & Wakefield team had themselves a back-up plan.
“They also had a number of West Coast investors and somehow, through the ether, they knew about Robert [Kory] and Robert knew about them,” Mr. Schmerzler said.
In an ironic twist of fate, the fact the two groups knew about one another meant that Mr. Kory was suddenly aware he had a competitor breathing down his neck. Perhaps inspired by the competition, Mr. Kory and Co. set out to secure the necessary music rights—like Rogers and Hammerstein and Andrew Lloyd Weber—and raise enough capital to be able to pull off the 3D/4D venture. He also hired actor Hugh Jackman to serve as a spokesman for the project.
“He got all these balls in the air, all at the same time, and the whole deal was structured on the fact that he had a lease for this theater,” Mr. Mendelson said.
Then Mendelson and Schmerzler advised The New 42nd Street to “hold Robert and his investors’ feet to the fire and make them commit.”
The nonprofit landlord firmed up its offer to Mr. Kory: sign a lease and start paying full monthly rent; sign the Goody Guy Guarantee with lease execution; and waive his right to terminate the lease, thus becoming “an iron-clad tenant.” In exchange, Mr. Kory would receive extensions on his security deposit and his construction guarantee, thus giving him more time to finish his financing.
On April 14, 2011, Broadway 4D Theater NY LLC signed a long-term net lease with The New 42nd Street. In December, Mr. Kory posted his full security deposit, and the lease that seemed so tenuous for two decades had finally become “hard.”
When it came time to submit applications to REBNY for the 2012 Retail Deals of the year, the two felt they had enough to frame an intriguing narrative around.
“What no broker does is keep a deal log of all the things that happened over the course of a deal, so when you decide to submit these things, you go through your files and your notes,” said Mr. Schmerzler. “When you get into that process, you can’t believe all that you went through to finally pull it together and get a deal done.”
But Mr. Mendelson was skeptical. The year before, he submitted his work on the Uniqlo deal that brought the Japanese retailer to 57th Street, which he believed was a sure-fire winner. It lost.
The two sent in their submission, presented and packaged like a treatment for a Hollywood movie, crediting the piece with a nice cinematic touch: “Written, Produced & Directed By: C. Bradley Mendelson and Alan Schmerzler.”
On a late May morning inside REBNY’s conference room, a group of judges assembled for the standard corporate breakfast fare of bagels and juice. Among those present were Robin Abrams of the Lansco Corporation, Chase Welles, Peter Braus of Lee & Associates and Andrew Schulman of Thor Equities. For three-and-a-half hours, they pored through each submission, eventually narrowing down to a few finalists.
The deal that proved to be the most intriguing—and the most befuddling—was Schmerzler and Mendelson’s.
“The deal was ephemeral at best, in its early stages. It was just a daydream and a conversation,” said Mr. Welles. “To harden that up and make it real is difficult.”
The narrative’s twists and turns proved complex for the seasoned panel of judges. Richard Frome, a real estate attorney and a judge on the panel, helped guide the group through the deal. But even he was stumped, and the judges phoned both brokers to get clarifications on certain points.
“It was a very complicated deal, so we needed to understand ‘did this guy fund the construction deposit?’ There was a lot of different aspects to the deal,” said Mr. Braus.
Ultimately, the judges selected The Times Square Theater deal for the award.
“I think this deal won because we felt that the brokers stuck with it for 10 years, to make a deal under impossible conditions,” said Ms. Abrams.
Weeks later, the Cushman & Wakefield duo received their prize.
“I was surprised, but it was very nice to win. It’s very gratifying,” said Mr. Mendelson.
“It’s very hard to capture everything that happens in the course of a big transaction in 10 pages,” Mr. Schmerzler added.