A nearly unheard of real estate player has offered the sweetest deal yet for the quarreling investors about to lose Two Herald Square: $370 million to pay off debts and preserve some equity for investors. But some of the investors are doubtful.
Alpha Equity Group is dangling that amount, said Christopher Milito, a partner at Morrison Cohen LLP, who represents Eddie Sitt, one of the major investors in the financially troubled office and retail building.
“Two Herald Square is one of the best retail properties in Manhattan,” Milito told Commercial Observer via email. “Eddie Sitt has re-asserted his authority as the proper manager and secured an offer with a $370 million valuation.”
The offer appeals to both factions of the four Sitt brothers, who have squabbled for the last year over what one side—which includes Milito’s client—alleges was mishandling of 2 Herald Square’s finances.
But the other side is less sure that the offer is sound. “I am highly doubtful the $370 million offer is real and will close for several reasons,” Stephen Meister, who represents Ralph Sitt, told CO. “We recently ran a comprehensive marketing process through Adam Spies of Cushman [and Wakefield], which did not produce such an offer.”
If the deal could close, it would also work well for another, rival potential buyer: Paramount Group, which holds the mezzanine position on the building’s leasehold and is “bleeding money,” to the senior debt holders at the moment, according to one source familiar with the situation. Punitive interest kicked in when the senior mortgage entered default.
The offer is enough to make the debt to Paramount Group that has bogged down the building go away, and pay off the $250 million leasehold mortgage, which was sold to SL Green Realty Corp. last month, one source said. If, of course, the deal goes through.
“The letter of intent [from Alpha Equity] is non-binding, backed by a deposit of a tiny fraction of 1 percent of the price, and has a due diligence ‘out,'” Meister said. Time is of the essence to this deal—perhaps more so than usual. Meister said the property is losing $100,000 a day on debt service. “Even if Paramount and the partners are inclined to permit Alpha Equity some time to close … no one can afford to wait very long, unless Alpha Equity is prepared … for the huge cost of any delay,” he said, and he doubts they take on that risk.
Alpha Equity, helmed by principal William Segal, most recently planned to develop nearly 600 units of luxury senior housing on the site of a former smelting plant in Staten Island, as the Staten Island Advance reported. Those plans were shot down by the local Community Board in April, however. No contact information for Alpha was available.
Two Herald Square ran into trouble last year when major tenants Publicis and H&M left for other pastures and were not replaced. The building was reportedly losing $1.7 million in revenue each month, The Real Deal said, and needed cash to execute its lease with WeWork, but had no refinancing of its fee mortgage in place and insufficient rent rolls.
Exactly how the building got into this fix is a matter of some dispute. The leasehold interest was originally purchased in 2007 for $275 million. In March of this year, a group of minority investors filed suit in Manhattan Supreme Court against Ralph Sitt and a group of LLCs affiliated with the mezzanine lender on the property, according to public documents. The suit alleges that Ralph Sitt had faked a document that made him sole manager for the building and taken out a $30 million mezzanine loan on the asset with Paramount without the consent of the other investors. It alleges that the JV LLC behind the mezzanine note named Paramount as a “preferred equity partner”—a choice the litigants say amounted to “overreaching terms and conditions” that gave Paramount too much power over the property.
The source close to the situation said the mezzanine loan was closer to $20 million, with the debt starting at $18 million but growing once the owners defaulted and were dinged with additional interest. A call to Paramount was not immediately returned.
The allegations led to an injunction preventing any decisions about the building’s fate to move forward without all of the brothers signing on, another source close to the matter who asked not to be identified told CO.
However, Meister disputes Eddie Sitt’s claim that he is now the lawful manager. “The court denied a request by Eddie Sitt to grant an injunction installing him as manager,” he said, adding that he has has never acted as manager. He also alleges that Eddie and the other Sitt brothers defaulted on their shares in the property.
The JEMB deal, however, put almost no equity back into investors’ pockets, although it allowed them to curtail tax liability associated with the sale, the second source said. It also provided an option for the Sitts to buy back into the property with fresh equity. The deal died some time in the last month, according to The Real Deal.
Paramount, of course, could still attempt to take control of the building. The second source said that the junior debt holder was working with all sides to help facilitate the Alpha Equity sale. Even Ralph Sitt, who allegedly improperly forged the deal with Paramount that sunk the building, is supposedly on board with the Alpha bid, according to one source.
The Alpha offer allows investors to avoid major tax implications but also gives money back to investors, of which there are 87 in addition to the Sitt family members.
“We are hopeful that all of the Sitt brothers will work together to avoid the scenario that prior offers contemplated: a wipe-out of the investors’ equity,” Milito said.
But Meister fires back that Milito has misrepresented the capital behind the Alpha offer. “Milito said that Savanna Fund was Alpha Equity’s partner. I have represented Savanna in the past, and called to check. They confirmed they met with Alpha Equity and passed on the deal.”
The moral of the story? Don’t do business with family.
Update: This story has been updated with comments from Ralph Sitt’s attorney.