Embattled 2 Herald Square will be turned over next month to Paramount Group, which holds the mezzanine position on the building’s leasehold, unless the current highest bidder—Alpha Equity Group—forks over $5 million soon, a judge ruled today.
Alpha, which had no representative present at today’s hearing in Manhattan Supreme Court, has until July 26 to provide the deposit to buy the leasehold on the building from Sitt Asset Management, according to attorney Stephen Meister. Meister represents one of the warring factions of the Sitt family: Ralph Sitt.
If Alpha plunks down the cash and signs a binding letter of intent, the group would have 30 more days to close the transaction, Meister said. No contact information for Alpha was available.
But if Alpha fails to cough up the funds, a restructuring will take place, handing control of 2 Herald to Paramount through a deal where, once recapitalized, 10 percent of revenue behind all of Paramount’s expenditures would be distributed to investors in the building, Meister said. The proposed deal is likely the only way investors will preserve their equity, as 2 Herald Square was bought via a 1031 exchange with a property then-called 6 Times Square. If the investors exit because the property is foreclosed upon or sold, they will owe millions in taxes for the discharged mortgage, which will count as capital gains.
The four Sitt brothers, who with their mother comprise the family’s ownership of the asset, have squabbled for the last year over the building’s finances. An additional 87 investors own portions of the leasehold on the Garment District property.
Paramount was “bleeding money,” to the senior debt holders while the building sat in limbo during the bickering, as CO has previously reported.
Two sides of the family disagree about who has the authority to sign off on the sale, with one side claiming that Ralph Sitt has looted the property for cash, while he claims that his brothers delayed negotiations for refinancing, which is how the property’s cash flows became constrained. Eddie Sitt‘s attorney declined to comment for this story.
The leasehold was originally purchased in 2007 for $270 million. The property ran into trouble last year when major tenants Publicis and H&M left for other pastures and were not replaced. The building needed cash to execute its lease with WeWork, but had no refinancing of its fee mortgage in place and insufficient rent rolls.
In March of this year, some investors sued Ralph Sitt and a group of LLCs affiliated with the mezzanine lender on the property, alleging that the loan with Paramount amounted to predatory lending that gave Paramount overreaching terms and conditions.
The $200 million securitized loan on the property, which had been part of the CMBS transaction WBCMT 2007-C32, was put in the care of special servicer CWCapital before SL Green Realty Corp. bought that note and a $50 million B-piece in April.
While offers were floated for the building from a variety of would-be buyers, some expressed skepticism that the lenders would cooperate with a sale.
“I am highly doubtful the $370 million offer is real and will close for several reasons,” Meister, who represents Ralph Sitt, told CO after the recent offer from Alpha Equity came to light. “We recently ran a comprehensive marketing process through Adam Spies of Cushman [& Wakefield], which did not produce such an offer.”
But today, Meister made clear that he and his client do want the Alpha deal to close, but also want a plan in place to hand the keys to Paramount if it doesn’t.
The asset is “losing about $80,000 a day,” he said, and giving the property over to the mezz lender would “defer an enormous tax bill.”