‘Severe Cash Flow Issues’ Send Thor’s 545 Madison Avenue to Special Servicing

The debt is backed by the 17-story, 139,540-square-foot office tower at the southeast corner of Madison Avenue and 55th Street. Marx Realty, the ground lease owner, sold the leasehold to LCOR in 2006, records show.

Over the last year and a half, Thor has run into issues covering its debt burden, per Trepp data. The loan’s debt service coverage ratio (DSCR) was last reported at 0.69x at year end 2018, due to “an increase of approximately $450,000 in ground rent per the terms of the ground lease,” as well as stress on the property’s occupancy, according to servicers watchlist commentary.

The expensive ground lease scenario is reminiscent of the saga surrounding the recent $150 million sale of the Chrysler Building, with Aby Rosen’s RFR Holding picking up the trophy asset at a bargain price due to rising costs associated with the ground lease held by the Cooper Union school, as CO previously reported.

One investor familiar with 545 Madison and the Chrysler Building sale told CO: “Wait and see. This is just the beginning. All these ground leases are going to have a come-to-Jesus moment.”

A source close to 545 Madison told Commercial Observer: “[Marx] owns the fee and this is an issue with the leaseholder [Thor]. Marx Realty has no debt on its fee interest…industry sources believe the leasehold owner will be strained by capital and will not be able to fund the necessary [tenant improvements] and leasing commissions to re-lease the building. The smart money says that Marx Realty will receive the leasehold interest back, which will allow the property to become a premiere Madison Avenue destination. [Marx] is in the best position here.”

A source close to the borrower claimed that Thor has no control over the building, having sold a 98 percent stake to a high-net-worth international investor, who has invested through a trust vehicle called Viera; although, the source would not provide information on who the investor is, what he or she paid for the stake or when the transaction happened.

CO was not able to confirm details of this deal or verify the trust utilized by this unnamed investor. A representative for Thor declined to comment.

After its 2013 leasehold purchase, Thor CEO Joseph Sitt said, “545 Madison Avenue is the epitome of what New York City real estate has to offer. It is a state-of-the-art property located at the epicenter of the city’s Plaza District and counts elite financial and tech firms, and luxury retailers as tenants…This was a rare opportunity to acquire a premier property and we are excited to add it to our growing portfolio.”

The property’s valuation was at $55 million by the end of 2013, representing a 55 percent loan-to-value at the time the loan was securitized—it also carried $5 million in mezzanine debt—according to information from Trepp.

The loan in question was securitized in the $958 million J.P. Morgan Chase-led JPMBB 2014-C18 commercial mortgage-backed securities (CMBS) transaction and represents roughly 3.7 percent of the $805.4 million in remaining collateral in the conduit. The loan is also the largest in the pool of office loans included in the deal.

At the time it was securitized, the loan’s DSCR was 2.04x and remained above that level through 2015, according to Trepp commentary. The figure dipped to 1.32x in 2016 and as low as 0.59x the following year. Its occupancy slipped from around 94 percent in 2015 to as low 85 percent last year.

It was first added to the servicers watchlist in October 2017, because its DSCR fell below 1.10x due to stress on the asset’s occupancy, which fell to 81 percent that June. By June 2018, the asset had regained its footing, posting a 1.36x DSCR.

By September 2018, cash flow issues resurfaced and its DSCR dipped again after investment firm RNK Capital vacated its 7,175 square feet on the 14th floor upon the expiration of its lease. According to Trepp, after RNK vacated, the borrower began a process to redevelop the space for a new tenant.

Ogden Capital Properties is currently the largest tenant in the office portion, occupying roughly 28,000 square feet—20 percent of the asset—across the fourth through sixth floors on a lease that expires in March 2023, according to data from CoStar Group.

The property also hosts U.K.-based luxury retailer Alfred Dunhill (4,206 square feet) and Swiss watch manufacturer Roger Dubuis (794 square feet) in ground-level space, according to data from CoStar.

Built in 1956, the property underwent a $100 million renovation in 2008, according to information from Trepp and reports detailing Thor’s 2013 purchase of the leasehold.

In November last year, Thor tapped real estate advisory and management firm Avison Young to manage and lease the property.