05/04/2011

Auction Set for Near-Vacant Building in NY

A foreclosure auction is planned for a nearly vacant office building in Midtown Manhattan whose condominium-conversion plan fell victim to the market crash.

Lehman Brothers holds more than $325 million of defaulted debt on the 321,000-square-foot property, at 1107 Broadway. It has scheduled a foreclosure auction for June 6, according to marketing materials provided to investors.

Lehman has hired Eastdil Secured to drum up interest in the auction. The hiring of a broker is a routine step in Uniform Commercial Code foreclosures, because the courts want to ensure that lenders widely advertise foreclosure proceedings. Meanwhile, Lehman is negotiating with the borrower about a possible settlement that would avert the auction.

Lehman is clearly positioned to take over the property. It could effectively “bid” up to the amount of debt it holds without putting up any cash. But it's unclear whether Lehman prefers to foreclose or would step aside if a third party bid a high enough price for the debt.

The Flatiron District property, known as International Toy Center North, is owned by a partnership that includes Tessler Developments of New York. Tessler, which is led by Yitzchak Tessler, bought a 50% stake in 2007. The seller, a partnership between investor Joseph Chetrit and Arbor Realty of Uniondale, N.Y., retained the remaining 50% interest. The transaction valued the property at $235 million. Tessler, continuing the path of Chetrit and Arbor, planned to convert the building into residential condos.

The property is at the northwest corner of West 24th Street, at the point where the sloping Broadway intersects with Fifth Avenue alongside Madison Square Park. It is connected by an air bridge to the 800,000-sf office building at 200 Fifth Avenue, which is on the southwest corner of West 24th Street.

In 2005, a Chetrit partnership bought 1107 Broadway, 200 Fifth Avenue, the 8,300-sf building at Seven West 24th Street and another small building for a combined $355 million. In 2007, Chetrit sold 200 Fifth, known as the International Toy Center, to L&L Holdings of New York for $485 million.

Lehman's debt package financed the recapitalization of 1107 Broadway and the attached Seven West 24th Street. The package had an original balance of $343 million, including mezzanine debt. The Tessler partnership drew down $203 million immediately, with the balance earmarked for the renovation. Some of that balance was subsequently drawn down. Including accrued interest, the Tessler partnership now owes more than $1,000/sf, or $330 million.

Lehman, which is in bankruptcy, has yet to file any documents with the U.S. Bankruptcy Court outlining its long-term plan for 1107 Broadway. The investment bank, which had a massive commercial real estate portfolio when it collapsed, has held on to some properties that it felt would rebound in value relatively soon and has looked to sell or recapitalize others.

The 16-floor building at 1107 Broadway is a candidate for redevelopment. It is zoned for both commercial and residential use and, unlike 200 Fifth Avenue, doesn't have a Landmark designation. The building has been largely vacant since 2007 and is currently only 9% leased. The lone tenant is a Citibank branch on part of the ground floor and basement. The building at Seven West 24th Street is subject to a ground lease that expires in 2027.

Both 1107 Broadway and 200 Fifth Avenue were long known as the headquarters for toy manufacturers. The buildings hosted annual trade shows for the industry, giving rise to the International Toy Center moniker.

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