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Quiet Investor Offers Leading $370M Bid for Two Herald Square

Quiet Investor Offers Leading $370M Bid for Two Herald Square

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.

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—allege was mishandling of 2 Herald Square’s finances. And it likely works just as well for another, rival potential buyer: the 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.

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 off to SL Green Realty Corp. last month, one source said. If, of course, the deal goes through.

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, with partners. 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. 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.

In the meantime, SL Green bought the senior debt, as Commercial Observer first reported, and JEMB Realty was close to signing a $350 million deal to buy the leasehold.

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, but the second source said that the junior debt holder was working with all sides to help facilitate the sale. Even Ralph Sitt, who allegedly improperly forged the deal with Paramount that sunk the building, is supposedly on board with the Alpha Equity bid, according to one source. Ralph and David Sitt’s attorney did not immediately respond to a request for comment.

The Alpha Equity 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.

Source: commercial


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