The Real Deal New York

GEMS committed to UES school project despite “hemorrhaging cash”: Merchants

Developer files amended complaint in ongoing dispute over botched deal

July 08, 2016 07:12PM
By Mark Maurer Twitter_logo_blue copy

GEMS Merchants

From left: Abraham Merchant, Denise Gallucci and GEMS World Academy in Chicago

A subsidiary of Dubai schools operator GEMS Education masked its frail financial status upon signing a lease for an ultimately scrapped school on the Upper East Side, Merchants Hospitality alleges in the latest update to an ongoing dispute between the two firms.

An amended complaint filed Friday in New York State Supreme Court presents GEMS’ 2014 internal emails disclosed during discovery. In the emails, officers at GEMS discuss the bouncing of checks and a significant drop in cash flow.

Since 2014, Financial District-based hospitality and development firm Merchants Hospitality and GEMS, the world’s largest operator of K-12 schools, have been trading lawsuits over failed plans for a 213,000-square-foot school at East 93rd Street and Second Avenue. GEMS signed a 40-year triple-net lease in 2014 for a site that Merchants was planning to develop. Merchants later claimed that GEMS backed out of the lease deal, while GEMS insists Merchants falsely represented its stake in the site’s parcels.

In a separate suit, SL Green Realty TRData LogoTINY also sued GEMS, alleging the school operator breached its contract with the real estate investment trust. SL Green claims it had a deal with GEMS to develop the site, but that GEMS went ahead and struck a deal with Merchants.

Merchants’ amended complaint focuses on the alleged financial woes that a GEMS subsidiary didn’t disclose at the time it signed the lease. The subsidiary is an entity known as Topco (Cayman) Limited, the guarantor of the lease.

An attorney and spokesperson for GEMS could not be reached for comment, while a representative for Merchants declined to comment. Merchants is seeking more than $200 million in damages.

According to Merchants, GEMS pledged to have $150 million in liquidity for the 40-year duration of the lease, but in fact had only about $50 million. GEMS also vowed that there were no material changes to its financial condition since its prior-year financial statements.

The lawsuit alleges that GEMS’ cash flow plummeted in the 2014 fiscal year – to $39.8 million from $106.7 million. Net cash from operating activities in 2013 financial statements totaled $249.3 million and dropped to $5.4 million as of March 2014, the suit said. During that period, Topco’s liabilities grew to $405.3 million from $205.2 million, Merchants claims.

“Topco’s finances had declined so significantly that it was bouncing checks,” the suit claims.

After receiving cash flow statements from GEMS CFO Nick Guest, a GEMS officer wrote in an email to GEMS New York’s CEO Denise Gallucci in June 2014, “Nick sent a cash flow to me that would raise more questions than confidence.”

In a separate June 2014 email, Ganapathi Bhat, director of treasury and budgets at GEMS, wrote that a GEMS account was “overdrawn and [the bank is] not passing cheques.”

Merchants claims that because GEMS was “hemorrhaging cash,” it looked for reasons to escape the lease. These included manufacturing a delay in signing a required architect’s agreement and declaring the lease terminated when the deadline for the agreement passed.

In July 2015, Merchants flipped the contracts for the parcels for $112 million to Maplewood Senior Living, which is developing a 20-story senior housing building on behalf of real estate investment trust Omega Healthcare Investors.

GEMS, which runs more than 70 schools worldwide, continues to search for a location in New York City. Last year, the company was negotiating for the full 174,000-square-foot office component at 111 East 59th Street.

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