The Real Deal New York

Merchants Hospitality: Dubai firm bailed on school project

Firm is seeking $941M in lawsuit over planned UES school

June 30, 2014 05:31AM
By David Jones

Abraham Merchant

Abraham Merchant

Lower Manhattan-based real estate firm Merchants Hospitality is asking a judge today for a restraining order in a $941 million suit that accuses a Dubai-based firm of backing out of a private school project on the Upper East Side.

Merchants Hospitality, in a lawsuit filed Friday in Manhattan Supreme Court, claims that GEMS Education, a private school operator based in the United Arab Emirates, used a dispute over which architect would design a new school at Second Avenue between East 92nd and 93rd streets as a pretext to back out of a 40-year school construction-and-lease deal.

Merchants’ attorneys say GEMS was trying to conceal its inability to help finance the project.

“When the lenders did due diligence, they came back and said that these guys can’t perform,” said attorney Y. David Scharf, who represents Merchants.

Lawyers for GEMS denied the allegations, noting that they filed their own suit on Friday to get their $9.5 million deposit back. Attorney Robert Ward, who represents GEMS, said Merchants’ case has no merit.

“GEMS Education’s finances are strong, and the issues here are the developer’s weak finances and its other problems,” said Ward. “The lease terminated by its own terms because of the developer’s problems. We look forward to presenting our case in front of the court.”

The suit outlines a deal for Merchants to build a 213,000-square-foot building for an estimated construction cost of $117 million, or $550 per square foot.

GEMS would pay annual rent starting at $14.75 million, with a 2.25 percent annual increase, bringing the total value of the contract to $940.8 million, according to court documents.

Merchants claims GEMS approached it through a broker, who was not named, about using the site for a private school. The developer originally planned a residential project called the Amalfi for the spot.

GEMS has private schools in major cities around the world, including one that is currently under development in Chicago. Court papers indicate that Handel Architects was retained to design the school, but a dispute ensued over details about how to draft the agreement.

Merchants and GEMS also disagreed over a requirement for the education firm to post a $15 million security deposit, with another $15 million due when construction started. The suit says that GEMS negotiated a deal to deposit only half that amount, or $7.5 million.

Adam Hochfelder, the former high-flying real estate mogul who went to prison for fraud, is a point man on the project. He is working as a consultant for Merchants, as The Real Deal reported.

Merchants, in court documents, also claims that an affiliate for GEMS took on $193 million in new debt after they reached their initial deal. That allegedly hurt the company’s financial situation, and increased the risk of financing the deal.

  • Jimmy

    Shocker that a transaction involving Hochfelder would end up in litigation

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