The Real Deal New York

Inside the auction of Extell, Ring’s 251 Park Avenue South

Attorney Joshua Stein lays out what to expect from the bidding process

In just a couple of weeks, some of real estate’s biggest players are expected to converge on a Lower Manhattan courthouse for the auction of 251 Park Avenue South, the largely vacant office building co-owned by Extell Development and landlord Frank Ring. The 100,000-square-foot property has been the subject of a lengthy struggle, with Extell accusing Ring of mismanagement. But it’s also one of the most coveted properties in Midtown South. And the man wielding the gavel? That would be court-appointed referee and real estate attorney Joshua Stein, who sat down with The Real Deal to discuss the building’s tumultuous history, its physical structure and what some expect to be a major bidding war.

What’s the background of this building?
Once upon a time, 251 Park Avenue South was owned by Leo Ring, who owned 50 percent, and Robert Eisner, who owned the other 50 percent. When Robert Eisner died, his interest was eventually sold to Extell Development. When Leo Ring died, the 50 percent that he owned went to his sons, Michael and Frank Ring, who each ended up owning 25 percent. Extell Development was not happy with how Frank Ring was managing the property so Extell requested that a court terminate Frank Ring’s management of the property and order the property to be sold because they were not content to co-own it with the Rings. The court decided not to rock the boat on the management of the property but directed the building to be divided up or sold.

What was the issue with the management of the building?
This building was about 70 percent vacant. That’s a very high vacancy rate in any market. I think Extell was probably upset about that. There may have been other concerns.

Can courts generally order the sale of buildings in this way?
If you have multiple people who own property together, and they don’t have a partnership or an LLC or some type of co-tenancy agreement, if they can’t get along then almost as of right an unhappy co-owner can ask the court to divide up or sell the property. The court has the authority to disentangle them.

What’s the best way to do that?
The best way to disentangle co-owners of real estate is to split up the real estate. If you could do it, you would take the building and split it in half. In this case, the court appointed a referee – me – to look into the question of whether the building could be broken into two. I did a lot of thinking, investigated the building and got input from the parties and ultimately concluded that the building could not be split into two pieces and should be sold. At that point, I was directed to sell the building. I was authorized to spend some money to do an advertising program, which was effective.

Has anything changed with the building since it was ordered to be sold?
At some point along the way, Michael Ring sold his interest to Extell, meaning Extell owns 75 percent now but the dynamic is still the same.

When is the auction?
The auction was originally scheduled for Aug. 28. The parties agreed to adjourn until Oct. 9, which is now around the corner. Two reasons they might have adjourned would be to expose the property to the market more or because they’re trying to settle their litigation.

Tell us about the physical structure of the building.
It’s a really beautiful, solid, classic old building with good bones and magnificently tall ceilings and lots of windows. The upper floors have 16-foot ceilings. There’s lots of flexibility in terms of the zoning of the site. You could turn it into residential condominiums or a hotel, which I suspect are higher and better uses of the building than office space. The values of condominiums have become so stratospheric recently that I would think the new owner’s first choice would be condos if they can do that. You’re somewhat constrained by long-term leases on the ground floor and the top three floors, but there are ways to work around those.

Who are the tenants?
The ground floor tenant is Sovereign Bank and the upper floor tenant is Maharam, a premier fabric design company. That company was acquired by Herman Miller within the last year or so. Potential bidders are laying bets on whether Herman Miller would like to move the Maharam operations to some more central location and cancel the lease, which would be good for development of the building. I have no idea how feasible that is.

Is the building in good shape?
The tenants have pretty good systems. The building as a whole will require some substantial capital expenditures to bring the systems up to current standards. They are functional but in many cases quite outdated. This is not a turn-key investment asset; this is a project for someone.

What kinds of bidders have expressed interest so far?
We’ve had interest from a lot of different kinds of investors, including many of the usual suspects here in New York. We’ve also gotten interest from overseas and the West Coast for different kinds of uses. There are some surprises but for the most part it’s who you would have expected to see.

Is there a reserve price for the building?
There’s no reserve price but if you look at the dynamics, it’s a pretty safe bet that bidding will start at $24 million. The likelihood of a bid below that is very close to zero because the Extell Group put an $18 [million] mortgage on their interest in the building, which is 75 percent. If the mortgage of $18 million was adequately supported by three quarters of the building, that implies to me that it’s like having a mortgage of $24 million on the building as a whole. So that’s sort of a floor for the bidding.

Do you think Extell will bid on the building?
All the market talk I hear suggests that Gary Barnett [the founder of Extell] will be bidding. I assume that both Ring and Barnett have some bidding strategy in mind whereby they’ll bid up to a certain amount and if the bidding goes beyond that amount, they’ll become a seller not a buyer.

How many bidders do you expect at the auction?
There was a similar auction between the same parties for 20 West 47th Street [another building in the Ring portfolio] and there were about 85 people in attendance. I would be surprised if we have fewer than that number here.