It will go down as one of the biggest boondoggles in New York real estate history.
French bank Natixis made a $1.6 billion bet on 20 Times Square — a 42-story tower that includes a hotel, retail and 18,000 square feet of electronic signage — a property that was later valued at just $1 billion. If that wasn’t bad enough, Natixis financed the deal for Maefield Development’s Mark Siffin and his partners at Fortress Investment Group, who were both landlord and tenant at the tower.
That conflict of interest seems glaring now that Siffin and Fortress defaulted on the leasehold debt, forcing Natixis and a group of overseas investors to take over the property through foreclosure.
“If you’re a leasehold lender, you don’t like to see your borrower as a landlord,” said Joshua Stein, a commercial real estate attorney.
Having someone on both sides of a deal can create a hairy situation when a conflict arises. Landlords and tenants are each supposed to protect their rights (and the rights of their investors or lenders.) But when they’re the same company, it’s hard to see how they would act as a true fiduciary.
“It’s very common for landlords and tenants to ultimately be at each other’s throats,” Stein said. “The positions are just adverse.”
Maefield and Fortress, meanwhile, will reap nearly $30 million annually as owners of the fee position at the property, also known as 701 Seventh Avenue, according to ratings agencies’ analyses of the deal.
The situation has real estate insiders questioning how a blue-chip lender could make such an error. Many think the 20 Times Square leasehold — on which Natixis lent $650 million — is virtually worthless. Natixis declined to comment, and Maefield did not respond to requests for comment.
One source familiar with the property summed it up thus: “They’re going to get slaughtered.”
Revving the money machine
After a Manhattan court ruled in January that Maefield owed $778 million to Natixis, the lender took control of the 350,000-square-foot building at auction and tapped SL Green Realty to manage it. A representative for the REIT said the lenders plan to inject capital and get the hotel open and running. They expect that the hotel will be in the red for the next year or two, and intend to spend additional funds to market the retail and the hotel in an effort to reach profitability.
Lenders will also reconfigure the vacant retail space, where shuttered doors remain placarded with promotional material for a 2019 Madonna album.
It is a state of affairs that veteran New York developer Steve Witkoff could not have imagined a decade ago when he bought the 16,000-square-foot parcel alongside a group of investors that included Indianapolis-based Maefield and New York–based Fortress, a major distressed debt and equity player. The price tag to purchase the land, buy out tenants, raze an 11-story office building and construct the luxury hotel came to roughly $436 million, records show.
Meant to be a money-minting machine in the heart of Times Square, lower floors in the building would contain roughly 74,000 square feet of retail wrapped by an electronic billboard with a captive audience on the world’s most famous retail thoroughfare. Marriot signed on to operate the 452-room hotel under its Edition brand.
The big bet
The project was the brainchild of Maefield’s Siffin, a developer who began building retail and residential properties in the Midwest before turning his attention to the Crossroads of the World.
“Eighty percent of people who visit the city come to Times Square — it sends a message of who we are in the world,” Siffin said in a 2018 interview with The Real Deal.
To finance the project, Siffin put together a crew of big-name investors. In addition to Fortress, they included Howard Lorber’s New Valley, Steve Witkoff, Ian Schrager, Michael Ashner’s Winthrop Realty Trust and the late Howard Michaels’ Carlton Group.
The partners bought the site, tenant buyouts and air rights and nabbed a first construction loan between 2012 and 2014 for a total of $436 million. With construction nearing completion in 2018, Maefield and Fortress — which until that point had only minority stakes — decided to go all-in, buying out the other investors in a deal that valued the property at $1.6 billion.
Backing that buyout was Natixis, the French investment bank with global ambitions and an appetite for risk, particularly in the world of derivatives trading. Maefield closed the deal to buy out its partners in April 2018. That same month, François Riahi, formerly Natixis’ head of global markets, ascended to the role of CEO.
Natixis loaned Maefield $650 million from its balance sheet for the purchase, and held Maefield’s lease on the building and its right to collect rents as collateral. Meanwhile, the bank securitized an additional $750 million and sold the debt to investors, who took as their collateral the ground underneath the luxury development.
A mezzanine loan of $150 million plus a buy-in from Maefield of $59 million brought the mix of debt and equity for the takeover of 20 Times Square to $1.6 billion.
Credit rating agencies noted at the time that the property had no proven track record of revenue, but the securitized debt nonetheless received A-level ratings based on “the strength of the securitization structure,” according to Moody’s.
“The worst that could happen to investors [who bought securities collateralized by the land] was that they would get the building for free,” said E.J. Park, a credit-ratings officer at the company, who added that the overall structure of financing was “unusual.”
All the money sloshing around was enough to pay off a $200 million investment made in 2014 by foreigners seeking permanent residency in the U.S. through the EB-5 program: a cash-for-green-cards initiative that has been a godsend for developers but come under heavy criticism from lawmakers for its lax oversight.
Upon learning in 2018 that their money would be redirected to TSX Broadway, a Maefield project located just across the street from 20 Times Square, a quarter of the 400 investors sued Nicholas Mastroianni, the controversial head of a regional center that controlled the funds, as well as the center itself. (The investors later settled out of court.)
Meanwhile, Maefield was struggling to get leasing traction at the project. Hershey’s occupied a modest 7,500 square feet for a poor man’s M&M store. A joint venture between the National Football League and Cirque du Soleil claimed 50,000 square feet for an interactive sports museum that closed in less than a year.
Ian Schrager, who heads Edition, insisted at the time that the hotel was not affected by the foreclosure.
“It is very unfortunate that The Times Square EDITION got dragged into a dispute between the real estate owner and its financial institutions,” he wrote on Instagram. “The dispute has absolutely nothing to do with the hotel or its resounding success.”
Foreclosure dragged through court, and the pandemic caused the hotel portion of the building to close, further denting Maefield’s ability to service debt. Payments to CMBS investors, however, never wavered, protecting annual income of $29.3 million for Maefield, plus step-ups, as owner of the fee interest.
For Natixis, France’s fourth-largest publicly traded bank, it was another blow.
The bank took a hit during the Great Financial Crisis and had to set aside nearly half a billion euros for its role in directing cash to funds managed by Bernie Madoff. In 2018, it took a $300 million loss on a bet on derivatives transactions in South Korea, a debacle that led to CEO Riahi’s firing in 2020.
After a judge ruled in Natixis’ favor and gave it control of the building, the lender tapped SL Green to manage the property, pushing the deep-pocketed office landlord to service the leasehold debt, plus the rent owed to Maefield as owner of the land beneath the building.
As long as Maefield makes interest payments to CMBS bond holders, it will recoup its equity investment and then some.
Its lenders, meanwhile, hold the bag on a $650 million loan in default.