UPDATED May 18, 2022, 12:30 p.m.: A decade-old deal to build out a large retail space in the heart of Times Square landed Jeff Sutton with both a lucrative addition to his portfolio and a new enemy: an investor who claims the billionaire Wharton Properties founder cheated him out of millions.
Investor Norman Rappaport claims Sutton defaulted on a $15 million loan Rappaport provided him in 2011 to buy the landmarked I. Miller Building at 1552 Broadway and alleges that Sutton used a shell company to swindle him out of his agreed-upon share of the profits, a complaint filed in New York Supreme Court last week shows.
The lawsuit accuses Sutton, Wharton Properties and 1552 Broadway JS Mezz LLC, the alleged “dummy corporation” of fraud, unjust enrichment and breach of a promissory note.
Following the publication of this story, Wharton Properties issued the following statement:
“Mr. Rappaport’s recent allegations regarding Jeff Sutton are completely baseless. Mr. Rappaport has been a long-term successful investor with Jeff Sutton. As he well knows, the creation of newly formed entities (which by definition have no assets) and the use of corporate debt is part of virtually every real estate deal and in no way constitutes ‘foul play.’ So too, his current tactic of commencing this public action simply to seek to embarrass Mr. Sutton, even though he had the opportunity to have an expedited binding arbitration to resolve this matter quickly, is regrettable. Mr. Sutton is an extremely successful investor with a sterling reputation and has a 30+ year track record of having successfully dealt with many investors. He intends to vigorously and successfully defend against this meritless attack.”
The dispute stems from a 2011 deal in which Sutton partnered with SL Green Realty to acquire the 15,000-square-foot Midtown property for $137 million. Weeks after that deal, Sutton and SL Green picked up the ground lease at neighboring 1560 Broadway, then knocked down the walls to combine the spaces. (SL Green is not a defendant in Rappaport’s lawsuit.)
Within months, clothing retailer Express signed a 15-year lease to occupy the resulting 30,000-square-foot space at a time when retail rents were rising across the city — particularly in Times Square.
Rappaport alleges that after securing a $125 million mortgage on 1552 Broadway in 2011, Sutton and SL Green approached him, described in the lawsuit as a “long-time friend” of Sutton, for the remaining funds needed to close the deal.
Rappaport claims he loaned Sutton $15 million in August 2011, with the expectation that the loan would be paid back by September 2016. Rappaport agreed to a 7.5 percent annual interest rate — or nearly $94,000 per month — in exchange for a 10 percent cut of the profits from the combined properties. Sutton agreed to personally guarantee the loan, according to Rappaport.
Issues with that arrangement quickly arose, Rappaport claims.
Sutton allegedly refused to document the transaction with a promissory note and instead sought to renegotiate a more favorable arrangement. After Rappaport refused, he claims Sutton executed a promissory note in January 2013 — more than a year after the $15 million loan was issued.
This turned out to be a ruse, according to Rappaport, who claims Sutton refused to sign the note personally or as a member of Wharton Properties. Instead, Sutton signed the note on behalf of 1552 Broadway JS Mezz LLC, an entity which Sutton falsely misrepresented as part-owner of the property, Rappaport alleges.
Rappaport claims he accepted the note because Sutton had already made more than a year’s worth of interest payments. The note allegedly funneled all financial obligations on the property through the LLC, which had neither a stake in the building nor any assets to repay Rappaport.
Rappaport’s suit calls Sutton’s promissory note a “farce” and part of a scheme to get Rappaport to lend the money at a lower interest rate and cheat him out of both the $15 million loan and his share of the property’s profits.
Sutton defaulted on the promissory note in August 2016, according to Rappaport, who claims he didn’t insist on immediate repayment because Sutton continued to make monthly interest payments.
In December 2020, Sutton allegedly informed Rappaport he would no longer pay the interest, citing the financial impact of the pandemic. But an annual report put out by SL Green, a publicly traded REIT, revealed that the joint venture’s leases at 1552-1560 Broadway generated almost $30 million in revenue last year, according to the suit, which claims Sutton instead has used the money owed to Rappaport to invest in and acquire other properties.
Rappaport is suing for his 10 percent stake in the profits, the $15 million loan repayment and monthly interest payments that have accrued since the end of 2020.
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This story was updated with a statement from Wharton Properties.