Some owners fight to the bitter end, but ultimately don’t have enough money to hold on during a hostile takeover. That’s what happened to Tessler Developments and the Chetrit Group at 855 Sixth Avenue, a development site just a few blocks south of Herald Square, when Durst Fetner Residential stepped in. In March 2007, Yitzhak Tessler of Tessler Developments partnered with Meyer and Joe Chetrit of the Chetrit Group to shell out $140 million to a group led by Baruch Singer for six of eight parcels that ultimately made up the development site at 855 Sixth Avenue. A year later, they paid another owner $12.3 million for a seventh parcel. The partners planned to build a 355,000-square-foot condo tower on a retail base at a pricey cost of about $402 per square foot for the land.
Dealing with distress
The developers had started demolition, but before they even poured a foundation, they ran into trouble and couldn’t repay their $105.3 million loan when it came due just 19 months later in October 2008. The next month, their lender (then iStar Financial) filed a lawsuit to begin to foreclose on the loan. That was a signal to potential buyers that iStar might want to unload the note.
Court installs referee
But far from selling, iStar continued to battle the owners in court. In November 2009, the lender won a significant victory when the court ordered the appointment of a referee to determine the value of the parcel and the best way to sell it.
Identifying the deal
Unlike some lenders around that time, iStar was not marketing the note. Indeed, Durst Fetner Residential president and CEO Hal Fetner, who had been eyeing the site since 2003, said he approached the firm several times and “got nowhere.” Then fortune stepped in. Fetner and his COO, Damon Pazzaglini, were at a party at their residential tower, the Victory, when they met a top iStar executive who happened to live in the building. That contact, plus a personal friend of Fetner’s, got him a meeting with iStar CEO Jay Surgarman in the fall of 2009.
Snapping up the note
Negotiations between iStar and Durst Fetner heated up in late 2009 and became “serious” in February 2010. Over the course of five weeks, “we kept offering,” Fetner said. “Finally we just simply said ‘Okay’ [to Sugarman’s price].” Fetner signed an agreement to buy the note for about $104 million in March 2010, and closed that May. He was able to pay near par for the loan, and said the firm prevailed “because we took an aggressive stance.” It also didn’t hurt that they offered all cash, and were able to close quickly.
Winning the property
But Durst Fetner still didn’t control the land, so it continued the foreclosure process in iStar’s place while Tessler and the Chetrits fought to hold on. The court imposed a deadline for the owners to either pay off the loan or lose the property at an auction set for Dec. 22, 2010. At the auction, Durst Fetner had a major advantage because it owned the debt, valued at $136 million — $105.3 million in principal, plus about $30 million in late payments, default interest and other penalties. Any competing bidder would have to pay more than that $136 million credit bid to win. On the other hand, Durst Fetner could have sold it for less, leaving Tessler and the Chetrits on the hook for the difference between the sale price and the credit bid (plus any additional accrued expenses). That difference is known as the “deficiency.”
Having an auction would have put Tessler and the Chetrits in a vulnerable position because they were responsible for covering the deficiency through personal guarantees for up to $19 million. That put pressure on them to accept a deal to hand over the title to Durst Fetner.
But what really forced their hand was that in late 2010, Durst Fetner had also quietly bought $39 million in mezzanine loans on the property from RCG Longview and Metropolitan Life for a steep discount. That meant the owners had virtually no chance of keeping the property. In order to stay afloat, they (or any new buyer) would have had to pay the first mortgage and the mezz loan.
When Joe Chetrit found out that Durst Fetner had bought the mezz loan, he knew he was finished, one insider said. “He was amazed when he found out [Durst Fetner] bought the mezz,” the source said. The auction was scrapped, and the parties negotiated to transfer the title.
Closing the deal
A day before the scheduled auction, Durst Fetner took over the title in a discounted sale. It also scored another bonus when M & T Bank lent it approximately $101 million and the firm was able to pull its money out of the deal, giving it equity to buy other properties. Still, additional debt and equity will be used to construct its 855 Sixth Avenue project, which has a total price tag of about $350 million, according to published reports.
The company is now preparing to erect a 500,000-square-foot building — 300,000 of which will be devoted to 350 rental units (80 percent market rate and 20 percent “affordable”). There will also be a 325-key, 130,000-square-foot hotel, and 90,000 square feet of retail. The land price basis for the project was about $208 per square foot — nearly half of where it started in 2007. Construction is expected to begin in April 2012.