Tapping bankruptcy court for protection

Clockwise from top left: Alchemy Properties’ Kenneth Horn, Bob Toll of Toll Brothers, Leonard Taub of Kaish & Taub, Jonathan Caplan of Jones Lang LaSalle, 376-380 Third Avenue and the State Supreme Court Building

The setup

One of the most aggressive strategies for holding on to a distressed property is bankruptcy. But while a bankruptcy filing temporarily stops the foreclosure process, there are no guarantees that it will ultimately halt it. Kaish & Taub Development Group found that out the hard way when they lost their Gramercy Park assemblage to Toll Brothers.

Builders Norman Kaish and Leonard Taub put together a complex assemblage in 2006 and 2007 with the intention of building a 20-story condo at 276-280 Third Avenue and 266 Third Avenue, at 22nd Street. The planned 144,000-square-foot glass-and-steel structure would vault over a three-story walk-up (whose owner refused to sell to the developers) and connect the two separate parcels. It was expected to cost $105 million. Swiss bank UBS lent the developers $30.5 million secured by the 276-280 Third Avenue site, which had 105,000 square feet of development rights. (A different lender financed the other site.) But facing economic headwinds, the developers

Dealing with distress

In late 2007, UBS walked away from several pending construction deals, including this project, where news reports state that the bank had agreed to provide construction financing. That left the developers scrambling for alternate lenders. Potential buyers such as Toll Brothers, which ultimately bought the site, took notice. “We knew about the site for four years,” said David Von Spreckelsen, senior vice president at the development firm. “We knew the owners, and they were talking on and off about [joint ventures] or selling.” Kaish & Taub failed to find replacement financing, nor could the firm repay the UBS loan, which was declared in default in August 2008. In March 2009, UBS filed to foreclose on the $30.5 million mortgage. A little over a year later, in May 2010, the state court judge appointed a referee to determine the amount the developers still owed on the loan. In November, with the debt valued at $46 million — including principal, interest and other charges — the judge approved the foreclosure sale and set the auction for March 30, 2011.

Holding on

The stage was set for that showdown in 2009 and 2010, as Kaish & Taub were trying to hold on by negotiating with potential investors willing to buy the site. They hoped to avoid losing everything at a foreclosure sale. But they were racing against UBS, which was also entertaining potential buyers for the note. The developers ultimately struck a tentative deal with Kenneth Horn’s Alchemy Properties, which offered to buy the site and air rights from them for $27.5 million in early 2010. All they had to do now was get UBS on board.

Bankruptcy

But UBS thought it could get more money and didn’t play along. So, a day before the scheduled auction, Gramercy Park Land, a so-called special purpose entity formed by Kaish & Taub for this project, filed for Chapter 11 bankruptcy, a common but sometimes risky strategy used to halt foreclosure actions. That bought them some time and delayed the auction.

In their bankruptcy filings, the debtors suggested that Alchemy Properties’ offer would provide a floor as a “stalking horse,” or minimum bid, at the bankruptcy auction. And if any bidder offered more, Alchemy would be paid 3 percent of the purchase price as a breakup fee. UBS didn’t bite, and successfully pushed for the litigation to return to state court. Kaish & Taub withdrew the bankruptcy filing when it became clear UBS wouldn’t agree to its terms.

Identifying a deal

Late last year, UBS had hired the Jones Lang LaSalle investment sales team led by Jonathan Caplan to market the note. During that time, JLL heard from potential buyers who were willing to pay above the Alchemy offer, court records show. Ultimately more than 100 parties reviewed confidential documents to consider a bid, among them the Pennsylvania-based home builder Toll Brothers, headed by Bob Toll.

Closing the deal

The foreclosure auction was now back on, for June 22, in the State Supreme Court building in Foley Square. A handful of investors made offers, but Toll Brothers’ $35.5 million bid won.

Taking control

On July 7, Toll Brothers officially obtained the deed to the property, which includes 276-280 Third Avenue (also known as 160 East 22nd Street) and air rights over four other properties. Von Spreckelsen said Toll Brothers plans to build a roughly 20-story building with about 80 residential units. It is unclear whether the units will be rentals or condos.