UPDATED April 17, 10:48 p.m.: Ongoing litigation at the Sitt brothers’ 2 Herald Square is making it difficult to refinance a $250 million loan on the property that was set to mature on April 11.
The 10-year CMBS loan, provided by Wells Fargo to Sitt Asset Management, was extended for six months, sources familiar with the deal told The Real Deal. The loan was sent to special servicing in March due to “imminent maturity default,” according to Trepp, and there is currently no lender in place to refinance the 11-story office building.
The 354,000-square-foot property at 1328 Broadway, valued at at least $500 million, is in the midst of litigation between several Sitt brothers, who own the leasehold. In May 2016, Eddie and Jack Sitt sued Ralph, as manager, claiming that he was “starving the property” and intending to dilute the members’ interests, according to court documents. The Sitts own a 51.75 percent controlling interest in the property, split five ways between four Sitt brothers and their mother.
In addition to the litigation, the loss of two tenants in 2016, and an upcoming tenant renewal, have put the property on shaky footing. In January 2016, H&M vacated a 31,000-square-foot retail space, which has yet to be filled. In August, Publicis New York left a 122,000-square-foot space and is being replaced by the office-sharing company WeWork.
As of November, the property was operating at a $1.7 million loss per month, according to court documents, and expenses were being covered by a $30 million equity infusion from Paramount Group. Only $6.4 million remained of the Paramount Group equity in November however, which was not enough to cover the additional costs of executing the WeWork lease on top of the monthly expenses.
To cover the costs, Ralph issued a capital call from investors, triggering another round of litigation. According to his brothers, he’d violated a preliminary injunction stopping him from making any unilateral financial decisions. Both the capital call and the WeWork lease eventually went through, but the 18-year lease comes with free rent through at least March 2018, putting a greater squeeze on the building’s cash flow.
“My first priority is saving the building …” Ralph wrote to Eddie during the dispute over the capital call. “So we’ll have something to quarrel over.”
Looming over all this was the April 11 deadline for the CMBS loan. Back in November, Ralph hired CBRE’s Shawn Rosenthal to secure north of $300 million in financing.
A letter from Rosenthal filed with the court in December detailed a list of lenders he had approached and who had declined to get involved. Morgan Stanley, Rosenthal wrote, will “pass on the transaction primarily because of the litigation issues between the partners.”
As of March 31, no lenders had come on board, according to court transcripts.
The litigation is ongoing, and in the interim, non-family investors in the Herald Square property have sued Ralph Sitt in a separate but related suit, trying to unseat him as manager. According to the court documents, a decision in the Sitt brothers’ case regarding the interim management of the company was pending the outcome of the refinancing negotiations.