Following the sudden death of developer Lou Ceruzzi last year, executives at his firm scrambled to come up with a direction for the company that bears his name.
Now, Ceruzzi Properties is negotiating to bring on a development partner for its most ambitious development – the $500 million project at 520 Fifth Avenue where they’ve spent the past few years struggling to develop a condo tower with partner SMI USA.
Robert Gladstone’s Madison Equities is in late-stage talks to join the project, sources told The Real Deal.
A spokesperson for Ceruzzi Properties declined to comment, and Gladstone did not respond to requests for comment.
Ceruzzi Properties, headed now by president Arthur Hooper, has been search for several months for a development partner. And the negotiations shine a light on some troubles with the project.
For starters, Ceruzzi and SMI bought the site at the height of the city’s investment-sales market in 2015 for $275 million from Thor Equities. But the condo market has fallen off precipitously since then, and many in the market feel much of the land’s value has eroded to the point where it’s wiped out the project’s equity, according to one source familiar with the site.
The land is not worth more than the $200 million bridge loan the sponsors got from Mack Real Estate Credit Strategies in the summer of 2017, the source said.
To further complicate matters, Ceruzzi Properties has very little equity in the deal, and is intent on holding onto its development fees. Earlier this year, Ceruzzi Properties and its partner were in talks with several developers to join the project, including Extell Development, Zeckendorf Development and HFZ Capital.
But those developers balked at letting Ceruzzi Properties hold onto the lucrative development fees, sources told TRD. So the company went with Madison Equities, which agreed to split the fees with Ceruzzi.
In return, Madison will bring on additional financing. The developer has a term sheet out with Och-Ziff Capital Management for a $200 million loan, which will be used to repay the Mack mortgage. Newmark Knight Frank’s Dustin Stolly and Jordan Roeschlaub, who are working with Madison to negotiate the debt, declined to comment.
And Madison will work to raise about half of the additional $60 million in equity the project with requires, with SMI USA on the hook for the remaining $30 million.
In choosing Madison as a partner, though, Ceruzzi Properties and SMI are teaming with a developer who has a reputation for being particularly litigious.
Last year, Madison sued its partner on the condo development at 10 Sullivan Street, Property Markets Group, accusing company principal Kevin Maloney of mishandling the project.
A judge in January tossed the lawsuit, but Maloney last year told TRD that Gladstone had an ego problem.
“Why should we not suffer the fate of all other Gladstone partners? I cannot think of a project he was involved in that didn’t include litigation or a bankruptcy,” he said.
And Madison and its partners sued the now-defunct brokerage Town Residential last year over the marketing of the condo project at 212 Fifth Avenue in NoMad. Gladstone also sued Town’s CEO Andrew Heiberger, claiming the executive defamed him and his company. The $100 million libel suit was settled last month.
Elsewhere, Gladstone is working on the most ambitious development project of his career: a $625 million supertall condo tower in the Financial District at 45 Broad Street. Madison is developing it with partners Pizzarotti Group, Gemdale Properties and AMS Acquisitions.
Despite holding a groundbreaking ceremony in April 2017, Gladstone has yet to land construction financing for the project.