Lower Manhattan retail condo squeezed by lender as Gap refuses to pay rent

Covid-19 relief for property’s $70M CMBS loan was cancelled by servicer

Gap Senior Director of Real Estate Jennifer Rondholz, Morgan Stanley Prime Property Fund head Scott Brown and 170 Broadway (Linkedin, Google Maps)
Gap Senior Director of Real Estate Jennifer Rondholz, Morgan Stanley Prime Property Fund head Scott Brown and 170 Broadway (Linkedin, Google Maps)

Deadbeat tenants on one side, demanding lenders on the other — it’s the classic landlord dilemma of the coronavirus era.

The retail condominium at 170 Broadway in Lower Manhattan is among the latest properties to feel this double squeeze, as its CMBS lender has cancelled Covid-19 relief while the sole tenant, Gap Inc., refuses to pay rent — and is even demanding a refund.

The property, of which 25 percent is owned by Crown Acquisitions and 73 percent by the Morgan Stanley-managed Prime Property Fund, is now more than 60 days delinquent on $70 million in CMBS financing it received in 2015, according to Trepp.

The loan’s servicer, Midland, noted in its commentary this month that a Covid-19 relief package for the condo was “cancelled due to lack of additional information provided to process the request.”

Two weeks ago, Gap sued to block the landlord’s attempt to terminate its lease, arguing that it had already terminated the lease in March because the purpose of the deal “has been completely frustrated” by coronavirus. The retailer also said in its complaint that it was “entitled to a refund of a prorated portion of the rent and expenses it paid for March 2020.” That was the month when the state shuttered non-essential stores.

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If Crown and Morgan Stanley are allowed to terminate the lease — which runs through 2030 — on their terms, default remedies could leave Gap on the hook for nearly $60 million in future rent, according to the suit.

According to lease terms included in the exhibits, the landlord is not obliged to mitigate Gap’s damages, such as by finding a new tenant, and may simply leave the store vacant until the lease ends in 10 years and demand rent for all of that time.

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Gap argues that the only reason it agreed to pay “enormous sums” in rent at the property, currently about $5 million a year or $310 a foot, was because of its location in a “heavily trafficked and bustling tourist spot” in the Financial District — an advantage that was wiped out by the coronavirus. It’s also an advantage unlikely to be restored in the near future, due to social distancing measures and even the possibility of a second wave of infections.

“The Landlord is not able to restore the Premises or Lower Manhattan to its former state, and Tenant will never be in a position to operate the Premises in the way in which it was contemplated when it entered into the Lease,” the suit says.

Gap, which declared in an April public filing it would stop paying rent for shuttered stores, has gotten into several legal tussles with landlords already.

In May, landlords in Midtown Manhattan and Los Angeles sued the retailer, whose brands include Banana Republic and Old Navy, over unpaid rent. Mall operator Simon Property Group has also sued Gap for more than $65.9 million in rent and other charges at more than 400 properties.

Crown Acquisitions, Highgate Hotels and the Carlyle Group acquired the 18-story former office building at 170 Broadway for $55 million in 2011 and split it into two condominium units.

In 2014, the partners sold the retail unit to Prime Property Fund for $70 million with Crown retaining a minority stake and controlling interest. Gap inked its lease soon after. Later that year, Bahrain-based Premier Group acquired the hotel unit — a 242-room Marriott Residence Inn — for $150 million.

Crown, Morgan Stanley, Gap and Midland did not respond to requests for comment.

Contact Kevin Sun at ks@therealdeal.com

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