Sternlicht’s LNR eyes auction for Midtown office facing foreclosure after $41M default

Economic shocks haven’t been good to the owners of 29 West 35th Street.

Coming out of the Great Recession, Paul Sohayegh and Roni Movahedian faced foreclosure on the 12-story Garment District office building in 2010 after defaulting on a $29.2 million mortgage.

Their partnership that held the building, Empire State Equities, managed to right the ship — only to take on water again when Covid decimated the rent roll.

This time, the building looks unlikely to escape the auction block.

After LNR, the special servicing arm of Barry Sternlicht’s Starwood Property Trust, filed to foreclose on 29 West 35th Street in early 2022, the firm won two judgments against Sohayegh and Movahedian in December over the owners’ default on a $41 million loan.

The first decision appointed a receiver to collect rents. The second named a referee to tally up the landlord’s debt, ultimately pegged at over $54 million in January.

Now, LNR is asking the court to approve the foreclosure so it can sell the building at auction.

The property’s latest troubles surfaced in August 2020, when Sohayegh and Movahedian defaulted on the mortgage they’d taken out a year prior and the loan transferred to special servicing.

Two of the building’s tenants, flex-office startup Knotel and business software provider Sprinklr, had stopped paying rent months earlier and racked up a combined $819,000 debt, for which the landlords sued in September 2020.

Together, the tenants occupied more than 75 percent of the office space.

In October, the landlords, through the limited liability companies United Group and American Equities, sued its ground-floor tenant, a bar named The Liberty NYC, for $139,000 of unpaid rent accrued between March 2020 (when bars were shut down for Covid) and July of the same year.

By December, LNR had accelerated the loan, demanding immediate repayment of the outstanding debt.

The landlord’s repayment prospects grew dimmer: In February 2021, Knotel filed for bankruptcy. On the bright side, the non-paying startup did vacate its five floors of office space. It had been 29 West 35th Street’s largest tenant, according to Fitch Ratings.

By the end of 2021, the property’s occupancy had sunk to 40 percent from 56 percent earlier that year, and Sohayegh and Movahedian reported negative net operating income for the year, a Fitch report shows.

In January 2022, LNR filed the foreclosure suit.

Steven Schlesinger, partner at Jaspan Schlesinger Narendran and counsel for the landlords, chalked up the fallout to the pandemic and the lender’s failure to extend relief.

“Perfect storm,” he said.

Scott Tross, a partner at Herrick Feinstein representing LNR, declined to comment.

Last month, LNR filed a motion asking the court to agree with the referee that $54 million was due and to approve the building’s foreclosure and sale.

If the court agrees, the landlords would be on the hook for whatever the sale does not cover, which could be tens of millions of dollars. The property was last appraised for $39 million in August 2022, according to Morningstar, and the city’s office market had a brutal fourth quarter.

Not surprisingly, Sohayegh and Movahedian are fighting the foreclosure.

On Feb. 17, their lawyer asked the court to deny the servicer’s request for a foreclosure judgment to give the landlords time to refute the referee’s debt estimate. A hearing was set for Feb. 28.

Schlesinger, who represented the Trump Organization during its Great Recession-era defaults, noted lenders are less likely than they were then to make deals with delinquent borrowers.

“This is a whole new world,” Schlesinger siad. “Banks and lenders can withstand the drag and leveraged real estate investors cannot.”

CORRECTION: This article originally stated that Wilmington Trust, a subsidiary of M&T Bank, was the lender on the loan. Wilmington Trust is a trustee on the debt. Wells Fargo was the original lender. LNR serviced the note after the default.