Tuesday, March 29, 2011

Like Father Like Son (In Law): Ivanka Trump's Husband About To Experience His First Real Estate Default

Over two years ago, when discussing the absolutely top ticked purchase of one 666 Fifth Avenue by under-30 real estate mogul extraordinaire, NY Observer owner and now Donald Trump son in law, Jared Kushner, we said: "Looks like the commercial mortgage apocalypse is about to claim its next victim, this time in the form of the appropriately numbered 666 Fifth Avenue building, home to such previously flourishing tenants as Citi Private Wealth Management...the building's DSCR has fallen to an abysmal 0.69. Even when taking into account the $98 million (or much less) reserve fund the building has set aside to cover rent shortfalls, one can assume it won't be long before the 666 insignia again prominently graces the roof, especially since it would have to replace a laughable Citi sign." Ah, the good old days of 2009, when news mattered, data actually flowed through models, hedge funds traded on constant inside information, markets actually dipped, POMO was a clown, and central planning was merely a drop of unrecycled ink in Ben Shalom Mugabe's toner cartridge. But we digress. With little surprise we read in the WSJ, that after an artificial delay of over 2 years, the inevitable is about to catch up with reality, confirming that no amount of Vissarionovichian market manipulation can make up for the complete absence of cash flows. "As of March, the aluminum-panel-clad skyscraper was about $3.5 million-a-month short on debt service, say people familiar with the matter. Only $10 million remained in a reserve fund used to service the property's $1.22 billion mortgage, which is tied to the office portion of the building. Its revenues are only one-fourth the amount forecast in 2007." Next steps: technical and/or full blown default.

More from the WSJ, which describes what in a normal world would have happened literally years ago:

Mr. Kushner is now facing off against a set of lenders that include private-equity heavyweights Starwood Capital Group and Colony Capital LLC. Talks have accelerated recently, with Mr. Kushner offering to put in tens of millions of dollars to recapitalize the property in exchange for some form of relief, people familiar with discussions said.

The Kushner family appears to have significant financial resources, and lenders don't expect other backers, including Mr. Trump, to come to Mr. Kushner's aid.

"The Kushners are ready and willing to invest more money into the property as soon as they can come to mutually satisfactory terms with the servicing agent," a spokesman for Mr. Kushner said.

Talks are fluid, but several people familiar with the talks say that outlines of a deal could be agreed upon within weeks.

New to the New York office market, Mr. Kushner, then 26, took the lead in buying 666 Fifth Ave., at 52nd Street, from landlord Tishman Speyer. The price—paid for with $1.75 billion in debt and $50 million in equity and $100 million in reserves from the Kushner family and family business partner George Gellert—assumed that a string of below-market expiring office leases would be replaced with companies paying far higher prices, according to loan documents. They also planned to sell a stake in the retail portion of the building and paid off junior debt.

The retail sale turned out well. In 2008, Mr. Kushner sold a controlling 49% stake in the space in a deal that valued it at $525 million. Earlier this month, Spain-based Inditex Group agreed to buy a portion of that retail at a significantly higher price, valuing it at about $8,300 a foot. It used to house an NBA store and will soon house the clothing brand Uniqlo's flagship store.

Once projected to take in nearly $120 million in annual office rent, the 39-story building will post income of close to $30 million this year, down from $60.1 million in 2007, people familiar with the rents said.

But the higher office rents haven't materialized and vacancies have increased. If Mr. Kushner were to miss a payment after the fund is depleted, he would be in default and representatives of the lenders could eventually attempt to seize the building if a deal isn't worked out, people involved with the talks said.

The commentary from the future presidential candidate now is oddly comparable to that uttered by young Master Kushner back then. Compare: "He is a very smart young man," Mr. Trump said of Mr. Kushner in an interview Tuesday. "I think it will come out well for him and everybody" (as of March 29, 2011) with: "We are well capitalized and conservative and feel confident that we will do well with this over time.” Kushner said (as of January 15, 2009). At least one has been proven wrong. Of course, sooner or later, everyone else who bets on the fortuitous alignment of the stars (ahem Gideon Bernanke) will end up bankrupt. The only question is how much of other people's money will be used up in the process- the Kushner cash legacy is about to find out first hand. "The bulk of the mortgage, $929.5 million, was securitized and sold off to investors as bonds. Private-equity firms Starwood Capital, Colony Capital, Area Property Partners and Paramount Group each bought stakes of the remaining $285.5 million in debt at a roughly 30% discount over the past two years, according to people familiar with the deals. Loan special servicer LNR Property Corp. has been taking the lead for all debt holders in the talks." And all will demand a piece of the pie.

Then again, with Kushner investing virtually zero equity in the project (thank you idiot CMBS investors), we are fairly confident he will promptly walk away leaving Starwood, et. al. fight over who gets to defect next.

This is especially true if the updated remittance report indicating that 666 Fifth is now a ghost town, is true, and where Izzy Englander's Millennium Partners may be the largest tenant left.

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