885 Third Owner Seeks Prepackaged Chapter 11

NEW YORK CITY-Facing foreclosure at the hands of the Royal Bank of Canada on a $210-million mortgage, the owners of the Lipstick Building at 885 Third Ave. filed a plan for prepackaged bankruptcy Tuesday. In court documents, the owners list assets of $139.9 million and liabilities of $210.3 million.

RBC will support the Chapter 11 plan, which would reduce its secured claim to $130 million if the plan is approved, according to court documents. The plan would create an entity to be known as New Lipstick LLC, which would pledge its entire ownership stake in the 34-story office property to RBC.

The RBC loan was part of a complex financing arrangement used by 885 Third’s ownership in its 2007 buy of the 636,192-square-foot Lipstick tower, so nicknamed because it resembles an open lipstick tube. GlobeStreet.com reported that an entity of Israel-based Metropolitan Real Estate Investors sold a 79% fee interest and 21% leasehold interest in the property to SL Green Realty Corp. and Gramercy Capital Corp. for $317 million. The two companies simultaneously entered into a 70-year leasehold/sub-leasehold arrangement for the building. Metropolitan 885 Third LLC then obtained the loan from RBC to help cover the $648.5-million purchase from Tishman Speyer Properties.

Along with the June foreclosure filing by RBC, according to a disclosure statement, “the causes which gave rise to the need to seek relief under Chapter 11 are numerous.” The disclosure statement cites “the recent violent downturn in the building and real estate markets.”

Specifically, vacancy rates at the property have increased, “making it more challenging to service the debt on the property,” according to the statement. “Renewal lease rates have also been lower than anticipated. Such lower renewal lease rates have continued to negatively impact the cash flow of the Third Avenue property, which resulted and continues to result in an undue strain on the debt service fund.” The owner’s inability to maintain a minimum $2.3-million balance in the fund triggered a default notice from RBC in April, court documents say.

Although the anchor tenant at 885 Third, law firm Latham & Watkins, renewed and expanded its space to about 400,000 square feet following the ’07 sale of the tower, one multi-floor tenant there won’t be renewing. That would be convicted Ponzi schemer Bernard L. Madoff, who leased three floors at the building and who is now serving a 150-year sentence.

The New York Post reported this past April that Surge Trading, which bought Madoff’s market-making trading operation, leased one of the Madoff floors at the property; the US government is paying for another. A third floor remains vacant.

In a statement, Jacob Abikzer, managing member of Metropolitan 885 Third Aenue Leasehold LLC, says the reorganization marks "a positive step toward the long-term health and prosperity of the asset. It will provide for the building’s near-term leasing prospects and longer-term stability as additional equity has been earmarked for current and future tenant improvements and leasing and marketing activities." Abikzer adds that Metropolitan 885 seeks to complete the reorganization by the end of this year.

Built in 1986, the Lipstick Building was designed by Philip Johnson and John Burgee. It’s located at the corner of 53rd Street and Third Avenue and ranks among the most distinctive office towers in Midtown. According to its website, Metropolitan also owns properties in Tulsa, OK and Dallas.