In a six-floor retail space near Times Square, the Guy Fieri restaurant has closed and construction hasn't begun on celebrity chef Todd English's food hall. A tourist attraction featuring a 1/87th scale model of New York City was behind on rent for two months as of December, according to loan documents.
It wasn't supposed to be this way.
When Kushner Cos. bought the property for $296 million in 2015, then-Chief Executive Officer Jared Kushner had big plans to capitalize on the tens of millions of tourists who visit the area every year. Deutsche Bank AG financed the endeavor before selling most of the debt to investors across Wall Street a year ago. Those investors were shown disclosures describing the retail space as 100 percent occupied and estimating it would throw off $24 million of rent annually.
But Fieri, English and Gulliver's Gate, the operator of the miniature Manhattan, account for $9.9 million of that rent estimate, which underpinned a market-defying appraisal boost and helped justify $370 million of loans, the disclosures show. Problems with these spaces could make the economics challenging.
Documents Requested
Last year, New York prosecutors requested documents from Deutsche Bank related to the property, where the Kushners used the debt to take out $59 million in cash. It isn't clear what prosecutors are looking for. But mortgages granted under generous financial assumptions then sold to others who will bear the risk have piqued their interest in other cases. A spokesman for the Brooklyn U.S. Attorney declined to comment, as did a spokesman for Deutsche Bank.
Kushners Cos. declined to comment or answer detailed questions about the property sent to them a week ago. A spokeswoman for Gulliver's Gate said that it "is up to date on their rent and paid in full on their lease" and there are "no concerns" about its future there.
Kushner, President Donald Trump's son-in-law and senior adviser, left his role in the family company when he joined the administration a year ago and divested from some assets. He says that, to avoid conflict of interest, he's no longer involved in the business.
Watch List
New managers of the loans bought from Deutsche Bank have taken notice of the property's issues. Even if they were brief, the missed payments by Gulliver's Gate, the second most lucrative tenant, triggered a clause in the Kushners' loan documents allowing creditors to demand any excess cash from the property until the problem was resolved, according to reports from debt servicers. Managers also put the retail space on watch lists for potentially troubled debt because it lost money for nine months through September 2017 after accounting for interest payments, the reports show. That's because new tenants were given millions in free rent, a common tactic used to fill store spaces. Kushner Cos. set aside $11 million of the loans for the free rent. Disclosures don't describe that figure as including funds for vacancies.
Bumps in the road are common when repositioning buildings, which can take years to reach full earning potential. But the retail tenants at the former New York Times building at 229 West 43rd Street posed special risks. Disclosures for potential lenders show that none had a credit rating from Fitch, Moody's Investors Service or S&P Global Inc., unlike many large retail properties that tend to be anchored by stores with known credit profiles.
Full Occupancy?
In truth, maintaining full occupancy looked tough from the start. When the debt was sold to investors, the 500-seat Guy's American Kitchen & Bar had been beset by negative reviews, and Todd English and his partners hadn't yet taken possession of the space for his food hall. The chef, who has pulled out of another project, was scheduled to open for business there last April. Gulliver's Gate, reportedly a $40 million endeavor, had not yet opened and was an untried competitor amid the glitz of Times Square.
On a recent Monday afternoon, the area reserved for Todd English was empty and unfinished with no sign of construction. Banners hung outside read "AFI Retail," the name of a subsidiary of the building's previous owner.
"We continue to work towards delivering this project," Richard A. Chinsammy, executive vice president of Outstanding Hospitality Management Group, English's partner for the food hall, wrote in an email. A spokeswoman for English said the restaurant is now scheduled to open in December.
Logos Pulled
Logos for Fieri's restaurant had been ripped from windows, though a large metal sign remained above the doorway. A spokeswoman for Fieri declined to comment.
Upstairs, about 50 people were visiting Gulliver's Gate. Two attendants said it was busier on weekends. Tickets for the 49,000-square-foot space filled with miniature buildings are $36 for adults and $27 for children and seniors. Tickets are also included with purchases of nearby hotel rooms, according to online reviews.
When Kushner Cos. bought the property in 2015 from Africa-Israel, the distressed firm of Russian diamond magnate Lev Leviev, online retailers were ascendant, and the future of brick-and-mortar stores was uncertain. So filling the property with tenants offering experiences seemed smart.
Ocean Odyssey
In addition to Todd English and Gulliver's Gate, Kushner signed National Geographic, whose "Encounter: Ocean Odyssey" promises an "incredible underwater journey" without any danger of getting wet. Bowlmor Lanes – with bowling, an arcade and party spaces – was already there. Neither tenant has been reported to have any problems.
The expected surge in income preceded a new appraisal in October 2016 at $445 million plus additional cash in accounts, indicating a stunning growth in value that far outstripped the broader Manhattan retail market, which had suffered a slowdown. Against that valuation, the $370 million of loans represented only 83 percent of the value, the investor disclosures showed. But Moody's and Kroll, the risk-assessment firm, found in independent calculations that the loans exceeded the value.
Four Trusts
Deutsche Bank's $285 million loan to Kushner Cos. was divided into four trusts with pieces of other loans to be sold to investors as commercial mortgage-backed securities. All told there are 163 loan pieces in the trusts, but only seven have been flagged on watch lists – including the four Kushner chunks. The Kushners received another $85 million in high-interest loans from SL Green Realty Corp. and Paramount Group.
In determining how much in interest payments the property could handle, underwriters estimated that costs to manage it would run about $4 million, disclosures show. If it achieved full rent of $24 million, that would indicate a modest cushion after making interest payments: about $18 million annually, according to data compiled by Bloomberg. But any loss of tenants with no immediate replacements could change those numbers quickly.
The situation might get worse before it gets better. In an October legal complaint against the Plaza Hotel, which contains a Todd English restaurant, the chef is accused of sexual harassment. In November, S&P downgraded the debt of another tenant, Guitar Center, saying it thought a potential debt restructuring could occur in the next six months, "a transaction that we would view as tantamount to a default." A Guitar Center spokeswoman declined to comment.
Entertainment venues are more likely to experience money crunches in an economic slump than traditional retailers, Kroll said in its March report on the property and its debts. "This may subject the loan to increased risk of default and loss," the firm said.
Still, there are worse venues to hunt for new tenants than Times Square, which commands the highest retail rents in the city after Fifth Avenue.
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