Just a few days after the auction of some of Ponzi scheme king Bernie Madoff's prized possessions, it looks like the building that housed his opulent offices may be heading to the auction block as well.
The owners of Manhattan's landmark Lipstick Building -- a Goldman Sachs subsidiary with the unwieldy name of Metropolitan 885 Third Avenue Leasehold -- filed for Chapter 11 bankruptcy protection Monday after defaulting on a $210 million loan back in April. The company's largest creditor, Royal Bank of Canada (RY), sued to force the sale of the building in June, and now is backing the prepackaged bankruptcy, which reportedly will give it 61% of its $130 million secured claim.
"The recent violent downturn in the building and real estate markets have had a significant impact on the debtor's operations," wrote Jacob Abikzer, a managing owner, in court papers supporting the filing. "Vacancy rates have increased, making it more challenging to service the debt on the property. Renewal lease rates have also been lower than anticipated."
Plunging Rents, Value
The liquidity crisis that began in 2008 devastated real-estate markets, and 2006 and 2007 leases expiring now might attract rents as much as 30% below their previous rates, says New York real-estate attorney Edward Mermelstein. The iconic Lipstick Building has lost significant value, he adds.
The owners bought the 34-story building at 885 Third Ave., between 53rd and 54th streets, at the top of the commercial real-estate market in 2007 for $648.5 million. "There's probably at least 30% to 40% of value that's disappeared -- most likely it's going to be more than that," Mermelstein says.
The most recent New York City market-value-history report appraises the property at a mere $199 million, although the true market value could be substantially higher.
Because the current owners have had trouble maintaining the building in the current economic conditions, Mermelstein predicts the building will likely change hands. "Who's going to step in and pick up the bulk of the major financial load?" he asks. "It's unlikely that it's going to be the current owner simply because additional equity in these types of situations is very difficult to bring in."