Kushner Cos and The Distressed Properties it Owns in Manhattan – Reason to Stick with What You Know

Debt, Conflict and Vacancy Imperil Kushners’ Times Square Dream

By Caleb Melby and David Kocieniewski

June 25, 2019

Jared Kushner’s family averted disaster last year when a Canadian asset manager swooped in to buy their skyscraper in midtown Manhattan, which had been hemorrhaging millions of dollars. Now they’re facing a similar crisis a few blocks away.

At the former New York Times building on West 43rd Street, a graying property in Times Square, the pattern is uncannily similar: Buy at a steep price, pile on too much debt, run up big losses, fight with tenants and flirt with default.

It’s the latest example of overreach for a family that built a fortune on suburban rental properties, only to have its urban ambitions stymied. Kushner Cos. bought the first six floors of the Times building for $296 million in 2015, envisioning a multifloor amusement park in the heart of Times Square. Four years later, a toxic brew of debt, conflict and vacancies has put their investment in jeopardy.

Tenants at the Kushner-owned property include a bowling alley, a guitar store and an ocean-themed exhibit.

 Photographer: Jeenah Moon/Bloomberg

Think of the building as a vertical mall with three-story neon signs beckoning tourists. There are tenants the Kushners inherited: a sprawling sushi restaurant, a below-ground Guitar Center store and a two-story bowling alley with thumping music. And ones they brought in—in the basement, National Geographic Encounter, an exhibit about oceans with humpback whales and sea lions cavorting on digital screens; on the second floor, Gulliver’s Gate, featuring detailed miniatures of the Colossus of Rhodes, the Empire State Building, Jerusalem’s Western Wall and other famous sites, complete with miniature trains and glowing skyscrapers.

The Kushners’ new tenants have a few things in common, including ticket prices exceeding $30, underwhelming crowds and financial trouble. The National Geographic exhibit has paid only partial rent since August, and the Kushners are looking for a new tenant. Gulliver’s Gate paid irregularly, prompting a legal battle that resulted in its rent being cut by almost half this year. Take a walk around the back of the building, and there’s a dusty unfinished space meant for a champagne bar. It never opened. Kushner Cos. has traded lawsuits with the proprietor, an operator of airport restaurants that is alleging fraud, claims the Kushners have denied.

A spokeswoman for the National Geographic exhibit confirmed that the attraction wasn’t paying full rent, but she declined to provide details. Gulliver’s Gate founder Michael Langer said he was “happy we were able to work together for an amicable agreement.” A spokesman for OHM Concession Group, which leased space for the champagne bar, didn’t respond to requests for comment.

Leased tenants at 229 West 43rd St. at time of 2016 loan

Current tenants

Rental income lower than projected in 2016

Currently empty

Office Condo

4th floor

Bowlmor Lanes

After trading lawsuits, got rent cut by nearly half

3rd floor

2nd floor

Gulliver’s Gate

Haru Sushi

Ground

floor

Los Tacos No. 1

American Market

by Todd English

Never moved in

Cellar

floor

Replaced by The Ribbon

Guy’s American Kitchen+Bar

National Geographic Ocean

Encounter

Hasn’t paid full rent since August 2018

Subcellar

floor

Guitar Center

Sources: Loan prospectus, Bloomberg research

The missteps have added up. Kushner Cos. assumed that all these tenants would be paying rent when it piled $370 million of loans onto the building in an October 2016 refinancing, most of it from Deutsche Bank AG. In March, the company defaulted on one high-interest chunk of its debt to other lenders, and the property has often run at a loss after accounting for loan payments, according to data compiled from disclosures to investors. While there’s always room for improvement, spaces for so-called experiential retailers require custom designs and can take years to fill.

The story of how the Kushner family purchased a Times Square building only to see it founder during an economic boom is one of zealous overconfidence and a passion for trophy properties, according to more than a dozen people interviewed by Bloomberg News. It’s also a tale of how the real estate market encourages excessive risk-taking, rewarding those who use steep leverage on speculative properties even as they pass potential losses to others. Most of the debt on the Times building has been transferred to investors – it’s their problem now. Meanwhile, Kushner Cos. allocated some of the loan to pay itself $59 million, according to public filings.

Wells Fargo & Co., which manages the loan, has placed it on a watchlist for troubled debt and taken control of the property’s accounts. At one point, the building also drew the attention of federal prosecutors. The U.S. attorney for the Eastern District of New York subpoenaed records about the refinancing in 2017. What investigators were looking for, whether the Kushners were a subject and if the matter is ongoing is unclear. Spokesmen for Deutsche Bank and Wells Fargo declined to comment, as did Jared Kushner’s attorney, Abbe Lowell. Representatives for Kushner Cos. didn’t respond to numerous requests for comment.

 

Top: National Geographic’s exhibit, where the fish are digital. Bottom: The shoe-rental counter at Bowlmor Lanes.

Photographers: Bryan Bedder/Getty and Yeong-Ung Yang/The New York Times

The former Times building and Kushner Cos. were both struggling when they came together in 2015. The 18-story landmark with a mansard roof had been the newspaper’s headquarters for almost a century, until the company moved a few blocks away in 2007. That same year, Africa Israel Investments Ltd. bought the building at 229 West 43rd St. for $525 million and began searching for a way to repurpose it, exploring everything from luxury condos to a Disney-themed hotel. When those plans fizzled, the company, led by Russian-Israeli diamond merchant Lev Leviev, decided to sell part of the site as a retail complex.

The rapid growth of internet shopping made many real estate investors skeptical. But Charles Kushner, founder of the company that bears his name and father of now-presidential adviser Jared Kushner, was still bullish on retail when Leviev’s brokers pitched him. He had reason for his optimism. In 2011, as Kushner Cos. was straining under a mountain of debt at its 666 Fifth Ave. skyscraper, selling the building’s stores for $1 billion helped pay off some of it and buy time.

Four years later, 666 Fifth Ave. was again operating at a loss. The Kushners were supposed to have improved the property and raised rents. Instead, they had been shopping a plan to knock it down and build a glittering high-rise twice as tall with a five-story shopping center at its base.

The Kushners needed an infusion of cash, and the bottom six floors of the Times building offered a tantalizing opportunity. Tens of thousands of peoplewalk by daily. The building was about half leased, but if the family could fill it quickly and bolster its rent rolls, Kushner Cos. could refinance at a higher valuation, taking any gains as profit.

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