At Kushners’ Flagship Building, Mounting Debt and a Foundered Deal

The Kushner Companies’ flagship property, 666 Fifth Avenue in Manhattan. After years of financial issues, the value of the office space is worth less than the mortgage, according to an analyst.

The Fifth Avenue skyscraper was supposed to be the Kushner Companies’ flagship in the heart of Manhattan — a record-setting $1.8 billion souvenir proclaiming that the New Jersey developers Charles Kushner and his son Jared were playing in the big leagues.

And while it has been a visible symbol of their status, it has also been a financial headache almost from the start. On Wednesday, the Kushners announced that talks had broken off with a Chinese financial conglomerate for a deal worth billions to redevelop the 41-story tower, at 666 Fifth Avenue, into a flashy 80-story ultraluxury skyscraper comprising a chic retail mall, a hotel and high-priced condominiums.

The official announcement said the company remained “in active, advanced negotiations” with a number of investors, whom it declined to name.

There is no question that the Kushner Companies — Jared has moved to Washington to serve as an adviser to his father-in-law, President Trump — needs to reach a deal soon, either to bring in a fresh infusion of cash or a well-heeled partner willing to foot the bill, if it wants to hold on to the building. Whomever it brings on as an investor would also have to buy out Vornado Realty Trust, the family’s partner in the tower.

More than a quarter of the office space in the building sits vacant. According to an analysis by Trepp L.L.C., a data and analytics firm that tracks bank lending, 666 Fifth Avenue has not generated enough money to pay its debts for several years, forcing the owners to cover the shortfall — at least $10 million in 2015. And that gap is growing. The interest-only $1.2 billion mortgage comes due in less than two years.

“This building has had financial issues for years now,” said Joe McBride, a senior associate at Trepp. “How much longer can they sustain it? Occupancy is at 70 percent, more leases are expiring, and they’re going into their own pocket to pay the debt.”

A deal with the Chinese company, the Anbang Insurance Group, which has ties to the highest echelons of the Chinese Communist Party, would have bound together two politically connected companies. It had become the subject of enormous media attention and had drawn scrutiny from Democratic lawmakers in Washington.

The speculation surrounding the deal became a distraction that led both companies to abandon the negotiations, according to a spokesman for Kushner Companies.

But the spokesman, James Yolles, said Charles Kushner remained optimistic that he would secure fresh investors who would not only pay off the existing debt on the building but also finance the demolition of the current structure and the construction of a 1,400-foot tower designed by Zaha Hadid. Jared Kushner sold his stake in the building to a family trust in January when he moved to Washington.

“We are well on our way to lining up the $2.5 billion in equity needed to get this deal done,” Mr. Yolles said, “and we’re confident that we’ll get there.”

The Kushner Companies bought the building in January 2007, closing the deal on Jared Kushner’s birthday and paying the highest price ever for a New York office building. “This is a great acquisition for our company,” Jared Kushner said at the time.

According to the Kushners, they put $500 million into the purchase. They then took out a mortgage and hundreds of millions in additional loans to cover the purchase price and ancillary costs.

The building represented a new beginning for a New Jersey real estate family that had specialized in suburban garden apartments. The Kushner Companies moved its headquarters to the 15th floor on Fifth Avenue, from Florham Park, N.J.

The Kushner Companies announced last week that talks with a Chinese company for a multibillion-dollar deal to redevelop the property had fallen through.

While the total paid for the building was not that much higher than the previous record — $1.72 billion for the MetLife Building — the price for MetLife worked out to about $600 a square foot, while the Kushners paid $1,200 a square foot for 666 Fifth Avenue.

Even at the time, income from the building, which was almost completely rented, covered only about two-thirds of the annual debt payments, according to records.

Then, as the 2008 financial crisis set in, rents, instead of going up, went down. To pay off some of their debt, the Kushners began selling parts of the building, including its most valuable asset, the retail space on Fifth Avenue, to the Carlyle Group and Crown Acquisitions for $525 million, a remarkable price. The proceeds were used to pay off secondary loans on the building, not the main mortgage.

But the bleeding continued. Two years later, with the tower’s reserve funds nearly exhausted and the owner losing as much as $30 million, the mortgage holder appointed a “special servicer” to oversee 666 Fifth Avenue. Such a company manages a property loan when the borrower is in danger of falling into default.

The Kushner Companies renegotiated the terms of the loan in 2011.

At the same time, Vornado, a publicly traded real estate company and one of the city’s largest landlords, bought 49.5 percent of the building’s office space for $80 million and other financial pledges as part of refinancing the property. In 2013, it bought the retail condominium from Crown and Carlyle for $707 million, except for a portion that had been sold to Zara, the Spanish clothing chain.

Vornado’s chairman, Steven Roth, declined to comment on the building. His firm has veto power over any deal, according to its loan agreements with the Kushner Companies.

The $1.2 billion mortgage on 666 Fifth Avenue has swelled to $1.4 billion with accrued interest, according to financial records filed by Vornado. Revenue, which continues to decline, covers only 66 percent of the building’s debt obligations, according to the latest report by Trepp.

At this point, the value of the office space is less than the mortgage, said Jed Reagan, a commercial real estate analyst at Green Street Advisors, a real estate research firm based in California. “There is no equity value” on the office portion of the building, he said.

The Kushners have not filled space as it opens up because they plan to demolish the aluminum-clad building. More than two years ago, when the market for superluxury condominiums and high-end retail was hot, they commissioned Ms. Hadid, a star architect who died last year, to design a residential and hotel tower sitting atop a base of high-end shopping to replace it.

The demolition and construction is projected to cost $7.5 billion. The Kushners are looking for a partner or partners to invest $3.3 billion, including $500 million from the Kushner family and others, who would own a 20 percent stake, according to Mr. Yolles, the company spokesman. Then they would need to borrow a staggering $4.2 billion.

To attract investors, developers typically put together an offering plan. The Kushners’ version is lavishly illustrated with renderings of the building by Ms. Hadid’s firm and rosy financial projections that show the retail and residential spaces commanding spectacular prices that, seven years from now, when the building is completed, would total more than $12 billion.

But the booming real estate market in New York, fueled in part by foreign investors, has cooled drastically at the luxury end.

Sales have slowed to a trickle at a generation of ultraluxury supertowers along 57th Street and elsewhere, and vacancies have opened up at storefronts along the city’s most lucrative shopping boulevards as rents have outpaced retailers’ ability to pay.

A year ago, a developer who owned the nearby Sony Building abandoned his very similar plan to convert that Madison Avenue office tower into a luxury mall, hotel and condominiums and sold it.

The Kushners’ spokesman said they were working with other potential investors to raise $2.5 billion. But Charles Kushner must offer a high enough price to also persuade Vornado to sell its stake in the building, buy out the remaining tenants and get Zara to vacate its space until the new tower is completed.

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