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July 14, 2022 – Judge Mary F. Walrath said at a hearing held Thursday that she will grant the Debtors' motion to enter into a stalking horse agreement under which 245 Park Member LLC (the "Stalking Horse Bidder" or "S.L. Green") will sponsor a Plan of Reorganization with respect to the Debtors' 245 Park Avenue property and (ii) approve related bidder protections (including a $5.0mn termination fee and a $2.0mn expense reimbursement). An order was subsequently filed at Docket No. 794 with the S.L Green APA filed as Exhibit C of Docket No. 762.
“To say that this is a momentous day for the case is certainly an understatement," Debtors' attorney Edmon Morton said at the hearing.
Gregory Pesce, also representing the Debtors, echoed those sentiments, commenting, “I’m pleased to say we’re here [seeking approval to designate S.L. Green as the stalking horse bidder] hand-in-hand with S.L. Green and all of our mezzanine lenders. That bid is going to set a clear floor for other parties with whom we’re in discussions now.”
Pesce told the Court that the Debtors were concerned about providing bid protections to S.L. Green, but "Ultimately we determined that the bid protections here were more than appropriate given the value that” SL Green’s bid is providing.
In addition, Pesce said “S.L. Green is putting new money to work. As of today, that number is $68 million.” He said that money is earmarked for costs related to administering the 245 Park Avenue property.
S.L. Green counsel Rachel Strickland painted a slightly less harmonious picture of how the Debtors and the stalking horse bidder arrived at the agreement, telling the Court that "tens of millions of dollars of administrative fees" have been accrued since the parties first appeared before the Court and that the building is worse off than it was at the outset of the Debtors' cases.
“We are where we are," Strickland, who told the Court that her client feels "absolutely justified" asking for bid protections, said at the hearing.
“We reluctantly agreed to [serve as the stalking horse bidder] to give more structure, more certainty” to the process, Strickland commented.
Strickland also said meeting the timelines set by the bidding procedures is of paramount importance to S.L. Green because, if an end of-August Plan confirmation and closing of the transaction is not achieved “this building will be completely out of money.” As a result, Strickland said the timeline is important “to make sure we get out of dodge before the well runs dry."
“We look forward to having a smooth, consensual rest of case," Strickland said.
Judge Walrath stressed during the brief hearing that, at this point, she is not approving any bid, but, rather, simply allowing S.L. Green’s bid to be designated as the stalking horse bid, and approval of a bid and any Plan “is for another day.”
In response to reservations of rights submitted by various parties, including in connection with the impact the transaction may have on non-debtor claims and default payments, Walrath said "everybody’s rights are reserved. Today I’m just designating SLG as stalking horse.”
Supplemental Bidding Procedures Motion
On July 9, 2022, the Debtors filed a motion requesting the supplemental bidding procedures order [Docket No. 762]. A copy of the Stalking Horse Agreement is attached to the motion at Exhibit C. On the same day, the Debtors filed a Revised Chapter 11 Plan of Reorganization and a related blackline showing changes to the version filed on June 9, 2022 [Docket No. 761].
The supplemental motion [Docket No. 762] states, "Following the filing of the Bidding Procedures (as defined below) on June 9, 2022, the Debtors sought to maximize stakeholder value by continuing to solicit potential proposals for 181 West Madison and 245 Park Avenue. As part of that process, the Debtors accelerated their discussions with S.L. Green — who, along with its affiliates, hold a preferred equity investment, mezzanine debt and other claims in these cases — regarding a potential stalking horse bid for 245 Park Avenue. The Debtors are pleased to report that those productive discussions have now resulted in a definitive agreement for 245 Park Member LLC (the 'Stalking Horse Bidder' or 'S.L. Green') to sponsor a comprehensive plan of reorganization for the Debtors with respect to 245 Park Avenue.
Under its bid (the 'Stalking Horse Bid') — the terms of which are subject to higher or better offers at an auction in accordance with the Bidding Procedures and Stalking Horse Agreement (as defined below) — S.L. Green will exchange at least $40 million of its preferred equity interests in 245 Park JV LLC for 100% of the common membership interests in 245 Park JV LLC, which indirectly holds 100% of the equity interests in the entity that owns 245 Park Avenue. In addition, S.L. Green will contribute cash of approximately $68 million at closing to satisfy the obligations necessary to effectuate the restructuring.
The Stalking Horse Bid, if consummated, would provide a host of benefits to the estates, including that it would:
(a) discharge 100% of the Debtors’ preferred equity obligation,
(b) provide for the payment in full in cash of administrative, priority and general unsecured claims, in accordance with the terms of the Stalking Horse Agreement and Plan,
(c) reinstate 245 Park Avenue’s mezzanine indebtedness on a consensual basis, as agreed to by S.L. Green and a super-majority of the mezzanine lenders, without the need to pay over $20 million in asserted default interest claims, and
(d) replace 181 West Madison Holding LLC with S.L. Green Realty Corp. as guarantor of 245 Park Avenue’s funded indebtedness on a prospective basis effective from and after the Effective Date….
In light of these numerous benefits, and as the Debtors will demonstrate at the hearing, the Debtors believe that the proposed bid protections — including a break-up fee of $5,000,000 paid solely from the proceeds of an alternative transaction (the 'Termination Fee') and the obligation to reimburse up to $2,000,000 in fees and expenses (the 'Expense Reimbursement') — are necessary to lock in the Stalking Horse Bid and reasonable under the circumstances. Indeed, the aggregate amount of the Termination Fee and Expense Reimbursement represents less than 0.4% of the transaction value."
Key Terms of the Stalking Horse Agreement
- Seller: PWM Property Management LLC
- Buyer: 245 Park Member LLC
- Consideration: HNA 245 Park Ave JV LLC (the “Existing Common Member”), as the holder of 100% of the common Membership Interests (the “Purchased Membership Interest”) in 245 Park JV LLC (the “Company”), shall transfer to Plan Sponsor, and Plan Sponsor shall purchase from the Existing Common Member, the Purchased Membership Interest free and clear of all Liens, together with all accrued rights and benefits attached thereto, under a chapter 11 plan approved by the Bankruptcy Court pursuant to section 1129(b) of the Bankruptcy Code in exchange for the payment by the Plan Sponsor of:
- an amount, not to exceed the “Cap” of $68,000,000, equal to the sum of (a) an amount, which shall not be less than zero, equal to $19,080,545 minus the total amount of cash in the Outstanding Rollover (MLB) Account, as such term is defined in the 245 Park Avenue Cash Collateral Order, plus (b) the Park Avenue Professional Fee Escrow Amount (as defined in the Plan), plus (c) an amount sufficient to fund the distributions to Holders of all Allowed Claims in accordance with the treatment of such Claims and subject to the terms provided in the Plan, plus (d) an amount sufficient to reimburse all amounts paid by the Plan Sponsor Debtors from the Petition Date through the Effective Date in respect of Administrative Claims (excluding costs of operating the businesses of the Plan Sponsor Debtors that would have been incurred regardless of the commencement of the Debtors’ chapter 11 cases, such as, without limitation, real estate taxes, property-related operating expenses, and insurance premiums), Park Avenue Professional Fee Claims, Priority Tax Claims and special servicing fees and professional fees paid to Situs Holdings, LLC in accordance with the Park Avenue Cash Collateral Order (capped at $4,901,000), minus (e) all cash held in the account held by the Debtors at Signature Bank in account number ending in -0134 at the Closing, and
- an aggregate amount equal to $40,000,000 of all Claims in respect of the Preferred Member Interest held by the Plan Sponsor (as such amount may be increased by Plan Sponsor during the Auction in accordance with the Bidding Procedures).
- Bid Protections: a Termination Fee in the amount of $5,000,000 and Expense Reimbursement for expenses incurred by the Plan Sponsor in connection with the Transactions in an aggregate amount up to $2,000,000, upon the consummation of the Alternative Transaction solely from the cash proceeds of such consummated Alternative Transaction.
- Milestones: Prior to the valid termination of the Stalking Horse Agreement, the Company and Plan Sponsor shall use their respective commercially reasonable efforts to obtain the entry of:
- the Stalking Horse Order by July 18, 2022
- the Disclosure Statement Order by July 21, 2022; and
- the Confirmation Order by September 1, 2022
- Bid Deadline: July 21, 2022
- Auction: July 26, 2022
The significantly revised Plan reflects a major breakthrough in these cases, i.e., “a definitive agreement for 245 Park Member LLC (the 'Stalking Horse Bidder' or 'S.L. Green') to sponsor a comprehensive plan of reorganization for the Debtors with respect to 245 Park Avenue,” as described in the supplemental bidding procedures motion [Docket No. 762] and related supporting documents filed with the Court on July 9th.
The following is an amended summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement)
NB: Former Class 7 ("Intercompany Claims") and Class 12 ("245 Park Ave JV LLC Common Equity Interests") have been deleted.
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $2,417 and the estimated recovery is 100%.
- Class 2 (“Other Secured Claims aims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $167,855 and the estimated recovery is 100%.
- Class 3A (“Park Avenue Mortgage Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The outstanding aggregate principal amount is $1,200,000,000.00 plus interest accruing and unpaid at the non-default contract rate of 3.67% through the Effective Date.
- Class 3B (“West Madison Mortgage Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The outstanding aggregate principal amount is $240,000,000.00, plus interest accruing and unpaid at the non-default contract rate of 3.90% through the Effective Date.
- Class 4A (“Mezzanine A Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The outstanding aggregate principal amount is $236,500,000.00, plus $8,211,805.56 in outstanding non-default rate interest at the non-default contract rate of 5.00%, plus interest accruing and unpaid at the non-default contract rate of 5.00% through the Effective Date.
- Class 4B (“Mezzanine B Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The outstanding aggregate principal amount of $221,000,000.00 plus $8,747,916.67 in outstanding non-default rate interest at the non-default contract rate of 5.70%, plus interest accruing and unpaid at the non-default contract rate of 5.70% through the Effective Date.
- Class 4C (“Mezzanine C Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The outstanding aggregate principal amount amount $110,500,000.00 plus $5,256,423.61 in outstanding non-default rate interest at the non-default contract rate of 6.85%, plus interest accruing and unpaid at the non-default contract rate of 6.85% through the Effective Date.
- Class 5A (“Mezzanine A Guarantee Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5B (“Mezzanine B Guarantee Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5C (“Mezzanine C Guarantee Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5D (“Park Avenue Mortgage Guarantee Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 6 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $5,935,644FN and the estimated recovery is 100%. FN: Projected amount of General Unsecured Claims by Debtor is as follows: 245 Park Avenue Property LLC – $5,497,310; and 181 West Madison Property LLC – $438,334.
- Class 7 Reserved.
- Class 8 (“Intercompany Interests”) is unimpaired/impaired and not entitled to vote on the Plan.
- Class 9 (“Equity Interests in 181 West Madison Holding LLC”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 10 (“Park Avenue Preferred Equity Interests in 245 Park JV LLC”) is unimpaired/impaired and subject to the outcome of the auction, entitled to vote on the Plan. The aggregate amount of claims is $161,930,167FN and the estimated recovery is up to 100%. Holder shall receive, subject to the outcome of the Auction, the treatment set forth in the Plan Supplement. FN: Projected amount of Park Avenue Preferred Equity Interests includes the initial investment amount, accrued interest through September 30, 2021 and prepetition accrued interest and cash dividends due from October 1, 2021 through October 30, 2021.
- Class 11 (“Guarantee of Park Avenue Preferred Equity Interests in 245 Park Ave JV LLC”) is unimpaired/impaired and subject to the outcome of the auction and entitled to vote on the Plan. Holder shall receive, subject to the outcome of the Auction, the treatment set forth in the Plan Supplement.
- Class 12 (“PWM Property Management LLC Common Equity Interests”) is impaired Subject to the Outcome of the Auction and entitled to vote on the Plan.
Petition Date Perspective
On October 31, 2021, PWM Property Management LLC and eight affiliated debtors (“PWM” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 21-11445 (Judge Walrath). The Debtors, who with non-debtors own 245 Park Avenue in Manhattan and 181 West Madison in Chicago, are represented by Edmon L. Morton of Young Conaway Stargatt & Taylor, LLP. Further board-authorized engagements include: (i) White & Case LLP as general bankruptcy counsel, (ii) M3 Advisory Partners, LP as restructuring advisors ("M3," with M3's Mohsin Y. Meghji serving as CRO) and (iii) Omni Agent Solutions as claims agent.
The Debtors, together with non-debtors, are indirectly owned by China's HNA Group North America LLC ("HNA") which is in turn a sub of Hainan Airlines Holding Co.
Each of the two properties are noted skyscrapers, with tenants of 245 Park Avenue including Major League Baseball; Angelo Gordon; Bear Stearns and JPMorgan Chase; and 181 West Madison home to, inter alia, Northern Trust and the USCIS.
In March 2017, HNA purchased the 245 Park Avenue property for a reported $2.21 billion from Brookfield Property Partners and the New York State Teachers’ Retirement System. HNA financed the acquisition with a $1.75 billion loan from a consortium of lenders including J.P. Morgan Chase, Deutsche Bank, Barclays, Natixis and Societe Generale in addition to $568 million of mezzanine financing. In 2018, financial issues forced HNA to divest significant element of its $22.0bn portfolio which included a $148.0mn stake in 245 Park Avenue to office REIT SL Green ("SLG"), which was at that time also appointed as property manager and leasing manager.
HNA purchased the Chicago property for a reported $360.0mn in March 2017. In each case, HNA was dogged by suggestions that it had overpaid and both properties have been on the market for the better part of three years.
The Debtors' lead Petition suggests that the SLG relationship has now soured (SLG owed a $301k management fee as noted below), with the Debtors accusing SLG of representing direct competitors and looking to use Chapter 11 to exit its management arrangements with SLG and enter into a new one with Milstein Brothers Real Estate LLC.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Cook County Treasurer ($13.4mn property taxes claim), (ii) NYC Department of Finance ($9.8mn property taxes claim) and (iii) SL Green Management Corp ($301k management fee claim).
Events Leading to Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Meghji Declaration”), Mohsin Y. Meghji, the Debtors’ chief restructuring officer, detailed the events leading to PWM’s Chapter 11 filing. The Meghji Declaration provides: “A number of factors have contributed to the decline in the Park Avenue Debtors’ earnings and liquidity one of which is the COVID-19 pandemic, which has significantly impacted the global economy and the Debtors’ businesses and made these chapter 11 cases a necessary step to maximize the value of the Debtors’ estates.
The Debtors acquired 245 Park Avenue in May 2017 for $2.21 billion. The property was appraised at $2.25 billion at the end of 2018. While the appraised value fell to $2.21 billion at the end of 2019, and then to $2.05 billion at the end of 2020, even based on its most recent valuation, the 245 Park Avenue still has significant equity value. Large, dense commercial office markets like New York City have been disproportionately affected by pandemic-driven market conditions, and market researchers expect that this sector will likely be among the slowest to recover. The pandemic has facilitated a shift to remote work, sparking a global conversation about making permanent changes to the traditional office model and causing many employers to re-evaluate their office space needs….
Moreover, with many commercial tenants experiencing liquidity pressure based on the impact of the pandemic on their own businesses, rent collections in the commercial real estate sector have been adversely impacted and the value of commercial real estate has fallen. High vacancy rates have resulted in a more tenant-friendly market, giving struggling commercial tenants leverage to seek lease concessions which drive down net effective rents. In fact, Moody’s further predicted an office rent decline of approximately 8.9% in New York over the course of 2021, with rents likely to reach a low point in late 2022. The combination of vacancies and depressed rents has resulted in drastically reduced operating income for many commercial real estate owners.
But the problems at 245 Park Avenue are not entirely due to the pandemic. They have also been caused by SLG Manager’s failure to properly perform its primary job: retaining and recruiting world-class tenants for the Property. As noted above, one of 245 Park Avenue’s long-standing anchor tenants, MLB, determined not to renew its lease beyond November 1, 2022. Moreover, MLB’s departure within one year of its lease’s expiration on November 1, 2022 is a 'Tenant Trigger Event' under the 245 Park Avenue Mortgage Loan. A 'Tenant Trigger Event' will permit the Park Avenue Servicer, as of November 1, 2021, to sweep certain excess cash flows described above into an account established for the Park Avenue Mortgage Lenders’ benefit (the 'Cash Dominion Rights').
Given the impending occurrence of the Tenant Trigger Event, the Debtors anticipated that, in the absence of filing these chapter 11 cases, the Park Avenue Mortgage Lenders would imminently exercise such rights. The potential exercise of the Cash Dominion Rights by the Park Avenue Mortgage Lenders would starve the Park Avenue Debtors of access to their excess cash flows, leaving the Park Avenue Debtors without the means to make quarterly dividend payments to the SLG Member or to satisfy the Preferred Equity Contribution in favor of the SLG Member, which may be accelerated and become due as soon as December 31, 2021. The failure to redeem the Preferred Equity Contribution when it is due, in turn, will trigger a Forced Sale under the LLC Agreement, requiring that Park Avenue JV or the Owner Member divest its interests in 245 Park and/or its subsidiaries, in each case, to the SLG Member or a third party buyer. Moreover, the LLC Agreement provides the SLG Member with the sole and absolute discretion to determine the identity of the purchaser, the sale price, timing and all other terms and conditions of the Forced Sale, which need not be commercially reasonable.
While the Debtors approached the SLG Member to seek an extension of the maturity of the Preferred Equity Contribution, none was granted. Indeed, SLG Member did not engage; it did not even respond to a markup of a prenegotiation agreement it demanded the Debtors execute. Given current market conditions, the Debtors consider that a Forced Sale would be value-destructive and would likely represent a windfall to the SLG Member at the expense of the estates.
SLG Manager’s failures are not limited to MLB, it has not signed any new tenants for 245 Park Avenue since it assumed the Property Manager role in November 2018. This is particularly concerning because SLG Manager has conflicts of interest arising from its status as an affiliate of both the SLG Member and a holder of a portion of the Mezzanine C Loans. By virtue of its position as Property Manager, SLG Manager is empowered to drive down the value of the property for the benefit of the SLG Member by failing to procure new tenants and renew existing leases, including by directing tenants to one of the many nearby properties it manages.
There is significant equity value in the Properties and the Debtors are focused on reorganizing their business, improving the efficiency of their management and operations and positioning the Properties to better compete with their peer group. For example, the Debtors are in the midst of a $20 million modernization project in respect of 245 Park Avenue that commenced in 2019 and is due to be completed in 2022… The improvements will allow the property to command higher rents and the Debtors project revenue growth in respect of 245 Park Avenue of up to $222 million by 2030.
Additionally, through these chapter 11 cases, the Debtors intend to reject the 245 Property Management Agreement and replace SLG Manager as soon as practicable following the Petition Date. The replacement of SLG Manager will put management of the property into the hands of a non-conflicted manager that is motivated to maximize the Property’s performance. It will also reduce the management fees currently paid for the Property.”
About the Debtors
According to the Meghji Declaration, "The Debtors constitute a business enterprise that owns premium commercial real estate properties and related assets. Specifically, the Debtors own commercial office towers located at: (a) 245 Park Avenue in New York City ('245 Park Avenue'); and (b) 181 West Madison Street in Chicago, Illinois ('181 West Madison,' and, together with 245 Park Avenue, collectively, the 'Properties'). The Properties are managed by third-party property managers (the 'Property Managers'). Most of the Properties’ corporate functions are provided by the Property Managers, who supply the on-site personnel and engage the majority of the vendors and thirdparty contractors at the Properties. Consequently, the Debtors do not have any employees of their own and have a limited number of trade creditors."
Corporate Structure Chart
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