PWM Property Management LLC – With Dismissal Efforts Behind Them and New Property Manager Installed at 245 Park Avenue; Debtors Seek Exclusivity Extensions as They Begin Exploring Restructuring Alternatives

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February 25, 2022 – The Debtors filed a motion to extend the periods during which they have an exclusive right to file a Plan, and solicit acceptances thereof, through and including June 28, 2022 and August 27, 2022, respectively [Docket No. 483]. Absent the requested relief, the Plan filing and solicitation periods are scheduled to expire on February 28, 2022 and April 29, 2022, respectively.

On October 31, 2021, the Debtors, who own commercial office towers located at (i) 245 Park Avenue in New York City ("245 Park Avenue") and (ii) 181 West Madison Street in Chicago, Illinois ("181 West Madison"), filed for Chapter 11 protection with over $2.0bn of indebtedness. At filing, the Debtors cited the impact of the COVID pandemic but also stressed that "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."

On December 20, 2021, the Court denied a motion by 245 Park Member LLC (the “SLG Member”) to dismiss the Debtors’ Chapter 11 cases [Docket No. 253]. 

With that dismissal effort (part of "contentious [SLG Member-driven] litigation at every step") repelled and an SLG Member affiliate (SL Green Management Corp) now replaced as the property manager at 245 Park Avenue, the Debtors argue that they have been able to make significant progress in recent weeks. In addition to the replacement of "245 Park Avenue’s conflict-riddled property manager," the Debtors have retained Houlihan Lokey to "develop a strategy for engaging with potential investors regarding refinancing and other restructuring alternatives…"

The extension motion notes, “The Debtors commenced these cases to achieve four main objectives: (a) prevent 245 Park Avenue’s mortgage lender from exercising cash dominion over the property’s bank accounts beginning on November 1, 2021, which would have starved the property of liquidity; (b) replace 245 Park Avenue’s conflict-riddled property manager; (c) explore value-maximizing alternatives for restructuring their funded indebtedness, which exceeds $2 billion; and (d) confirm a plan of reorganization, hopefully on a fully-consensual basis.

Despite contentious litigation at every step, the Debtors have managed to achieve the first two objectives and have made significant strides towards achieving the third.

First, the Debtors negotiated fully consensual final cash collateral orders with the Special Servicers for both of their properties. The final cash collateral orders provide the Debtors with numerous benefits, including: (a) access to cash (all of which constitutes cash collateral of the Special Servicers) necessary to operate their properties in the ordinary course and fund the administration of these cases; (b) runway to fund approximately $19 million into the MLB Reserve (as defined below) over a twelve-month period; and (c) case milestones that will allow the Debtors sufficient time to explore value-maximizing restructuring alternatives.

Second, the Debtors have installed Newmark as 245 Park Avenue’s new property manager, and the Debtors’ professionals have started working with Newmark towards the development of a new business plan for the property that will maximize value for all stakeholders.

Third, the Court recently approved the Debtors’ retention of Houlihan Lokey on a consensual basis. With Houlihan Lokey’s retention resolved, the Debtors’ business stabilized, and Newmark in place as the new property manager, the Debtors’ advisors have begun the process of exploring potential restructuring alternatives and exit strategies. These efforts include the formulation of a new business plan for 245 Park Avenue, which Houlihan Lokey will rely upon to develop a strategy for engaging with potential investors regarding refinancing and other restructuring alternatives.

Notwithstanding these hard-fought achievements, more remains to be done. Only now, after a two-month delay caused by S.L. Green Management Corp.’s (‘SLG Manager,’ and together with its affiliates, collectively, ‘SL Green’) litigation tactics, have the Debtors been able to install a conflict-free property manager for 245 Park Avenue and engage an investment banker that can assist the Debtors in exploring potential restructuring alternatives. Now that a process to explore potential restructuring alternatives is underway, the Debtors require additional time to properly test the market and explore potential value-maximizing exit strategies. For this reason, the Debtors seek a 120-day extension of their exclusive plan filing and solicitation periods.”

In a declaration in support of the exclusivity extention motion [Docket No. 484], the Debtors' CRO provides some interesting background as to the operational health of the Debtors (and perhaps the New York commercial real estate property markey more generally): "Since the Petition Date, the Properties’ performance has been stable. As the Chief Restructuring Officer I know there has been an increase in 245 Park Avenue’s occupancy rate — as of the filing of this Motion, 245 Park Avenue was approximately 90.23% occupied, as compared to approximately 88.04% on the Petition Date. Rental income has remained stable as tenants have continued to pay in the ordinary course, notwithstanding any impact that the recent Omicron variant may have had on tenants’ return to office plans. Moreover, since the commencement of these cases, I know the Debtors have continued to pursue new leases and amend existing leases to extend or expand lease terms. Since the Petition Date, the Debtors have executed new leases or amendments with respect to approximately 167,000 square feet of office space. The Debtors are in active negotiations with other prospective and existing tenants in respect of further leasing opportunities."

Case Background

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.

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.”

Prepetition Indebtedness

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."

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