Whether the real estate market is flying high or plagued by a downturn, there’s a certain prestige to owning a premier Manhattan office tower. And when one of these properties changes hands, it’s always big news in the commercial real estate investment community. Such was the case with the change in ownership of 245 Park Avenue in September 2022. You can’t miss it. 245 Park is a striking, 1.8 million-square-foot office high-rise occupying an entire block along one of the most prominent corporate corridors in the world, and it belongs to the New York-focused REIT SL Green Corp. Most office transactions are as simple as the buyer getting financing to pay the seller and the seller turning over the property upon receipt of the agreed-upon price. But SL Green’s road to acquiring the 44-story tower from China-based conglomerate HNA Group was anything but typical.
When SL Green took possession of 245 Park, the industry was abuzz for more reasons than one. There was a great deal of drama attached to the change in ownership of the property, and it all began in October 2021 when owner HNA filed for Chapter 11 bankruptcy protection, a move linked directly to the company’s $2.2 billion purchase of 245 Park from a joint venture of Brookfield Property Partners, Clarion Partners, and the New York State Teachers’ Retirement System in 2017. HNA recapitalized 245 Park in 2018, and that’s where SL Green came into the picture. SL Green made a $148.2 million investment in the HNA ownership entity in a deal that left them with a 49 percent preferred equity interest in the property as well as the role of property manager. At the time, 245 was 91 percent leased, with Societe Generale Americas as the anchor tenant.
Fast-forward to HNA’s 2021 bankruptcy and the legal wrangling and mudslinging begins. Acting through its subsidiary PWM Property Management LLC, HNA filed a motion to annul the property management and leasing agreement with SL Green. At the time, 245 Park was feeling the impact of the pandemic on the office market, but HNA pointed the finger at SL Green. “The problems faced by 245 Park Avenue have been exacerbated by the poor performance of that building’s conflicted property manager, S.L. Green Management Corp,” PWM Property Management noted in the court document. “SLG Manager’s failure to secure a single new tenant for 245 Park Avenue in the three years it has managed the building will have dire consequences for the Debtors.”
SL Green’s role as property manager for 245 Park became a moot point in 2022, when the building was put up for auction as part of HNA’s bankruptcy restructuring and SL Green emerged as the stalking horse bidder. With no other qualifying bids for the property, SL Green acquired 245 Park at a gross asset valuation of $2 billion, including the assumption of approximately $1.7 billion of existing debt. SL Green wasted precious little time commencing a repositioning program at 245 Park and taking legal action against HNA, demanding repayment of its investment in the HNA ownership entity. As agreed upon in the joint venture contract between HNA and SL Green, should there be a default on 245 Park, SL Green would be entitled to repayment. There was a default. After filing for bankruptcy, HNA defaulted on a $500 million loan on 245 Park and the debt was transferred to special servicing. Despite the contract specifications, HNA challenged SL Green’s claim, but in May 2022, SL Green won a $185 million arbitration award.
Even with the arbitration ruling, HNA wasn’t going to hand over the funds without a fight. HNA filed a motion with the United States District Court Southern District of New York to vacate the award, but the motion was denied, with the court having determined that in its role as guarantor, HNA had violated agreements governing SL Green’s investment in 245 Park. Despite the rejection of its bid for relief from the judgment, HNA apparently wasn’t in a compliant state of mind, and dragged its feet in paying SL Green. In July 2022, the court confirmed the arbitration award and granted SL Green’s motion for a prejudgment order of attachment of HNA International’s assets, requiring HNA to give SL Green a 14-day advance notice of the sale of any properties owned by HNA until the award is paid in full.
Fast-forward to 2023, and HNA is still resisting payment of the $185 million arbitration award. HNA moved to be relieved from the judgement, claiming that SL Green had already received more than the final award and judgment. The plea proved fruitless. The court noted, “HNA International plainly has attempted to frustrate and obstruct 245 Park’s efforts to collect on the judgment.” The court again denied HNA’s motion for relief and ordered HNA to turn over its 100 percent membership interest in HNA North America directly to SL Green. The judgment means that HNA was ordered not only to repay SL Green the $185 million, but turnover to the Manhattan REIT the 100 percent membership interest in HNA North America. HNA North America owns other assets in the United States, including the 181 West Madison office high-rise in Chicago’s West Loop neighborhood. In June 2023, the Bankruptcy Court for the District of Delaware issued a notice of auction for 181 West Madison, with bidding to commence on August 4, 2023. Whether proceeds from the sale will have to be turned over to SL Green has not been publicized.
Amid the legal back-and-forth, SL Green continues its repositioning of 245 Park. “The plan we have for it, I think, is going to make it among the best non-brand-new construction buildings on Park. But we’ll be able to lease it at rents that are going to be well into the triple digits,” Marc Holliday, CEO of SL Green, said during the company’s first quarter 2023 earnings call on April 20. The average asking rent for Class A properties in Manhattan in the first quarter of the year was $80.52 per square foot, according to research from Colliers.
Still, while SL Green continues its upgrading of 245 Park, the REIT has debt on the property to deal with, and the company isn’t disclosing whether the building is destined for sale as part of its $2 billion disposition plan. But it seems SL Green doesn’t have to begin fretting too much about the loan. In April 2023, Fitch Ratings affirmed seven classes of 245 Park Avenue Trust 2017-245P, the loan on the property, despite the fact that the building’s occupancy level had dropped to 79 percent at the close of 2022. “The affirmations reflect the high quality and prime location of the collateral, institutional sponsorship and property management, and the historically strong performance and quality tenant base at the property,” Fitch Ratings explained in a rating action commentary. On the other hand, Fitch also revised the rating outlooks from stable to negative, citing the potential for downgrades if property management is unsuccessful in re-tenanting vacant space and improving cash flow amid challenging market conditions.
245 Park is one of those skyscrapers that any investor would be proud to have in its portfolio. SL Green’s acquisition of remaining interest in the asset amid its partner’s bankruptcy proceedings proved to be a complicated scenario that has yet to reach an ending. To date, it is unclear if HNA has paid SL Green the $185 million arbitration award. Regardless, the trading of 245 Park was one of the most complicated and contested high-profile U.S. office transactions of all time.