Metropolitan Real Estate throws Lipstick Building into Ch. 11

Metropolitan Real Estate Investors has filed a pre-packaged bankruptcy protection plan for New York’s iconic Lipstick Building after defaulting on a $210 million mortgage.

The New York-based firm’s affiliate Metropolitan 885 Third Avenue Leasehold filed the Chapter 11 petition yesterday, after Royal Bank of Canada sued to force a sale of the 592,000-square-foot office tower.

Under the pre-packaged reorganisation a new entity, known as New Lipstick LLC, will be creating and pledge its ownership stake to RBC, according to a report by Reuters.

885 Third Ave

In a statement, Metropolitan said the Chapter 11 filing had been made with the consent of its lender adding: “This strategic reorganisation is a positive step toward the long-term health and prosperity of the asset.”

The firm added that additional equity had also been earmarked for “current and future tenant improvements and leasing and marketing activities”. The Chapter 11 process should be completed by the end of the year, Metropolitan said.

Metropolitan acquired the building – which gets its nickname from its elliptical shape – in 2007 for $607 million in partnership with Israeli investors Tao Tsuot, Financial  Levers and Marciano Investment Group. According to data provider Real Capital Analytics, the deal was underwritten with a 5.5 percent cap rate, and financed with a RBC $210 million senior mortgage and a $60 million mezzanine loan, provided by Goldman Sachs. Metropolitan bought the office from a venture between Tishman Speyer and New York Common Employees Retirement System, who originally bought the property for $235.1 million in 2004.

At the same time as buying the building, the Metropolitan consortium sold the property’s freehold to a venture between SL Green and Gramercy Capital for $317 million. According to RCA, 21 percent of 885 Third Avenue sits on a land lease with 75 years remaining.

Reuters cited court records showing that Metropolitan 885 Third Avenue Leasehold had $139.9 million of assets and $210.3 million of liabilities. “The recent violent downturn in the building and real estate markets have had a significant impact on the debtor's operations,” Jacob Abikzer, president of Metropolitan Real Estate, reportedly said in the court filing. “The debtor filed this case as a result of serious liquidity issues.”