SL Green has defaulted on $24 million in rent and taxes due at 2 Herald Square, according to a lawsuit from the owners of the land underneath the 370,000 square-foot building across from Macy’s flagship store.
SL Green “has made clear that it has no intention of paying,” according to the suit filed yesterday in New York State Supreme Court by a partnership between TIAA and Norges Bank Investment Management. “This is not because [it] did not have the funds to pay.”
This dispute involves some very big hitters. TIAA manages $1.3 trillion in assets for retired teachers and Norges manages the world’s largest sovereign wealth fund with $1.7 trillion in assets. SL Green is New York’s largest commercial landlord with more than 30 million square feet of property, including 1 Vanderbilt Ave. and 1515 Broadway.
The plaintiffs further accuse SL Green with fraudulently transferring rent paid by 2 Herald Square tenants into its own pockets to pay off debt, then claiming there was almost no money in the building’s bank account. According to the suit, an unnamed SL Green executive said “this is a playbook that SL Green uses to hide money and avoid satisfying its contractual obligations.”
Last month TIAA and Norges terminated SL Green’s ground lease, which gives the developer the right to operate 2 Herald Square, but claim the developer refuses to hand over the premises.
TIAA and Norges declined to comment.
SL Green described the lawsuit as “a distortion of the facts.” It accused the ground-lease owners of interfering with its effort to turn around the building, which is 60% vacant, and said they had recently attempted to “block” SL Green signing a “sizable lease” that would re-stabilize the property.
“We look forward to providing a full response to this claim in the coming months,” SL Green said.
2 Herald Square’s ground appears to be much more valuable than the building. The land was valued at $365 million when Norges bought a 49.9% stake in the lease from TIAA in 2014. Last year, SL Green bought out a partner in the building for no money, then persuaded the lender to settle its $182.5 million mortgage for just $7 million.
After making that deal, SL Green tried to make another and notified 2 Herald Square’s landowners that it wanted to renegotiate the ground rent. But the parties couldn’t reach an agreement, so SL Green stopped paying rent and property taxes, the lawsuit says. SL Green claimed default was justified because there had been a downturn in the commercial real estate market, according to the suit, and it hadn’t been able to lease space at prices that would enable it to keep paying ground rent.
In addition to defaulting on $16 million in rent and $8 million taxes, the plaintiffs say SL Green has neglected to maintain 2 Herald Square. They say SL Green’s actions resulted in a boiler room fire last year that forced students who used the building as a dormitory to evacuate in the middle of the night.
