EB-5 entity seeks repayment of alleged $79.5M investment at 215 Chrystie

An EB-5 equity entity claims in a lawsuit filed yesterday in New York State Supreme Court that the developers of the hotel and condo project at 215 Chrystie Street in the Lower East Side mismanaged the funds and improperly siphoned off money and is seeking repayment of its alleged $79.5 million investment.

The plaintiff, an entity called Manhattan Chrystie Street Development Fund, LLC, is seeking a judgment of $79.5 million which it claims is its equity investment, as well as fees and penalties based on that, as well as a preferred equity return allegedly due over the past 14 months totaling just under $5.5 million. The case does not yet have an index number. LINK

The complaint includes allegations of facts presented by the plaintiff which may or may not be complete or accurate. The defendants have not yet filed response papers.

The approximately $60 million mezzanine loan held by Shinhan Investment is being marketed for sale, according to the complaint and an article the Commercial Observer published in September 2020.

Ian Schrager and Steven Witkoff are the lead developers for the 28-story, approximately 255,000 square foot mixed-use commercial building, containing a 374-room PUBLIC hotel as well as 11 residential condominium units. The complaint claims that Ziel Feldman and Howard Lorber affiliates are investors in the project.

The lawsuit alleges:

“At the outset of the Project, in 2014, Defendants commissioned an appraisal that estimated the value of the yet to be built PUBLIC hotel at $259 million.

“In March 2019, the Managing Member refinanced the Starwood Loans with Deutsche Bank resulting in a $173,250,000 senior loan, $30,875,000 senior mezzanine loan, and $30,875,000 junior mezzanine loan (“Deutsche Bank Loans”).  Sometime in 2019, Deutsche Bank sold the $61,750,000 in mezzanine loans to Shinhan Bank. Cushman & Wakefield is now marketing the sale of the mezzanine loans for Shinhan Bank.

“Between 2016 and 2019, the JV made cash distributions of up to $78,779,894 to the Managing Member.

“Between 2015 and 2019, the Managing Member received approximately $30,626,570 in Related Party Transaction fees.

“In 2014, the yet to be built PUBLIC hotel was initially appraised at an estimated value of $259 million. The pro forma financial statements for the hotel provided by the Defendants and included in the appraisal projected gross revenue of $81 million and cash flows of $25.2 million in 2018. But, in 2018, gross revenue in fact was 25 percent lower than projected, while cash flows were 43 percent lower than projected. The same pro formas included in the appraisal projected gross revenue of $87.4 million and cash flows of $27.9 million for 2019. But, in 2019, gross revenues were 27 percent lower than projected, while cash flows were 67 percent lower than projected. In fact, the PUBLIC hotel operated at a loss in the first three years it was open. In 2017, the hotel lost $15.4 million. In 2018, the hotel lost $1.5 million. And in 2019, the hotel lost $8.3 million

“There is now $235 million of debt on the Project, in addition to $79.5 million of Preferred Equity, which is due and payable to Plaintiff as a result of Defendants’ defaults. Taken together, these obligations far exceed the $259 million appraisal of the hotel done in 2014,

“Defendants breached the JV LLC Agreement by making improper distributions of tens of millions of dollars to the Managing Member. Between 2016 and 2019 – before the hotel opened and in the first 30 months of hotel operations – Defendants paid themselves up to $78 million in distributions.”

Compiled by Adam Pincus