Madison International sues city over Atlantic Center fee purchase

By Adam Pincus

Madison International Realty through the entity Atlantic Center Fort Greene Associates, LLC, claims the City of New York is blocking the investor’s right to buy the Atlantic Center mall fee interest at 625 Atlantic Avenue, in Fort Greene, Brooklyn, developed by Forest City Ratner. Madison owns the retail through a long-term ground lease as tenant with the city as landlord.

Madison International alleges the city is delaying its contractural right as ground tenant to execute a purchase option, and those delays make the purchase more expensive, which results in the city “enriching itself as the tenant’s expense,” according to the complaint, filed Friday in New York State Supreme Court. LINK

In effect, the parties don’t agree on how to value the sale price. Madison International asserts the value should be based on an older valuation of the property, while the city claims the property should be revalued through a current appraisal. The values would likely differ by tens of millions of dollars, but neither valuation is specified in the complaint.

The city has not filed a response. Court filings are the position of one party and are not necessarily accurate or complete. Madison International CEO Ronald Dickerman declined to comment.

Madison owns the 394,000-square foot retail, which is directly across the street from Barclays Center. Forest City Ratner built the massive and squat retail which it opened in 1996 and 2011 sold a 49 percent stake to Madison International in as part of a a 15-property retail portfolio transaction. In 2017, Madison bought the remaining 51 percent of those assets, which included 625 Atlantic Avenue.

The ground lease was signed at a time when the immediate area lacked investment and the city through its Economic Development Corportation sought to incentivize urban development through low-cost ground leases, which like most private ground leases included tenant purchase options.

Forest City signed the ground lease on August 4, 1995, as part of the Atlantic Terminal Urban Renewal Area. The lease covers two lots on Block 2002, Lot 1 and Lot 90.

The initial term of the ground lease ran from September 8, 1995 to October 31, 2021. For subsequent periods, there was a rent determination formula.

On September 8, 2021, 26 years later, Madison notified the city it wanted to buy the parcels and related air rights for the price which was “150% of fair market value” using the “Agreed Initial Fair Market Value” to determine the price, according to the complaint.

The complaint continues, “Indeed, the Ground Lease is specifically structured to provide a strong incentive to Tenant to exercise the Purchase Option on or prior to April 30, 2022 by fixing the Agreed Initial Fair Market Value and a strong disincentive to Tenant for exercising its Purchase Option thereafter. A major component of the purchase price is 150% of the fair market value of the Land. No tenant would ever pay a 50% premium over fair market value to exercise the Purchase Option; typically, purchase options are either at fair market value or a discount thereto. Here, instead, the Purchase Option was purposely structured to incentivize Tenant to exercise its option no later than April 30, 2022, which is what Tenant did.

“As discussed more fully below, Landlord, having induced Tenant to spend tens of millions of dollars to develop, tenant and operate the property, is now trying to renege on its bargained-for incentive to Tenant.

“Landlord’s self-serving conduct is forcing Tenant to make a decision between adjourning the closing and paying a substantially higher Base Rent, proceed with closing and deposit hundreds of millions of dollars in escrow in order to rightfully exercise the Purchase Option, or rescind its exercise of the Purchase Option.”

The plaintiff attorney is Janice Mac Avoy partner at Fried, Frank, Harris, Shriver & Jacobson where she is co-head of the Real Estate Litigation Practice. (Incidentally, The Real Deal interviewed her for The Closing, where she gave one of the best interviews ever in that long-running series.)

Correction: The name of the Barclays Center was misspelled and has been corrected.