Kush­ner’s role in D.C. looms over N.Y. project

Fam­ily firm’s tower has lost ten­ants, money as in­ter­est has ‘chilled’

The Washington Post - - FRONT PAGE - BY MICHAEL KRANISH AND JONATHAN O’CON­NELL

Jared Kush­ner and his fam­ily com­pany seemed close to strik­ing a deal in 2016 to trans­form their ag­ing, money-los­ing 41-story Man­hat­tan of­fice tower into a new and prof­itable Fifth Av­enue skyscraper twice as tall.

A team led by Kush­ner and his fa­ther, Charles, courted global in­vestors and prospec­tive ten­ants.

Then Don­ald Trump be­came pres­i­dent and Kush­ner be­came his fa­ther-in-law’s se­nior White House ad­viser. Prob­lems en­sued.

Kush­ner met in De­cem­ber with a Rus­sian banker, lead­ing to ques­tions about whether he was mix­ing his role in the com­ing Trump ad­min­is­tra­tion with his busi­ness. A Chi­nese in­sur­ance fund and a for­mer Qatari for­eign min­is­ter backed away from a po­ten­tial $900 mil­lion in­vest­ment in the skyscraper. An­other for­eign fund­ing stream was dis­rupted when Kush­ner Cos. came un­der fed­eral scru­tiny for its use of a con­tro­ver­sial fed­eral visas-for-in­vest­ment pro­gram at an­other project.

To­day, 666 Fifth Av­enue ap­pears to be the most trou­bled of the projects Kush­ner left be­hind for his fam­ily to man­age. With one-fourth of its of­fices empty, lease rev­enue does not cover monthly in­ter­est pay­ments, ac--

cord­ing to lend­ing doc­u­ments. A $1.2 bil­lion mort­gage, with es­ca­lat­ing in­ter­est rates, comes due in 18 months. A rat­ings agency has clas­si­fied a $115 mil­lion por­tion of the loan as “trou­bled,” and com­pany of­fi­cials de­cline to say whether it will be fully re­paid.

“They were crushed by this,” said Thomas Bar­rack, a friend of Trump and Kush­ner’s and for­mer project in­vestor. Kush­ner’s move to the White House “just about com­pletely chilled the mar­ket, and [po­ten­tial in­vestors] just said, ‘No way — can’t be as­so­ci­ated with any ap­pear­ances of con­flict of in­ter­est,’ even though there was none.”

Lau­rent Mo­rali, who be­came pres­i­dent of Kush­ner Cos. last year, said in an in­ter­view that he is mar­ket­ing a 60-year-old alu­minum-clad build­ing “that is not com­pet­i­tive” with more­mod­ern prop­er­ties. He said the com­pany will de­cide soon whether to pro­ceed with its am­bi­tious re­de­vel­op­ment plan or scale back.

Mo­rali said the com­pany is cur­rent on its loans. The com­pany says it has a strong na­tional port­fo­lio of prop­er­ties, in­clud­ing 20,000 res­i­den­tial apart­ments and 13 mil­lion square feet of com­mer­cial space.

“This is one as­set owned by Kush­ner [Com­pa­nies], Mo­rali said, de­scrib­ing 666 Fifth Av­enue. “It is a small frac­tion of our as­sets.”

Kush­ner di­vested his stake in the prop­erty in Jan­uary, sell­ing it for an undis­closed amount to a trust con­trolled by his sis­ter, Ni­cole Kush­ner Meyer.

Kush­ner de­clined to be in­ter­viewed. White House spokesman Josh Raf­fel said in a state­ment that in the lead-up to the elec­tion, Kush­ner fo­cused on wind­ing down his real es­tate work.

“Through­out the cam­paign, Jared grad­u­ally re­duced his dayto-day-role in Kush­ner Com­pa­nies,” Raf­fel said. “Start­ing sev­eral weeks be­fore the elec­tion un­til he fully re­signed, his fo­cus at the com­pany was on tran­si­tion­ing over his re­spon­si­bil­i­ties and re­la­tion­ships.”

The Man­hat­tan skyscraper is not the only Kush­ner project to draw at­ten­tion since the elec­tion. The com­pany has ac­knowl­edged that fed­eral pros­e­cu­tors in the East­ern Dis­trict of New York have sub­poe­naed doc­u­ments about use of the EB-5 visa pro­gram at One Jour­nal Square, a planned Jersey City de­vel­op­ment. Meyer touted her brother’s White House po­si­tion in court­ing Chi­nese in­vestors un­der the pro­gram, which of­fers tem­po­rary visas in ex­change for $500,000 in­vest­ments.

Meyer later apol­o­gized, but the Jersey City project lost a state tax break and is part­ing ways with the co-work­ing start-up WeWork.

The fam­ily’s net­work of fed­er­ally sub­si­dized apart­ments has come un­der fire from con­gres­sional Democrats over the com­pany’s hard-nosed pur­suit of delin­quent renters.

In his White House role, Kush­ner ap­peared be­fore Se­nate com­mit­tees to ex­plain meet­ings with for­eign of­fi­cials that he said he in­ad­ver­tently omit­ted from his se­cu­rity clear­ance ques­tion­naire. And spe­cial coun­sel Robert S. Mueller III, who is in­ves­ti­gat­ing whether Rus­sia col­luded with the Trump cam­paign, is ex­am­in­ing Kush­ner’s deal­ings, The Wash­ing­ton Post has re­ported.

As in­ves­ti­ga­tions pro­ceed, pres­sures at 666 Fifth Av­enue are build­ing. The prob­lems trace back to a brash de­ci­sion Kush­ner, then 26 and a Man­hat­tan real es­tate novice, made a decade ago.

Un­der pres­sure

Man­hat­tan com­mer­cial real es­tate was boom­ing when Kush­ner bought 666 Fifth Av­enue in 2007 for $1.8 bil­lion — the high­est price paid at that time for an of­fice tower in the United States. Ex­perts spec­u­lated that Kush­ner had vastly over­paid.

Kush­ner took over the com­pany be­cause his fa­ther, Charles, had just served time in fed­eral prison for tax eva­sion, il­le­gal cam­paign con­tri­bu­tions and wit­ness tam­per­ing. Ea­ger to re­brand their com­pany, the Kush­n­ers had sold much of their New Jersey real es­tate hold­ings to make the Man­hat­tan gam­ble.

To back up a colos­sal loan pack­age, the Kush­n­ers had a $2 bil­lion ap­praisal, based largely on the premier re­tail space fronting Fifth Av­enue, but months af­ter buy­ing the build­ing, the Great Re­ces­sion pum­meled val­ues.

By 2010, Kush­ner risked los­ing the build­ing. He was delin­quent on pay­ments, ac­cord­ing to a re­port by Trepp, which an­a­lyzes real es­tate trans­ac­tions, and he en­tered debt re­struc­tur­ing ne­go­ti­a­tions. He sold the re­tail por­tion at a profit, which helped cover the Kush­ner fam­ily’s in­vest­ment, but the of­fice por­tion was hem­or­rhag­ing, ac­cord­ing to losses out­lined in lend­ing doc­u­ments.

Kush­ner was un­der ex­tra­or­di­nary pres­sure from other in­vestors. Kush­ner, who had mar­ried Ivanka Trump in 2009, turned to two friends of his fa­ther-in-law for help.

Bar­rack, who ran a Cal­i­for­nia in­vest­ment com­pany called Colony Cap­i­tal, had met Don­ald Trump in the 1980s when he ne­go­ti­ated on be­half of a client for the sale of the Plaza Ho­tel.

In 2010, Bar­rack’s com­pany ac­quired part of the dis­tressed debt on 666 Fifth Av­enue. He in­vested $45 mil­lion and even­tu­ally made a profit, he said.

In 2011, Trump called Bar­rack to ar­range a meet­ing for Kush­ner. As Bar­rack re­called it, “Don­ald called and said: ‘ Look, I have no idea what’s go­ing on. Jared has some deal you have an in­ter­est in.’ ”

Kush­ner flew to Cal­i­for­nia and told Bar­rack about his plan to sal­vage the project. He came alone, with­out lawyers, and Bar­rack was im­pressed. Kush­ner told him that in­vestors should ac­cept a re­struc­tur­ing plan to keep the project afloat — even though some of them would get less than they ex­pected from their in­vest­ment.

Af­ter 75 min­utes, Bar­rack agreed to help, con­clud­ing that “it seems like it is in ev­ery­one’s in­ter­est to re­struc­ture this.” He said he called Trump and told him: “You should get down on your knees that your daugh­ter found this kid. He is out of cen­tral cast­ing. He was re­spect­ful, he was to­tally up to date on the facts and the num­bers and had a very per­sua­sive de­meanor.”

Kush­ner also turned to Steve Roth, Trump’s part­ner in an­other Man­hat­tan of­fice build­ing. Roth’s com­pany is Vor­nado Realty Trust. Its ties to Trump at­tracted at­ten­tion re­cently when it bid on a new FBI head­quar­ters build­ing, a project the ad­min­is­tra­tion later can­celed. Roth de­clined to com­ment for this ar­ti­cle.

In 2011, Roth’s com­pany bought 49.5 per­cent of the of­fice por­tion of 666 Fifth Av­enue, en­abling Kush­ner to re­struc­ture the debt and ex­tend the $1.2 bil­lion loan to 2019, ac­cord­ing to lend­ing doc­u­ments. Vor­nado an­nounced in late 2012 that it paid $707 mil­lion for the re­tail por­tion.

Other in­vestors were not as lucky. Area Prop­erty Part­ners held $105.4 mil­lion of Kush­ner’s debt, ac­cord­ing to lend­ing doc­u­ments, and ob­jected to the re­struc­tur­ing terms. The Post re­ported in May how Kush­ner, as owner of the New York Ob­server me­dia out­let, urged re­porters to pur­sue a neg­a­tive tip about Area Prop­erty’s chief ex­ec­u­tive. The Ob­server re­porters said the tip was un­founded and no ar­ti­cle was pub­lished. Area de­clined to com­ment. Kush­ner has de­clined to com­ment when asked about the Ob­server mat­ter.

At the time, Kush­ner was op­ti­mistic about 666 Fifth Av­enue and his abil­ity to at­tract new ten­ants.

Since then, the oc­cu­pancy rate has plum­meted to 70 per­cent, far short of ex­pec­ta­tions, ac­cord­ing to lend­ing doc­u­ments. Citibank, a pri­mary ten­ant when Kush­ner bought the build­ing, has va­cated the prop­erty ex­cept for a small re­tail space. Phillips Nizer, a law firm that has been a ten­ant for 22 years and oc­cu­pies two floors of the build­ing, is leav­ing at the end of this year, ac­cord­ing to man­ag­ing part­ner Marc Lan­dis.

Rev­enue has de­clined. When Kush­ner Cos. took over the prop­erty in 2007, the net op­er­at­ing in­come was $61 mil­lion. That dropped to $41 mil­lion in 2016 be­cause of the sale of the re­tail por­tion and de­clin­ing of­fice oc­cu­pancy, ac­cord­ing to Trepp.

Mo­rali said that the build­ing strug­gles to com­pete in a soft com­mer­cial mar­ket in which of­fice leases have shifted to trendier Man­hat­tan spa­ces such as Hud­son Yards.

The strain on the Kush­n­ers is hard to quan­tify. The com­pany is pri­vately held, and it de­clined to pro­vide an in­de­pen­dent fi­nan­cial re­port.

The com­pany has taken steps to bol­ster its fi­nances. In 2016, just be­fore Trump’s elec­tion, it re­fi­nanced its por­tion of the for- mer New York Times build­ing, in­clud­ing a $285 mil­lion loan from Deutsche Bank, giv­ing it $74 mil­lion more than Kush­ner had paid a year ear­lier, ac­cord­ing to se­cu­ri­ties fil­ings. The com­pany de­clined to spec­ify how the $74 mil­lion has been used.

The com­pany’s big­gest chal­lenge was find­ing a way to turn 666 Fifth Av­enue into a mon­ey­maker be­fore the debt came due.

Tall or­der

The plan for turn­ing 666 Fifth Av­enue into an 80-story of­fice tower was dis­trib­uted to prospec­tive in­vestors and greeted with skep­ti­cism when it be­came pub­licly known last year. The Real Deal, a New York real es­tate pub­li­ca­tion, de­scribed it as a “tower of hubris” for the Kush­n­ers.

The plan called for va­cat­ing the build­ing and con­struct­ing the taller tower, in­clud­ing ho­tel rooms and lux­ury hous­ing, un­der a de­sign by famed ar­chi­tect Zaha Ha­did, who died last year. Much of the pro­posal is con­cep­tual, but a ren­der­ing showed a struc­ture with a squat base with top-flight re­tail and a tall, thin tower for lux­ury res­i­dences. While fi­nanc­ing de­tails have not been dis­closed, a key com­po­nent of the plan would be to have new in­vestors foot much of the bill, en­abling the Kush­ner Cos. debt to be re­tired or rene­go­ti­ated and giv­ing the com­pany a stake in the new prop­erty.

Kush­ner Cos. val­ued the ren­o­va­tion at $7.5 bil­lion. A num­ber of New York City’s big­gest real es­tate firms that pre­ferred quick re­turns de­clined to get in­volved, ac­cord­ing to New York real es­tate ex­ec­u­tives and an­a­lysts. The plan re­lied partly on rais­ing money from for­eign in­vestors through the EB-5 pro­gram. The com­pany has said that ap­ply­ing for such funds was al­lowed un­der the rules.

Kush­ner and his com­pany also re­cruited deep-pock­eted global in­vestors who might see the build­ing as a way to make a dis­tinc­tive mark in Man­hat­tan. But the ef­fort posed eth­i­cal ques­tions as Kush­ner moved into his role with Trump. In 2016, Kush­ner si­mul­ta­ne­ously helped run Trump’s pres­i­den­tial cam­paign and served as pres­i­dent of a com­pany seek­ing bil­lions of dol­lars from for­eign en­ti­ties.

One deal that came close to fruition was with An­bang, a com­pany closely af­fil­i­ated with the Chi­nese govern­ment that con­sid­ered in­vest­ing $400 mil­lion, ac­cord­ing to Bloomberg News. An­bang had just bought the land­mark Wal­dorf As­to­ria ho­tel when Kush­ner met with its rep­re­sen­ta­tives there a week af­ter the elec­tion, ac­cord­ing to the New York Times. An­bang later is­sued a state­ment say­ing that “there is no in­vest­ment” and de­clined to com­ment fur­ther.

An­other po­ten­tial in­vestor was a fund run by the for­mer prime min­is­ter of Qatar, Ha­mad Bin Jasim al-Thani, one of the world’s wealth­i­est men, who would have lent $500 mil­lion, ac­cord­ing to the In­ter­cept. Ha­mad did not re­spond to a re­quest for com­ment. Kush­ner Cos. has con­firmed the China and Qatar ef­forts. Nei­ther ef­fort suc­ceeded.

Con­cerns about Kush­ner’s busi­ness deal­ings in­ten­si­fied when it was dis­closed ear­lier this year that he met in De­cem­ber with the top ex­ec­u­tive of the Rus­sian bank Vneshe­conom­bank, or VEB. The bank has said that the ex­ec­u­tive, Sergey Gorkov, who is close to Rus­sian Pres­i­dent Vladimir Putin, dis­cussed “promis­ing busi­ness lines and sec­tors” with Kush­ner. VEB is Rus­sia’s eco­nomic de­vel­op­ment bank and is con­sid­ered an arm of the Krem­lin.

Kush­ner as­sured Congress in a July 24 state­ment that the meet­ing did not in­volve “any dis­cus­sion about my com­pa­nies, busi­ness trans­ac­tions, real es­tate projects, loans, banking ar­range­ments or any pri­vate busi­ness of any kind.” Democrats have de­manded an in­ves­ti­ga­tion.

Kush­ner’s fam­ily com­pany said that as of Jan­uary it had not sought in­vest­ments from en­ti­ties con­nected to for­eign gov­ern­ments, although that does not rule out tak­ing money from wealthy for­eign­ers who also have busi­ness be­fore the U.S. govern­ment. A per­son close to the com­pany said that com­pany of­fi­cials con­tinue to meet with po­ten­tial in­vestors from the United States and other coun­tries.

Mo­rali said that ex­clud­ing for­eign govern­ment funds will not pre­clude him from find­ing in­vestors. “We hap­pen to be at a point where we’ve ex­plored a lot of dif­fer­ent op­tions and I’m pleased with the progress we’ve made on them,” he said, “so I can an­tic­i­pate that over the next cou­ple of months the part­ner­ship is go­ing to make a de­ci­sion.”

Nonethe­less, steer­ing clear of for­eign govern­ment funds could nar­row his op­tions.

Of the 10 prici­est of­fice-build­ing pur­chases last year in Man­hat­tan, two were made by a sov­er­eign wealth fund in China (China In­vest­ment Corp.) and a third was by the cen­tral bank of Hong Kong. Three of the other pur­chases came from pri­vate en­ti­ties in Saudi Ara­bia, Canada and Spain, some­times in­vest­ing pub­lic money.

New York real es­tate con­sul­tant Arthur J. Mi­rante II, who ad­vised the Kush­ner fam­ily on the orig­i­nal deal, said 666 Fifth Av­enue could prob­a­bly be re­leased as an of­fice build­ing with mod­est in­vest­ment. Re­de­vel­op­ment is more dif­fi­cult, he said.

“If they have to for­get about that mar­ket be­cause of Jared be­ing in the White House, they’re go­ing to have to look else­where,” Mi­rante said.

Mean­while, the in­ter­est rate on the Kush­ner com­pany’s prin­ci­pal loan rose to 5.5 per­cent from 5 per­cent this year and will con­tinue to rise to a max­i­mum of 6.3 per­cent, ac­cord­ing to Trepp. The loan is held by a group of in­vest­ment banks and in­vestors led by Gen­eral Elec­tric and Wells Fargo.

That, in turn, has cre­ated an op­por­tu­nity for Kush­ner’s part­ner, Roth’s Vor­nado. Un­like Kush­ner Cos., Vor­nado’s cen­tral busi­ness is leas­ing New York of­fice build­ings. Some an­a­lysts ex­pect Roth to wait out the Kush­ner re­de­vel­op­ment plan and, if it fails, try to take over the prop­erty — de­spite what Roth has said pub­licly.

Ear­lier this year, Roth told share­hold­ers that 666 Fifth Av­enue “is an on­go­ing, com­plex, dy­namic and un­pre­dictable sit­u­a­tion . . . and it is the rare case when we may be sell­ers.”

Bar­rack said that when Kush­ner went to the White House, his fa­ther, Charles — who had helped de­vise the re­de­vel­op­ment pro­posal — must have known that his ef­forts would be un­der­mined. Charles Kush­ner did not re­spond to a re­quest for com­ment.

“This was [Charles’s] dream and his baby,” Bar­rack said. “When Jared de­cided to go to Wash­ing­ton, he prob­a­bly had a heart at­tack.”

As a re­sult of the Kush­ner fo­cus, Bar­rack said, in­vestors have to ask them­selves, “Are they will­ing to take the scru­tiny of what comes along with” in­vest­ing with Kush­ner Cos.?

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