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2018-01-19 — bloomberg.com

In a six-floor retail space near Times Square, the Guy Fieri restaurant has closed and construction hasn't begun on celebrity chef Todd English's food hall. A tourist attraction featuring a 1/87th scale model of New York City was behind on rent for two months as of December, according to loan documents. It wasn't supposed to be this way.

When Kushner Cos. bought the property for $296 million in 2015, then-Chief Executive Officer Jared Kushner had big plans to capitalize on the tens of millions of tourists who visit the area every year. Deutsche Bank AG financed the endeavor before selling most of the debt to investors across Wall Street a year ago. Those investors were shown disclosures describing the retail space as 100 percent occupied and estimating it would throw off $24 million of rent annually.

But Fieri, English and Gulliver's Gate, the operator of the miniature Manhattan, account for $9.9 million of that rent estimate, which underpinned a market-defying appraisal boost and helped justify $370 million of loans, the disclosures show. Problems with these spaces could make the economics challenging.

Last year, New York prosecutors requested documents from Deutsche Bank related to the property, where the Kushners used the debt to take out $59 million in cash. It isn't clear what prosecutors are looking for. But mortgages granted under generous financial assumptions then sold to others who will bear the risk have piqued their interest in other cases. A spokesman for the Brooklyn U.S. Attorney declined to comment, as did a spokesman for Deutsche Bank.

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Gulliver's Gate was cited due to a technicality and payments were only a few days late, she said. The company has a letter of intent for the Fieri space from a prestigious tenant at a higher rent, and the operator of the food hall is making final adjustments to its plan, she added, saying the changes are increasing the value of the property and will attract more visitors. A spokeswoman for Gulliver's Gate said that it "is up to date on their rent and paid in full on their lease" and there are "no concerns" about its future there.

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Even if they were brief, the missed payments by Gulliver's Gate, the second most lucrative tenant, triggered a clause in the Kushners' loan documents allowing creditors to demand any excess cash from the property until the problem was resolved, according to reports from debt servicers. Managers also put the retail space on watch lists for potentially troubled debt because it lost money for nine months through September 2017 after accounting for interest payments, the reports show. That's because new tenants were given millions in free rent, a common tactic used to fill store spaces. Kushner Cos. set aside $11 million of the loans for the free rent. Disclosures don't describe that figure as including funds for vacancies.

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In truth, maintaining full occupancy looked tough from the start. When the debt was sold to investors, the 500-seat Guy's American Kitchen & Bar had been beset by negative reviews, and Todd English and his partners hadn't yet taken possession of the space for his food hall. The chef, who has pulled out of another project, was scheduled to open for business there last April. Gulliver's Gate, reportedly a $40 million endeavor, had not yet opened and was an untried competitor amid the glitz of Times Square.

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When Kushner Cos. bought the property in 2015 from Africa-Israel, the distressed firm of Russian diamond magnate Lev Leviev, online retailers were ascendant, and the future of brick-and-mortar stores was uncertain. So filling the property with tenants offering experiences seemed smart.

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The expected surge in income preceded a new appraisal in October 2016 at $445 million plus additional cash in accounts, indicating a stunning growth in value that far outstripped the broader Manhattan retail market, which had suffered a slowdown. Against that valuation, the $370 million of loans represented only 83 percent of the value, the investor disclosures showed. But Moody's and Kroll, the risk-assessment firm, found in independent calculations that the loans exceeded the value.

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The situation might get worse before it gets better. In an October legal complaint against the Plaza Hotel, which contains a Todd English restaurant, the chef is accused of sexual harassment. In November, S&P downgraded the debt of another tenant, Guitar Center, saying it thought a potential debt restructuring could occur in the next six months, "a transaction that we would view as tantamount to a default." A Guitar Center spokeswoman declined to comment.

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