(Bloomberg)—Kushner Cos., the real estate firm owned by members of Jared Kushner’s family, is staring down another crisis.
The firm’s partnership in four Brooklyn office buildings barely covered debt payments last year. Now a global recession caused by the coronavirus pandemic is threatening to disrupt a financial high-wire act: balancing an ailing major tenant, WeWork, and $300 million of loans issued in 2018 by South Korean insurers.
A deteriorating situation at the property, known as Dumbo Heights, would add to the family’s business woes. Last month, Kushner Cos. missed a mortgage payment at another property, a tourism-focused one in Manhattan’s Times Square with $285 million of debt issued by Deutsche Bank AG. That project has been foundering for two years. Financing arrangements at both properties allowed little wiggle room for tenants unable to pay rent.
Landlords across New York, one of the world’s most important property markets, are experiencing a lurching end to the good times as businesses shutter and rent checks stop coming. But only Kushner Cos. has a former chief executive officer who’s now a White House adviser and presidential son-in-law taking a leading role in guiding the U.S. through the crisis.
Kushner divested some assets to family members when he joined the White House in 2017 to avoid possible conflicts of interest, although the exact nature of the transfers has never been made clear. His lawyer, Abbe Lowell, who has said Kushner follows all ethics rules, declined to comment for this story.
“Dumbo Heights has been a huge success, and any suggestions to the contrary are absolutely false,” a spokesperson for Kushner Cos. said in an email. “Of course, rent collections during the pandemic will likely be similar as with all other landlords at this time. The properties are essentially 100% leased at rents far exceeding the initial underwriting at acquisition.”
Troubled Debt
Dumbo Heights, which the Kushner family co-owns with Aby Rosen’s RFR Holding LLC, had $27.5 million of free cash flow to cover $25.4 million of debt payments last year, an uncomfortably close margin for lenders. In August, banks put it on a list for potentially troubled debt, which triggered the lenders’ right to review new leases and major changes to leases, according to lender reports.
One major tenant, WeWork, which sub-leases office space, has engaged more than 600 landlords in discussions as it seeks to reduce its rent by as much as 30%. In some cases it is offering a share of revenue in exchange, as some of its tenants refuse to pay rent, exacerbating one of the most spectacular flame-outs of a high-flying startup in recent memory.
WeWork leased all of the office space in one of the Dumbo Heights buildings, as well as four floors in another, and accounted for more than one-fifth of the properties’ rent roll as of 2018. WeWork declined to comment.
Kushner Cos. is already in discussions with its lenders about the Times Square property, where it defaulted on high-interest loans late last year. Help might soon be needed in Brooklyn and beyond. Whether it comes from existing lenders, new ones, private equity firms or rescue funds from state or national governments isn’t yet clear.
Ethics Concerns
Either way, the situation is a textbook example of concerns raised by ethicists when Trump took office without divesting his assets: What happens when lenders need to collect from the family of one of the most powerful people in the world?
The $2 trillion relief bill passed by Congress in March barred the president and his family from receiving loans or other funds from the U.S. Treasury. But that may not affect Kushner family assets if Jared Kushner has divested his stakes, or if his percentage ownership is small.
“These are Kushner problems, these are not coronavirus problems,” said Virginia Canter, a former ethics adviser to Democratic presidents who is now chief ethics counsel for Citizens for Responsibility and Ethics in Washington, a group that has been critical of the Trump administration. “But they’ll potentially be able to take advantage of federal relief, and if they do I think we should know about it.”
Confusion about how the president’s son-in-law manages relationships with family members has caused trouble before. Last month Bloomberg News reported that Kushner shed his stake in Cadre, a startup he cofounded, after Japan’s SoftBank Vision Fund -- weighing an investment in the company -- raised concerns. In 2017, shortly after he joined the White House, talks between Kushner Cos. and China’s Anbang Insurance Group fell apart after terms became public, months after he said he divested his share of the property to family members.
Brooklyn Waterfront
In 2013, when Kushner Cos., Rosen and other investors bought the former Bible-printing plants on the Brooklyn waterfront from the Jehovah’s Witnesses for $375 million, the deal looked like a good bet. Brooklyn was booming, and the family’s partnership spent $162 million to convert the buildings into airy offices. Soon big names like Etsy Inc. and WeWork moved in.
At one point in 2018, Charlie Kushner, Jared’s father, turned down an offer of about $600 million for the buildings, believing they could fetch more than $1 billion, according to a person familiar with the discussions.
That year the partnership looked to refinance. With an appraisal of $640 million, it took on $480 million of loans, including $300 million of higher-interest debt from funds operated by South Korean insurers Shinhan Financial Group and DB Insurance Co. Both companies count that country’s national pension service among their largest owners, with about 10% stakes in each.
Chiwu Park, a managing director at Shinhan’s alternative investment subsidiary that made the loan, said in an email that interest payments on the Dumbo Heights loan are up to date and that “the sponsors are in good relationship with the lenders.” Representatives of DB Insurance declined to comment.
Debt Woes
Appraisals are more art than science. When the $180 million of Kushner Cos.’s loans that weren’t issued by Korean firms were sold, disclosures for potential investors said the loan-to-value ratio, a common measure of risk, was 75%. But S&P Global, a ratings company, estimated a 140% ratio when accounting for all the debt, meaning the loans were worth more than the property in their calculation.
Loading up properties with debt is a familiar strategy for Kushner Cos., which spent $1.8 billion for 666 Fifth Ave. in 2007, a record at the time and financed almost entirely with debt. When the 2008 financial crisis hit the following year, it set off a decade-long headache that ultimately resulted in a deal to lease the building to Canadian investment firm Brookfield Asset Management in 2018.
The Times Square property was purchased in 2015 for $296 million, before a refinancing piled on $370 million of loans, mostly from Deutsche Bank. The Kushner family received the appraisal on that building after signing some tenants with untested business models, including one that displayed miniature replicas of cities, and a National Geographic exhibit about oceans.
Gulliver’s Gate, which featured the miniature replicas, has since declared bankruptcy, and the National Geographic exhibit has been paying reduced rent.
The Times Square and Dumbo Heights properties are remnants of a decade of big real estate plays by the Kushner family in New York City. That spree mostly ended when they offloaded their flagship Manhattan office tower and their interest in a handful of Brooklyn development projects. Kushner Cos. has been pivoting back to investing in the kinds of assets that made the family rich in the first place: middle- and working-class apartment complexes, including many in the New Jersey suburbs.
--With assistance from Gillian Tan and Kyungji Cho.
To contact the reporters on this story: Caleb Melby in New York at [email protected];
David Kocieniewski in New York at [email protected].
To contact the editors responsible for this story: Jeffrey D Grocott at [email protected]
Robert Friedman
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