Buffalo’s tallest building, the mostly vacant One Seneca Tower, is now worth barely one-fifth of what a trio of New York City investors paid for it less than a decade ago, according to a court document that cites a formal legal opinion by Phillips Lytle LLP.
The court ruling, which dealt with a related matter, cited a Feb. 4 email from Phillips Lytle that said the value of the 38-story building that dominates the Buffalo skyline “did not exceed $18 million,” based on “comparable Western New York sales.”
That’s just 21 percent of the $85.04 million purchase price that Seneca One Realty – comprising Mark H. Karasick, Avy Azeroual and Charles Ishay – paid in January 2005, when they acquired the 850,000-square-foot tower.
At the time of the sale, the building was fully occupied, generating significant rental revenues. By contrast, it’s now 94 percent empty, with just a handful of tenants on the top floors.
The size and vacancy of such a building are two key factors that “tend to depress value” and likely played a key role with the tower, especially since the market overall “is very stable” and “has not plummeted,” said James R. Militello, owner of J.R. Militello Realty.
“I believe it’s more directly related to the building itself rather than the market,” said Shana B. Stegner, director of office sales and leasing for brokerage CBRE in Buffalo. “You had a building with a very healthy occupancy and long-term leases in place 10 years ago versus where the building is at currently. I can only assume that played a big part in determining the value of the building.”
The law firm’s analysis, conducted earlier this year and revealed this week in the ruling by State Supreme Court Justice Timothy J. Walker, demonstrates the degree to which the building and its owners were harmed by the departure of its three largest tenants – one of which is Phillips Lytle itself.
The law firm and HSBC Bank USA – the primary and former namesake tenant – both pulled out late last year, with Phillips Lytle moving to its new corporate headquarters a block away at One Canalside and the bank consolidating to the nearby HSBC Atrium and a complex in Depew. Between the two, they had occupied 85 percent of the tower.
Meanwhile, the No. 3 tenant, the Canadian Consulate, had closed in 2012. And other tenants such as PriceWaterhouseCoopers are following the bank and law firm out the door, though a few new tenants have recently signed on. That has left the soaring building on shaky footing, with the owners unable to cover the $75 million loan that remains, and which is due in February with a $73 million balloon payment. Anticipating trouble, trustee LaSalle Bank and the loan servicers initiated foreclosure proceedings last December, even before any default, and the building is now in the control of a court-appointed receiver, Richard J. Schechter.
The revelation in the court ruling represents further proof of the serious financial loss that the lenders and investors are widely expected to incur after they foreclose.
The judge noted that the property “will almost certainly not be sold for in excess of $75 million at foreclosure,” and most local real estate observers have predicted a sale for less than $30 million, if not closer to $20 million. That could mean writing off the balance of the loan.
As it was moving out, Phillips Lytle was hired in December to represent Seneca One in a tax dispute with the city over the building’s assessed value. According to Walker’s ruling, the firm advised Schechter, as the receiver, to accept a tax assessment of $24 million for the 2013 tax year and $21 million for 2014, based partly on its own valuation of the building.
In a further twist, Walker’s ruling came on a request by Phillips Lytle to intervene in the foreclosure proceeding because it contends that Seneca One owes it $612,574 in excessive lease charges. The firm had won a judgment at arbitration for that amount, and sought to ensure that it would be paid.
The judge denied the request, however, after rejecting the law firm’s assertion that it is a “priority creditor.” The judge also noted that the firm’s claim is against Seneca One, not LaSalle, and there is “insufficient value in the property for anyone – other than LaSalle – to ever receive any proceeds as a result of the eventual foreclosure sale.”