Buffalo’s tallest building has moved a big step closer to having a new owner, but the long-term future of One Seneca Tower may still be uncertain.
A state court in Buffalo last week granted a request for summary judgment in the foreclosure case against the tower’s owner, effectively ending the primary legal battle over the 38-story building.
The ruling by State Supreme Court Justice Timothy J. Walker authorized the lender to proceed with seizure of the tower. In doing so, Walker essentially accepted the arguments of the mortgage servicer and attorney Maureen Bass that they were entitled to foreclose because building owner, Seneca One Realty of New York City, had defaulted on its $75 million loan.
Walker directed local real estate attorney Peter A. Weinmann to calculate precisely how much is still owed on the loan, not including legal fees, and to determine if the property can be sold in pieces. Besides the 853,000-square-foot tower itself, the foreclosure also covers the parking ramp across the street.
No date was set for a foreclosure sale, but Walker ordered Weinmann to complete his report “with all convenient speed.” A sale would be scheduled after the report is submitted to the court.
Bass, partner at Buchanan Ingersoll & Rooney P.C., could not be reached to comment.
The judge’s order and anticipated sale would wrap up a process that began in December 2013, when Chicago-based LaSalle Bank, part of Bank of America Corp., filed the initial foreclosure papers against Seneca One, seeking control of the building. That was sparked by the near-simulataneous departures of the two largest tenants, HSBC Bank USA and law firm Phillips Lytle LLC, in the previous weeks.
HSBC consolidated operations to the HSBC Atrium building across the street and a facility in Depew, while Phillips Lytle took over the top four floors of the redeveloped and newly opened One Canalside next door. Along with the closing of the Canadian consulate and other departures, the tower had gone from 95 percent full to 95 percent empty.
Seneca One, led by Mark H. Karasick and Victor Gerstein of New York City, purchased the 43-year-old edifice and separate 830-space parking ramp in 2005, paying $85.04 million for the tower and $10 million for the garage. The investors took out an $83 million mortgage, and had paid it down to $75 million, with a $73 million balloon payment that was due in February.
But with so much vacancy in the building, there wasn’t enough revenue to cover the loan payments, prompting the foreclosure filing by LaSalle, the trustee for the investors holding the mortgage, and now LNR Partners, the special servicer controlling the loan. The loan is part of a larger commercial mortgage-backed security that was packaged and sold to investors by Goldman Sachs & Co.
Last summer, the city slashed the assessment on the building to just $22 million, down from its previous assessment of $49 million, and just a quarter of the $89 million value it had when the building was full. The assessment was reduced further in March, to $20.3 million, roughly matching what most local observers believe the building is now worth.
And that raises doubt about what will happen at the foreclosure sale, said Shlomo Chopp, managing partner at Case Property Services LLC, a bad debt advisory firm in New York that specializes in commercial mortgages. Accepting a purchase offer at that level would mean taking a $57 million loss that would be split among the bondholders. But because of the way the securities are structured, the loss is not absorbed evenly.
When investors buy mortgage-backed securities, they purchase a particular “class” or “tranche” of the investment, with each class earning a different rate of return based on the risk they assume. Any losses are absorbed first by the class with the highest risk, and so on. And those are the bondholders that control any decisions about the loans and collateral.
In this case, Chopp said, a $57 million loss would instantly wipe out two entire classes of bondholders – the ones who are also in control.
So instead of agreeing to a sale, Chopp said, the loan servicer is likely to take possession of the property and sit on it until it can get a better deal. That means incurring additional expenses to maintain the building, or even upgrade it, with those costs borne by the entire investor group. “The lender wants what they want, which is to recover as much as possible,” he said. “So it makes it really difficult to take aggressive actions, such as selling at the right time or investing to bring in new tenants.”
As a result, “you have a vacant property sitting in the middle of downtown and literally hurting the market,” he added.