In 2011, Salmar Properties set out to transform a 1.1 million-square-foot vacant warehouse in Sunset Park into a state-of-the-art industrial center. In exchange for tax breaks worth millions of dollars, the landlord promised the city to set aside 85 percent of the building for manufacturing tenants.
Actually, never mind that.
After years of the property sitting half-empty, the landlord has received permission from the de Blasio administration to lease to commercial office tenants up to 268,404 square feet on the upper floors of the eight-story building, known as Liberty View Industrial Plaza, according to an agreement made public Monday.
Salmar presented evidence to the New York City Economic Development Corporation that it is financially infeasible to lease the property for industrial use to the extent required by the deed. Industrial space typically rents for far less money than office space.
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Last May, Salmar wrote to the EDC that the restrictions no longer made financial sense. The agency appears to have accepted that reasoning, noting that “modification of the use requirements in the deed” would provide “employment opportunities for residents of the city.”
Salmar will pay the city $25,000 in administrative fees in exchange for the approval, according to the document.
Simultaneously with the modifications, the landlord secured a $117.6 million refinancing from Blackstone Group, replacing a $30 million loan Goldman Sachs provided at the time of the acquisition. Blackstone provided a $720 million refinancing for the nearby Industry City complex last month.
Salmar, founded by Sal Rusi and Marvin Schein, acquired 850 Third Avenue for $9.4 million in 2011. The deed required that 85 percent of the property be occupied and used only by industrial businesses for 30 years, with some retail allowed in the remaining space. That paragraph of the deed has now been replaced.
Salmar did not immediately respond to a request for comment.
The newly granted permission to lease to office tenants comes with certain restrictions. The landlord is initially permitted to lease 67,101 square feet to office tenants, while another 67,101 square feet will be leasable after certain “industrial improvements” are completed, such as installing code-compliant fire alarms, sprinklers and HVAC units.
The remaining half of the total allowed office space will become leasable in proportion with the amount of industrial space leased — 0.7 square feet of office space for each square foot of industrial.
The property is currently occupied by Amazon, Saks & Company and Bed, Bath & Beyond, according to public records. Industrial tenants occupy less than half of the total floor area, which surely disappointed the Economic Development Corporation, an agency that provides space at below-market rents to further policy goals such as creating jobs that pay well but do not require college degrees.
Rusi and Schein have poured about $140 million into infrastructure upgrades at the property, including a new facade and automatic elevators. But plans to attract manufacturers from Manhattan’s Garment District — a goal of the de Blasio administration when it rezoned that section of Midtown — did not pan out, and the landlord later pivoted to e-commerce tenants looking for last-mile storage space.
“It turned out that garment workers wanted to stay in the city,” Schein told The Real Deal last year. “They felt that if they moved out, they would lose their relationships with the European and American buyers that frequent Manhattan.”
At the time, Schein noted that some banks and other financial firms became interested in leasing the space for back offices, but the deed restrictions prevented this.
The EDC did win some concessions in the new agreement. A provision allowing Salmar to sue to relax a restriction on its use of the building if it could not service its debt has been struck. The use restriction on the remaining industrial space has been extended by another 27 years, to 2071. The company will also have to spend $10 million to $15 million within three years fixing up that space. And the rent on two industrial floors will be capped through 2045, beginning at $18.50 per rentable square foot and increasing at 3 percent annually.
Salmar, which also received a $3.5 million grant from EDC for the property in 2014, has faced scrutiny for its relationship with the city in the past. Members of both the Rusi and Schein family were found to have contributed nearly $60,000 to de Blasio’s re-election campaign in 2016.
The city’s concessions to Salmar come as controversy intensifies in Sunset Park over the preservation of industrial space. A proposed rezoning of Industry City now in the seven-month review process is at risk of being rejected for that reason.
Write to Kevin Sun at ks@therealdeal.com