Current Price – $0.22
Potential Recovery – up to $1.43
Upside – up to 650%
Expiration Date – TBD
This idea was shared by David.
- Current price: $0.23 (thinly traded). Market Cap: $9.4mm
- Litigation stub – potential recovery of up to $150+mm
- CEO (and 40% owner) recently agreed to finance litigation expenses on contingent basis
- Public court filings are available detailing Ambase’s claims against their JV partners, the Developers. See 10Q for case index number references
- A 20% holder just added to stake in high $0.20s
Ambase has (or perhaps had – more on this later) one investment of note, which is a stake in an LLC that was developing a super-luxury high-rise condo building at 111 West 57th Street in NYC. Click here for the property website. The building is currently about 1/3 built. Sales are expected to begin in 2018, though some units are apparently already under contract. Here is a good article about the current situation.
Ambase recently saw its equity interest in the project foreclosed upon by a junior mezzanine lender – though Ambase is appealing the Strict Foreclosure. The proximate cause of the foreclosure was budget overruns of $60mm+ in the $850mm project.
What makes Ambase interesting, even if the foreclosure is affirmed on appeal, is a provision in the Amended Joint Venture agreement between the Developers and Ambase that gives Ambase the right to put its stake back to the Developers (at a 20% compound return) if the “hard cost” budget grows past a certain threshold (“Equity Put Right”). More than a year ago Ambase filed a lawsuit against the developers alleging, among other things, that this equity put right had been triggered by budget overruns. The developers did not dispute the budget overruns, but instead said the conditions precedent to exercising the put option had not been met. Their arguments in opposition are not particularly compelling, IMHO.
For context, if the Put was exercised and honored, Ambase would be entitled to a payment approaching $150mm. The stock traded today at roughly $0.25 (Market Cap: $10mm). If Ambase were to settle the lawsuit against the developers for just the amount invested in the project, it would receive $65mm +/-. Note that any settlement amounts would be subject to the CEO’s Litigation Funding Agreement proceeds sharing requirements.
The Developer unequivocally controlled and managed the budget and the budget overruns are undisputed. The dispute centers on whether the “hard costs” increased by 10% triggering the Equity Put Right or if non-triggering costs increased instead. Due to the budget overruns, the lenders in deal required additional equity at the end of 2016. Ambase would not approve a financing, though Baupost had been lined up, because (and this is my conjecture) to do so would require their approval of a budget that Ambase felt was inaccurate and would eliminate their ability to exercise the equity put right (In the recent 10Q Ambase refers to “concerns about…the implications of the Proposed Budget”). So, Ambase refused to consent and the project went into foreclosure. Ambase is appealing the strict foreclosure by the new lender, Spruce Capital, but the prospects in this lawsuit are uncertain. There is a very real possibility that Ambase will lose its entire interest in the development project. They wrote off the entire investment in the Q3 2107.
Ambase as litigation stub. The CEO and 40% owner of Ambase, Richard Bianco, recently announced that he would underwrite the continued litigation (opposing the strict foreclosure and pursuing the equity put right, among other claims) against the developers on a contingent basis. He apparently feels very strongly that Ambase has been wronged by cutthroat NYC real estate developers. Based on my reading of the complaint and the developers’ replies as well as other filed documents, I agree with him.
Bianco is also lending working capital to the company, secured by the company’s office in Greenwich CT, to fund its limited operations.
Ambase’s Arguments and links to docs
Here is my high level summary of the situation and links to key documents in the public court records:
- The project at the time of foreclosure was roughly $60mm over the June 2015 budget – which, importantly, is the last “approved” budget
- Developers (“Sponsor”) had exclusive control over developing and managing the budget. Blowing the budget was the proximate cause in creating the loan’s out-of-balance condition.
- The JV Agreement permits ABCP to exercise it’s Put Right under certain budget growth conditions outlined in section 11.5 – http://tinyurl.com/yco…
- Developers were required by JV Agreement to supply a budget for approval by Ambase at least as frequently as within 60 days of the end of each fiscal year. Absent a new approved budget, the developers had to work under the last approved budget.
- Despite this requirement, Developers did NOT submit a proposed budget for approval between June 2015 and August 2016. This is undisputed.
- In response to a discovery request, Developers provided a “budget” in August 2016.
- Ambase asserts this budget, the first one Ambase had seen since June 2015, has greater than 10% growth in “Hard Costs” and thereby triggers the Put.
- Developers say this August 2016 budget “was never ‘submitted’ to investment pursuant to Section 8.2 of the JVA Agreement to ‘approve’ or disapprove’, the production of this draft in discovery did not and cannot trigger Investment’s Equity Put Right under section 11.5. http://tinyurl.com/yae…
- Note: Developers do not dispute the numbers in the August 2016 budget, nor the fact that they had not submitted required budgets since June 2015, they just assert that the August 2016 budget was not “submitted” for approval.
- ABCP believes it has found additional evidence via discovery that the put should be enforced – http://tinyurl.com/ycu…
- Might the foreclosure, in a perverse way, strengthen ABCP’s argument?
- “You see, Your Honor, we negotiated for the Put right to protect us against the developer blowing the budget and getting into trouble. And, they blew it. Now, about our Put…”
Based on the publicly available briefs and filings, I think the fact pattern tilts in favor of Ambase, but clearly only a court can decide and the timeframe is uncertain.
Two open questions: (i) does the case ultimately have merit and (ii) can the Put really be exercised and against whom/what entity. I don’t have answers to these questions, and likely no one can know for sure at this time, hence the current trading price.
That said, the CEO, who has the best visibility on the legal cases, is putting at least $7 million of his own money behind the lawsuit. And, he won’t get paid back if the lawsuit results in no payment to Ambase.