Hertz Group has a $140M problem in Louisiana
Firm seeks big payout from insurer on damaged office tower previously valued at $25M
By: Keith Larsen
Hertz Group’s Zev Hertz and the Capital One building in Lake Charles (Hertz Group, CTtcg, CC BY-SA 4.0, via Wikimedia Commons)
Hertz Investment Group is seeking to collect $140 million from its insurer for damages to its property caused by Hurricane Laura two years ago.
That is about six times more than Zev Hertz’s firm said prior to the storm that the property was worth.
The Los Angeles-based developer is in legal fight with Zurich American Insurance Company, alleging that Zurich — which has also already paid around $60 million toward the claim — has “jeopardized Hertz’s cash flows and financial position and impeded Hertz’s ability to tap the bond market for liquidity.”
In an internal valuation obtained by The Real Deal, Hertz only placed the fair value of the 22-story building at $25 million in 2019, significantly less than what Hertz now seeks to obtain.
The insurance payment is crucial for Hertz Investment Group. The firm, which once owned 21 million square feet of property, was forced to sell some of its languishing office buildings at a steep discount because of the pandemic. It recently stopped making distributions to investors. Meanwhile, it has payments due in January to its Israeli bondholders.
Hertz is a bellwether for the nation’s broader office market. Most of Hertz’s buildings are in second-tier markets such as Pittsburgh, New Orleans, and Cleveland, and not in New York City or San Francisco, which have unique market forces.
Hertz’s office building in Lake Charles, Louisiana, is its most troubled asset. Known as the Capital One building, it is the tallest tower in the small Lake Charles downtown. During Hurricane Laura, the building along with much of the city was ravaged. Windows were shattered and the interior was wrecked.
Today, the building still looks like hurricane wreckage, with boarded-up windows scattered throughout.
Its state of disrepair has led to a standoff with the city, which recently passed an ordinance deeming the property “blighted.”
Hertz has also sued the city, claiming the measure was enacted so the city could create a lien on the tower and get a piece of Hertz’s insurance proceeds. The city denied that.
Zev Hertz told TRD in an email that repairs on the building have started and progress should be visible this quarter.
“The timeline has a host of complications as there are various bottlenecks to the work; not to mention supply chain and labor shocks our economy has recently been exposed to,” Hertz said.
Hertz is suing Zurich and its subsidiary for the cost of repairs as well as for business interruption. The company said the cost of repairs to the building will exceed $166 million, but so far the insurer has paid less than $60 million, according to a court document.
Hertz’s lawsuits against the city and the insurer are ongoing. Zev Hertz said the company does not comment on pending litigation.
A trial originally scheduled for this month was rescheduled for January after the insurer requested more time to review 60,000 pages of Hertz documents including exchanges between Hertz Group and investors, according to Baton Rouge newspaper The Advocate.
Brooklyn-born Judah Hertz founded Hertz Investment Group in 1977, focusing on undervalued properties in Soho. It moved its attention from New York to Miami to Downtown L.A. and eventually to smaller cities such as New Orleans, where it owns about 4 million square feet of trophy assets.
Judah suddenly stepped down in August 2020. His son, Zev — who led a janitorial company — took over. In February of last year, Judah died from ALS.
Shortly after stepping in as CEO, Zev sold some of the company’s most valuable assets, including the 700,000-square-foot Bank of America Tower in Jacksonville, Florida, for $75.5 million; Hertz had paid $88 million for the office complex in 2014. The firm also sold its Pier 1 Tower in Fort Worth to the Texas city for $70 million, an 18 percent drop from its previous sale price.
The office market remains uncertain because of remote work. Hertz is exploring converting one of its office buildings in Downtown Pittsburgh to residential. Earlier this year, it was able to refinance a Houston office complex with $65 million in debt from the Israeli bond market.
In the past few months, the company stopped making distributions to its investors. Zev Hertz said the payments were halted in part because of “tightening of the debt markets,” which necessitates holding on [to] our cash for the time being, which is ultimately for the betterment of our shareholders.”
Zurich Insurance’s attorney did not immediately return a request for comment. An attorney representing the city of Lake Charles declined to comment.