Are developers playing "chicken" with the market?

David Goldsmith

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This week's New Development Report from Sotheby's Kevin Brown Team.

NB
Week of May 9 to May 15
Contracts signed 63, sales volume $246,930,769

Week of May 30 to June 5
Contracts signed 29, sales volume $76,051,970
 

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David Goldsmith

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Investor alleges HFZ diverted funds to save XI condo project
Arel Capital claims HFZ refused to provide complete and accurate accounting

As HFZ Capital began to run into trouble with its twisting XI condo project in Chelsea, an investor alleges the company fraudulently diverted funds from another deal to keep it afloat.

Arel Capital’s Richard G. Leibovitch
New York-based Arel Capital is suing HFZ Capital affiliates over a $7.3 million investment it made in four former HFZ Capital buildings in 2014. HFZ Capital was seeking to convert four pre-war rental properties into condos: at 88 Lexington Avenue; 90 Lexington; 301 West 53rd Street; and The Astor at 235 West 75th Street.

 

David Goldsmith

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Related Group’s condo kings expand their realm
Jorge Pérez on bold bets, lessons learned and a second go at national expansion

Getting burned twice in Las Vegas didn’t kill Related Group’s dream of national expansion. But it taught the megadeveloper the importance of boots on the ground.

Miami condo king Jorge Pérez and his son Jon Paul are expanding their Related Group with a $13 billion pipeline of projects throughout the Americas, their boldest move beyond Florida since their first Las Vegas venture in 2005, when they teamed up with George Clooney and Cindy Crawford’s husband, Rande Gerber, on a hotel, condo and casino development called Las Ramblas.

“We were selling like hotcakes. Then we got our construction costs back and realized, ‘I’m going to lose money for every condo that I sell.’ So we had to scratch that,” Pérez said. “Thank God somebody gave us a great offer for the land, and we left Las Vegas.”

Related is moving quickly to develop roughly 25,000 units in the United States and Latin America. By next year, markets outside Florida — including Georgia, Tennessee, the Carolinas, Virginia, Texas and the Rocky Mountain region — could account for more than half of its developments. In Latin America, it has condo developments in Mexico, Brazil and Argentina.
 

David Goldsmith

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This week's New Development Report from Sotheby's Kevin Brown Team.
 

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David Goldsmith

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Developers also playing chicken with each other:

Gary Barnett site has one problem: the Podolsky brothers​

Notorious landlords are holdouts at Extell assemblage on Upper East Side​

 

David Goldsmith

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This week's New Development Report from Sotheby's Kevin Brown Team.
 

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David Goldsmith

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This week's New Development Report from Sotheby's Kevin Brown Team.
 

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David Goldsmith

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This week's New Development Report from Sotheby's Kevin Brown Team.
 

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David Goldsmith

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NY Attorney General reviewing HFZ fraud complaint​

Complaint alleges Ziel Feldman offered condo units to investors in projects before filing offering plans​

New York state’s Attorney General has received a complaint accusing HFZ Capital Group’s Ziel Feldman of illegally offering apartments for sale — a violation that, if proven, could get him a lifetime ban on selling condos and co-ops in New York.
The complaint alleges that Feldman offered the units to investors in projects before filing his offering plan with the AG’s office, a source familiar with the matter told The Real Deal. That would be a violation of the state’s broad-reaching anti-fraud Martin Act covering the sale of securities or, in the case of real estate, condos and co-ops.
 

David Goldsmith

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Is Extell preparing to enter a new phase with One Manhattan Square? A few months ago Gary Barnett admitted they would be losing money on half of their current projects. Very recently OMS has been making a big push telling potential purchasers that this was their "final opportunities" for units and offering 20% of Offering Plan prices even though AFAIK they haven't hit 40% sold yet.

There's no way of knowing what all this means, but potentially there are indications they are about to market as a bulk package or packages the remaining units. We know they have been offering in bulk the remaining units at One57 for quite some time. And since the Condominium closed a year and a half ago it can't be cheap carrying 500 units (even if an undisclosed number entered their "rent to own" program).

It certainly seems like the vast majority of existing sales were to investors who rented the units they purchased. If Extell actually does sell off a large package of units to an investor who rents them out it could be a very long time before there is any substantial owner occupancy component of this project. At some point in the future that could make it difficult to finance individual units.
 

David Goldsmith

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Rising UCC foreclosures are “the tip of the iceberg”​

Mezz lenders are gunning for distressed developments as defaults increase

Churchill Real Estate’s Justin Ehrlich has seen a lot during his time as a developer and lender in New York. He witnessed the collapse of the real estate market during the 2008 financial crisis, followed by the mad rush to build luxury condo towers in some of Manhattan’s swankiest neighborhoods.
But nothing compares to the past nine months, he said. “It’s not normal,” Ehrlich noted. “It’s the worst I’ve ever seen.”

He pointed to an unusual rise in Uniform Commercial Code foreclosures by mezzanine lenders, which he sees as a canary in the coal mine for a mound of distress expected to hit the market in the next year. While judicial foreclosures are still banned under an emergency order by New York Gov. Andrew Cuomo, UCC foreclosures on some high-stakes projects have been moving ahead in recent months since they can bypass state courts.
With one of the roughest years on record coming to a close, many have been waiting for their moment to jump on distressed properties. Now, mezz lenders — which provide junior debt on real estate projects — are increasingly initiating UCC foreclosures on some major developments in need of “rescue funding.”
In August, for example, SL Green Realty filed a UCC foreclosure tied to a high-end retail property on Fifth Avenue owned by Joe Sitt’s Thor Equities. And most recently, CIM Group has been battling it out in court with Ziel Feldman’s HFZ Capital Group to auction off loans tied to several of the developer’s Manhattan condo projects.
Matthew Mannion, who specializes in UCC foreclosures, has conducted at least eight auctions tied to mezz loans or so-called membership interests since March, according to an affidavit filed last month. And Mannion told The Real Deal that more are on the way.
“This is the tip of the iceberg,” he noted.
The uptick in cases presents an opportunity for deep-pocketed lenders like SL Green and CIM that may soon be able to expand their portfolios by taking over projects on the cheap.
Representatives for SL Green and CIM declined to comment.
“Many of the players in the mezz space are not afraid to own the asset,” said Janice Mac Avoy, co-head of Fried Frank’s real estate litigation practice.
Mezzing around
After the last recession, banks pumped the brakes on highly leveraged real estate deals, forcing many developers to look elsewhere for funding. Mezz debt became one of the go-to financing sources to help fill the gaps.
It also has its drawbacks.
Mezz lenders are often among the last to get paid back on a project. So when things go south, their positions can easily get wiped out.
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But mezz lenders have a trump card in UCC foreclosures. They are often processed within two to three months, much quicker than traditional foreclosures, which can carry on for years.
By initiating a UCC foreclosure, a mezz lender has a chance to take over a struggling project or sell its stake in the property. In such cases, the junior lender has a huge advantage. It can place a “credit bid” on the property using the existing debt it is owed from the borrower. This allows mezz lenders to acquire assets at a lower cost than if they bought the property outright.
“Mezz lenders are much more aggressive because they are in a riskier position,” said Neil Shapiro, a partner at the law firm Herrick, Feinstein.
Yet UCC mezzanine foreclosures can be trickier than traditional mortgage foreclosures. Rather than being secured by the property, a mezz loan is converted to an equity interest in the business. So if the junior lender succeeds in a foreclose, it becomes the property’s primary owner and must make payments on the senior debt.
But Mac Avoy said banks and other senior lenders are often more apt to work with subordinate lenders — which usually have no prior history of default — than troubled borrowers. “Lenders aren’t thrilled doing business with someone who isn’t able to pay them back,” she noted.
When considering a foreclosure, mezz lenders have to decide if the project is worth more than its debt. If not, the mezz lender can try to sell its loan or work with the borrower on restructuring the loan terms.
“I am seeing the beginning of a lot of lenders saying, ‘We can’t do nothing,’” said Jay Neveloff, a commercial real estate lawyer and partner at New York-based Kramer Levin Naftalis & Frankel.
Lenders are getting especially antsy with borrowers who have been behind on payments for some time.
Such is the case with Mack Real Estate Group, which is seeking to foreclose on the second phase of the Denizen — All Year Management’s luxury apartment complex in Bushwick. Yoel Goldman’s Brooklyn-based firm was unable to close on a $652 million refinancing for the 900-unit rental complex and has halted payments to its bond investors in Israel.
Representatives for All Year and Mack did not respond to requests for comment.
Courtroom drama
In New York’s high-flying real estate market, nothing comes easy.
So as more lenders seek to foreclose on assets, more borrowers are filing lawsuits to stop them.
In one of the most high-profile cases so far, Los Angeles-based developer and lender CIM sought to foreclose on mezz positions on four of HFZ’s Manhattan condo projects.
The day before the planned auction last month, HFZ filed a lawsuit seeking to stop the sale, arguing that it was “commercially unreasonable.” The developer claimed that CIM’s two-month auction notice was indefensible and called the foreclosure effort a “predatory attempt to capitalize on the Covid-19 pandemic.” The judge ruled in HFZ’s favor and halted the auction for the time being.
Wonder Works Construction made similar claims in a lawsuit against New York-based mezz lender Nahla Capital. The lender sought to foreclose Wonder Works’ Upper East Side condo development Vitre, noted for its shiny glass façade. Nahla hired a team of JLL brokers to market the loan back in October.
But a judge denied Wonder Works’ lawsuit, noting that the firm had been in default on its loan payments since January. The auction went ahead this month, and Nahla won a credit bid on the property to essentially become the owner.
Representatives for Wonder Works did not respond to a request for comment.
Generally speaking, Neveloff said, borrowers usually file lawsuits to “buy time” to negotiate on payments. In at least one case, this has proved to be a successful strategy.
In May, Beverly Hills-based Ohana Real Estate Investors sought to foreclose on the five-star Mark Hotel on the Upper East Side and sell the hotel through auction. Alexico Group, the hotel’s owner, filed a lawsuit, which led to a judge delaying the sale for 30 days. That bought Alexico time, and the two parties were eventually able to reach a settlement, which increased the principal and interest rate on the mezz debt, Bloomberg reported.
Ohana and Alexico declined to comment.
The lawsuits can delay a sale, but ultimately a developer has to find money to pay its lenders. If not, Mac Avoy said, it will be similar to what occurred in the last crisis.
“It’s the musical chairs … of different ownership,” she noted
Churchill plans bankruptcy sale of Nassau Brewery project in Crown Heights

“Gross mismanagement” by partner Crow Hill Development cited as a reason for the sale​

There’s trouble brewing in Crown Heights.
A stalled project to redevelop the historic Nassau Brewing Company complex is now facing a bankruptcy sale, with one owner claiming the property has been mismanaged.
Churchill Real Estate, the project’s managing partner, is planning a bankruptcy sale for the mixed-use development at 945 Bergen Street. A Chapter 11 filing on Friday by Nassau Brewing Company Landlord LLC, cited alleged mismanagement as a reason for restructuring and selling, according to PincusCo.
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Fabian Friedland’s Brooklyn-based Crow Hill Development is a co-owner of the property, having acquired it more than a decade ago for $7.5 million, along with 1036 Dean Street. Friedland sold the Dean Street property in 2014 for $17.5 million, but retained the Bergen Street property.
Churchill joined the project in 2016 after investing an additional $5 million.

The project has run into numerous problems. A retail tenant alleges that they were unable to take possession of space, but were not given back their deposit or first month’s rent, $189,000 in all.
Churchill ultimately replaced Friedland as project manager last week, according to PincusCo. They claimed in their filing that the change was made “due to various payment and performance defaults involving, inter alia, misappropriation of funds and other wrongdoings,” and claim that Friedland “grossly mismanaged the project, apparently diverting millions of dollars that should have been put into the rehabilitation.”

The poor management allegations also involve construction funds and alleged counterfeit corporate documents.
 

David Goldsmith

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Diamond magnate Beny Steinmetz backed HFZ’s Belnord: documents

For years, Ziel Feldman-led firm disputed any ties to embattled investor​

For years, New York condo developer HFZ Capital Group denied any ties to one of the world’s most successful and notorious investors: diamond magnate Beny Steinmetz
Steinmetz, sources told The Real Deal in 2016, was a major backer of HFZ’s projects, including the XI, its twisting High Line condo project in West Chelsea.
That year, HFZ had denied any investment ties or business relationship to Steinmetz. The Israeli businessman had faced allegations of bribing the former wife of the late president of Guinea in order to secure lucrative mining rights for iron ore. And as Steinmetz’s legal troubles mounted, HFZ continued to insist that there was no relationship. But a document buried in a recent lawsuit filed against HFZ by a purported lender and reviewed by TRD appears to show that Steinmetz had made at least one investment in one of the developer’s major projects.


An organization chart attached as an exhibit in a lawsuit against HFZ shows that “Benny [sic] Steinmetz and Family Trusts” had a 60 percent interest in the company that ultimately controlled the condo conversion of the Belnord in 2015. It showed that Steinmetz’s family trust controlled 100 percent of an entity called Tarpley Belnord Corp, which controlled 60 percent of Belnord Partners LLC, the developer entity that is converting the historic rental at 225 West 86th Street into condos.

The exhibit was filed by Feldman’s legal team in a lawsuit brought by Israeli businessman Benny Shabtai, who claims to have provided loans to HFZ Capital that Feldman and former HFZ principal Nir Meir guaranteed.

The exhibit also included an email dated Nov. 24, 2015 from HFZ’s outside counsel, Jill Block [then of Mayer Brown], to Zvi Hahn of Katten Law, the trustee of Benny Shabtai’s trust. The email stated: “Attached is the organizational chart depicting the Belnord ownership.”
It marks the first time a public document has connected Steinmetz to HFZ. Earlier this year, Steinmetz was sentenced to five years in jail by a Swiss Court for the Guinean bribery allegations. Steinmetz said he would appeal the ruling.

Ziel Feldman, his wife Helene Feldman, and HFZ’s attorney did not return a request for comment. Steinmetz’s lawyer also did not return a request to comment.
In December 2016, a representative for HFZ sent a statement to TRD stating that “Beny Steinmetz is not in any way a ‘backer’ of HFZ.”
“He is not an investor in HFZ and he has no business relationship with HFZ,” the statement added. “The previous stories in The Real Deal are not accurate.”

When asked about the statement this week, the representative, Roxanne Donovan of Great Ink Communications, said she was “directed by her client to respond.” Great Ink no longer represents HFZ.
HFZ denied ties to Steinmetz as recently as last year. In a Wall Street Journal article published in early 2020 about how Steinmetz allegedly stashed money in 12 of HFZ’s New York City projects and one in Chicago, a representative said “HFZ Capital Group has no involvement with Benny Steinmetz or his companies. Mr. Steinmetz is not an investor in HFZ or any of its developments.”

Steinmetz’s legal troubles have only mounted since he was first tied to HFZ. In 2019, the Brazilian mining company Vale won a $2 billion arbitration award against a company tied to Steinmetz for investing in a failed joint venture to mine iron ore in Guinea.
Vale is also seeking to get information from HFZ and Aby Rosen’s RFR Holdings about Steinmetz’s alleged investment in their real estate properties.

HFZ has seen its real estate empire collapse over the past year.
The company has been hit by lawsuits, liens, and allegations of fraud. It had to surrender a number of properties to its lenders. Feldman and Meir have also had to sell off some of their personal luxury holdings in Manhattan and in the Hamptons. And a former HFZ executive was sentenced to prison in June for his connection to an alleged bribery scheme tied to the Gambino crime family. (Feldman, HFZ and Meir have not been accused of wrongdoing in the Gambino case.)

The Belnord was set to be one of HFZ’s most high-profile projects. The company bought the building from Extell Development for $575 million in 2015. It began converting its 200-plus rental units into condos, projecting a total sellout of $1.35 billion. In 2018, Westbrook Partners took a stake in HFZ Capital Group’s redevelopment of the Belnord, by converting the debt it owns on the property into equity.

This January, a spokesperson for Westbrook said to TRD that an affiliate of the firm is now the majority owner of the 14-story building at 225 West 86th Street and that HFZ only has a “minority non-controlling residual economic interest.”
Built in 1908, the building takes up a full block between Broadway and Amsterdam Avenue and East 86th and 87th streets, and features one of the city’s biggest inner courtyards, according to HFZ’s website. Robert A.M. Stern, the architect behind 15 Central Park West and 220 Central Park South, is overseeing the redesign.
 

David Goldsmith

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HFZ set to lose stake in $2B XI condo project​

Lender TCI schedules foreclosure sale on HFZ's interest in massive unfinished development​

One of the boldest bets of the past decade on New York City’s high-end real estate market appears to have finally run out of rope — a case study in what happens when big risks don’t pan out.

HFZ Capital Group’s $2 billion XI project on the High Line in West Chelsea is headed for foreclosure after years of hand wringing over its viability, The Real Deal has learned.

The project’s lender, a subsidiary of The Children’s Investment Fund, a UK-based hedge fund, has scheduled a UCC foreclosure sale for October on HFZ’s stake in the mixed-use development, marketing materials show.
 

David Goldsmith

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Nightmare darkens for largest Brooklyn condo project of 2019

A 15-unit development at 19 Hausman Street in Greenpoint, which topped The Real Deal’s list of the largest Brooklyn condo projects in 2019, filed for bankruptcy in April and is now being sued by its creditors.

Just three years ago, Rafi Manor’s firm, M Development, was a leading developer in Brooklyn with 12 active projects. Now, Manor is facing foreclosure actions on four Brooklyn properties he helped develop: 135 Bayard Street, 517 Brooklyn Avenue, 744 Lefferts Avenue and 52 Herbert Street.

Last year, lender Realya Investments sued Manor and an LLC tied to his firm for defaulting on acquisition loans at 54 Dupont Street in Greenpoint. Realya also sued Manor for allegedly breaching a loan agreement at 517 Brooklyn Avenue in Crown Heights.

Manor and the LLC, M1 Development, argued that they were only listed as guarantors on the loan, and were not parties to the loan agreement. The court disagreed, ordering Manor and M1 to pay the loan agreement, including principal and interest, which amounted to about $1.6 million plus interest at a rate of $512.33 per day.

A few months later, Manor and M1 filed for bankruptcy to satisfy their debts and reorganize. According to court documents, liabilities for M1 Development total $2.72 million, but it only has about $357,000 in assets from an ownership interest in several LLCs. Manor’s personal liabilities total approximately $6.2 million.

Four of the LLC entities in which Manor and M1 Development have an ownership interest are facing foreclosure actions, which the bankruptcy court allowed to proceed.

In court documents, Manor says changes to the New York City building code and increases in the cost of construction materials led to unanticipated expenses. He also said the pandemic stalled construction projects, further complicating his financial situation, though both lawsuits were brought against Manor before pandemic-related lockdowns began.

The 19 Hausman Street property previously faced a foreclosure action in 2019 by its former lender Tideway Capital Funding, but that situation was resolved, paving the way for Realya to step in as the project’s new lender.

Manor’s lawyers are now attempting to move the Realya lawsuits from state court to the Southern District of New York.

Manor could not be reached for comment. Representatives for Realya Investments and Realya Crown Heights LLC did not respond to requests for comment.
 

David Goldsmith

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Dumped by Macklowe and Churchill, Core Real Estate demands fees​

Brokerage was thrown off three of the developers’ projects​

Shaun Osher has launched a war on two fronts against developer Harry Macklowe and investment firm Churchill Real Estate.

Osher, the founder and CEO of Core Real Estate, is seeking $950,000 in termination fees that he says they collectively owe him after removing Core as the exclusive firm handling sales at three projects.

Osher sued Macklowe July 16, alleging that Core was owed $750,000 because its agreement to lead condo sales at One Wall Street was ended without cause. That same day, Osher texted Churchill’s principals demanding a meeting to discuss a Chelsea condominium that they had kicked him off more than a year earlier.
 

David Goldsmith

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HFZ owes XI lender $136M: judge

Children’s Investment Fund sued the developer in January​

The hits keep on coming for HFZ Capital.
The troubled developer was at the losing end of a recent court decision involving a lender on the XI, HFZ’s luxury condo project by the High Line.

A state Supreme Court judge ruled that HFZ owed $136 million to the U.K.-based Children’s Investment Fund, which provided a nearly $1.3 billion loan in 2017 for the West Side development, according to Crain’s. The lender claimed HFZ stopped making monthly interest payments on the loan in April 2020.
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The court delivered a summary judgment late last month, putting HFZ and its chairman, Ziel Feldman, on the hook for the $136 million, plus interest. Stu Loeser, a spokesperson for HFZ, said the company would appeal. He declined to comment further to The Real Deal.

HFZ purchased the project site for $870 million in 2015 and had Bjarke Ingels design dancing towers that included 275 apartments, a 137-key luxury hotel and a spa/wellness center.

Sales have been slow, however, and the developer has been beset with financial problems that have further hampered the project as well as others for the company. HFZ has lost four Manhattan condo projects and a 34-story Midtown office tower to foreclosure.
Last month, the New York attorney general received a complaint that Feldman allegedly offered apartments in the building for sale before filing an offer plan, which could net him a lifetime ban from condo and co-op sales in the state.

The Children’s Investment Fund has scheduled a foreclosure sale on HFZ’s stake in the XI for October.
 
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