The Real Deal New York

Judge rejects Warehouse 11 extension

Capital One says developers sold units without permission

February 10, 2010 12:32PM
By Sarah Ryley


Warehouse 11

A U.S. Bankruptcy Court judge rejected on Friday a settlement agreement that would have extended until next month the deadline for the developers of Williamsburg’s Warehouse 11 to buy the property’s discounted debt from lender Capital One.

Under the original agreement, which still stands unless an appeal next week is successful, the developers had until Dec. 21 to find an outside investor who would purchase the $50.8 million note at an undisclosed discount. Otherwise, Capital One could resume shopping it to an outside party.

The 120-unit condominium at 214 North 11th Street at Roebling Street appears to be the most valuable asset one of the developers, Isack Rosenberg, has an interest in out of at least six under siege by 10 creditors in Brooklyn’s bankruptcy court.

Rosenberg had hoped to use any profits from selling the condos toward settling his other debts, which have as collateral a lumberyard and adjacent warehouse on Kent Avenue; the rental portion of Olive Park in Williamsburg; a banquet hall on Flushing Avenue; and a home renovations center in Boro Park.

His attorney, Leo Fox, told The Real Deal he will appeal the court’s decision in a hearing scheduled next week, with procedural fixes to the settlement agreement. He pointed out that the extension was rejected on procedural grounds, not because the developers sold condos to buy out the debt.

In his objection to the ruling, filed yesterday, Fox noted that the developers had already raised enough money through sales to honor the agreement — which is $31 million, based on court filings.

The other Warehouse 11 developer, Yitzchok Schwartz, had an involuntary bankruptcy case filed against him that helped prevent the project from being foreclosed on. But he has only been peripherally involved in the proceedings related to Warehouse 11 and was not immediately available for comment.

Although the drafted settlement agreement envisioned the developers finding a third party investor to buy the $50.8 million note at an undisclosed discount, they attempted to raise cash another way: through a well-publicized fire sale that kicked off last month and has probably since made the building the city’s top seller.

Apartments were priced at an average of $550 per square foot — 27 percent less than when they came to market in 2008, and 21 percent less than Williamsburg’s current average listing price, according to the listings aggregator Streeteasy.com.

Thirty-four contracts were signed at the packed relaunch party Jan. 14, and nearly 60 had been signed within two weeks, David Maundrell, president of real estate brokerage aptsandlofts.com, had told The Real Deal. He declined to comment for this article.

But perhaps aptsandlofts.com was too successful, Fox said. In court documents, he accused Capital One of stonewalling his client’s attempt to buy out the debt himself “once it realized that the sales were proceeding expeditiously and that it could make more money if it torpedoed the deal.”

Capital One alleged in court documents that the developers commenced sales without its approval, which would be required to close the sales. “If Capital One was interested in the debtor selling units over time it never would have agreed to accept the sum provided for in the settlement agreement,” wrote Jennifer Silvestro, an attorney for Capital One, in the court documents.

However, a source close to the project said Capital One employees were actively involved in preparations to relaunch sales.

“The bank had viewed the property multiple times as it was being prepared for the relaunch, and had reviewed the sales strategy for the relaunch,” said the source, adding that the bank never tried to prevent the condo sales.

The lender’s attorneys did not respond to requests for comment, including on how the decision would impact Warehouse 11’s buyers.

“I don’t think that Capital One is looking to stop those condo sales, as a matter of fact,” Fox said, explaining that there are provisions under bankruptcy law that would allow for the sales to close even while the parties continue to battle it out in court. “The only issue now is, who’s going to get that money?”

He added, “What difference does it make how we repay them? They bargained for a number and we bargained to give them a number.”

Ultimately, the two developers expected to generate $50.6 million from sales — almost exactly the outstanding debt owed to Capital One — according to a development plan submitted by Fox. Once expenses and the “Capital One discount amount” were paid off, the plan estimated they would have had $8 million left to split.

The “discount amount” is blacked out, but the math indicates it was $31 million. Although, it’s unclear whether that figure includes some discounted settlement with the mezzanine lender RCG Entities, which is actively involved in the bankruptcy battle and is owed $15 million just on the Warehouse 11 project.

Fox alleged in court documents that the developers’ effort to find a buyer for the project’s debt was thwarted by an “intercreditor agreement” between Capital One and RCG. The agreement “clearly impacted on the rights and obligations” of anybody who might be interested in purchasing Capital One’s note, wrote Fox.

In fact, RCG states that its collateral in the Warehouse 11 loan includes a 100 percent ownership in the project, as well as the lumberyard and adjacent warehouse on Kent Avenue.

Capital One also happens to be a lender on the lumberyard, and began foreclosure proceedings on the property last spring, which was staved off by the bankruptcy filing. The same month, RCG attempted to foreclose on $7 million in debt it’s owed for a development Rosenberg finished in 2008 called Olive Park, where he still has an interest in the unsold apartments that are being rented.

RCG states in court documents that its efforts to collect on any of the collateral for its loans are complicated by the fact that other creditors, with loans also in default, lay claim to that same collateral. Therefore, RCG argued that the extension agreement be rejected, in part because the delay in debt reorganization was causing its collateral to erode.

The court rejected the extension because of various procedural issues that Judge Carla Craig ruled violated the bankruptcy code.

If the developers failed to produce enough money by the deadline, the agreement proposed the “immediate appointment of a Chapter 11 trustee” to sell Warehouse 11, versus after a hearing that would give other debtors the opportunity to object, as required by law. And the agreement would have limited the trustee’s duties to selling the project, versus giving the trustee control over all of the debtors’ assets, as required by law.

“It is possible that the Chapter 11 trustee would determine that the sale of [Warehouse 11] is not in the estate’s best interests, and that, instead, developing the [project] and selling the units to generate income is in the estate’s best interest,” Craig wrote in her decision.

If the developers met their deadline, the proposed agreement mandated that their bankruptcy case would be dismissed, which the court ruled is up to a judge to decide, not the debtors or creditors.

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