The Real Deal New York

Private equity firm Meadow Partners sues Pinnacle over $43M portfolio

Alleges rent-regulated operator is blocking sale of buildings by Massey Knakal

February 19, 2013 02:00PM
By Adam Pincus

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441 Convent Avenue , Jeffrey Kaplan and 241 Sherman Avenue

UPDATED, Feb. 19, 2:20 p.m.: A Midtown private equity firm is claiming in a new lawsuit that its partner the Pinnacle Group — once one of the most aggressive purchasers of rent-regulated housing in New York City — is hampering a sale of a portfolio of nine Upper Manhattan buildings in order to buy it back at a discount.

Investment firm Meadow Partners alleges that Pinnacle, in a breach of their joint venture agreement, is impeding efforts by commercial brokerage firm Massey Knakal Realty Services to market and sell the property.

Pinnacle acquired the properties between 2003 and 2005 for $43.8 million, city property records show.

“Pinnacle’s willful interference is designed to disrupt the market for the company property, to drive the price down, and then attempt to buy the property on the cheap,” Meadow alleges in a lawsuit filed Friday in New York State Supreme Court.

Pinnacle, for its part, said the lawsuit lacked merit.

“We are surprised and disappointed that Meadow instituted litigation, particularly because as recently as last Wednesday we were working out with their representatives a path forward,” an outside spokesperson for Pinnacle said. “While we do not generally comment publicly on our operations, we are confident that the matter will be resolved appropriately in light of the complaint’s lack of merit.”

Pinnacle, headquartered near Penn Station, has no financial incentive to sell the buildings located in Inwood, Hamilton Heights and Washington Heights, because it is collecting a fee for managing the properties, the complaint alleges. Managers often charge about 3 percent of gross revenue to operate buildings, insiders say.

According to the suit, the landlord has only allowed Massey Knakal and prospective purchasers access to the site once a week, claiming more visits would be disruptive. The landlord has blocked more frequent visits and inspections, most recently on Feb. 11, the complaint says.

Furthermore, Pinnacle has demanded that Massey Knakal provide information about potential buyers, even though the brokerage is representing only Meadow.

Pinnacle, led by investor Joel Wiener, owned an estimated 21,000 mostly rent-regulated apartment units in the city during the market boom, including more than 7,000 in Manhattan, according to a count from 2009 by housing advocates. Most of that Manhattan portfolio has been sold off, property records show.

In June 2010, it bought out its equity partner on the deal, Praedium Group, for about $30.3 million, city records show. And then Meadow Partners, led by managing partner Jeffrey Kaplan, purchased a 70 percent stake in the portfolio for $35 million on July 23, 2010, property records show. The largest of the buildings are the 91-unit 441 Convent Avenue in Hamilton Heights and the 73-unit 241 Sherman Avenue in Inwood.

Meadow and Massey Knakal did not immediately respond to calls for comment. Massey Knakal is not a party to the suit and is not accused of any wrongdoing.

Tales of internal battling between joint venture partners was rife during the downturn, but as the rental market in Manhattan improved over the past several years, the number of overleveraged properties declined.

Still, insiders whispered for years about multi-family operators dragging their heels with the intent to hang on to management fees while their equity partners suffered with low or negative returns.

In addition, if an operating partner has a declining portfolio, it might want to hold on to buildings to keep up appearances as a “player” in the business, noted William Weisner, a partner in the real estate practice group of Tarter Krinsky & Drogin, who was not involved in or familiar with this dispute.

At times, he said, “if the capital partners decide to sell the property, operating partners will sometimes seek to block the sale for several reasons: to preserve property management fees, to avoid phantom income on tax recapture, or as leverage to negotiate a ‘disposition fee,’” Weisner said.

The sensitivity of the allegations was underscored by the state of the complaint: Much of the language pertaining to the partners’ operating agreement was redacted, leaving just black bars.

The case hinges on the terms of a “right of first offer,” or ROFO, which are redacted. But Meadow alleges it sent a notice of its intent to sell the portfolio to Pinnacle on Nov. 12. Pinnacle, the papers say, rejected that notice as insufficient, and said it has not waived its rights to buy the property.

Meadow is asking the court to find that the November ROFO notice was valid, and that Pinnacle has waived its option to buy the property. Meadow also wants a judge to block Pinnacle from allegedly impeding the marketing and sale of the portfolio.

  • justice

    so let’s get this straight – Pinnacle screws Praedium in 2010 by squashing bids on buildings so Joel can but the buildings on the cheap (at prices below current bids from experienced buyers). Then Joel sells off most of the stake to Meadows at a huge profit. Now Meadows wants out and they are surprised that Joel is screwing them too??? Are the guys at Meadows really that stupid? It seems you made a deal with the devil, you knew it, and now you’re paying the price.

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