Since Macklowe Properties and CIM Group purchased 737 Park Avenue from the Katz family two years ago, and began converting the rent-stabilized apartment building to condominiums, they have tangled with several tenants in court. But now, the developers claim that the seller’s apparent lack of disclosure is to blame for the litigation and the corresponding construction delays.
Macklowe Properties, the Midtown-based development firm headed by Harry Macklowe, and CIM, the Los Angeles-based private equity firm, allege that Katz 737 Corp. failed to disclose that leases for three of the building’s apartments contained unique provisions that have hampered progress and driven up the cost of the project. They filed suit yesterday in New York State Supreme Court.
The buyers relied on the Katz family to provide accurate information about the leases to determine the correct purchase price, but the “seller has breached its warranties in various respects,” the suit said.
Now, the riders, waivers and other conditions have extended the leases beyond the expected termination, costing at least $1 million, Macklowe and CIM claim.
Conversions of Manhattan apartment buildings are notoriously complex, especially when they involve buying out rent-regulated leases, as this case does, industry insiders said.
“Conversion plans are not for the faint-hearted under the best of circumstances,” Kenneth Fisher, a real estate partner with Cozen O’Connor, said. He was not involved in this case and was speaking generally on conversions.
“Due diligence in multifamily acquisitions has become increasingly more important, especially in light of court decisions putting purchasers in the shoes of their sellers when it comes to establishing regulated rent histories,” Fisher added.
Macklowe declined to comment. An attorney for Katz and a representative for CIM did not immediately respond to a request for comment. The Katz family could not be reached.
Macklowe and CIM closed on the purchase of the 103-unit, 21-story building at the corner of Park Avenue and 71st Street in Lenox Hill, on Aug. 5, 2011, with a total redevelopment cost of $360 million.
The developers have already filed two suits against 737 Park tenants trying to get them out, and are separately facing a suit filed last fall by a plastic surgeon who claimed his medical office was damaged by the construction work.
In one case, Macklowe and CIM sued tenant Elizabeth Murray, claiming she was improperly operating a bed and breakfast out of her apartments, Units 3B and 4B. However, the developers later dropped that suit without explanation, as The Real Deal reported. They have now conceded that Murray may have rights to remain which they were unaware of, but they said in court papers that they still plan to try to shut down the alleged bed and breakfast.
Murray occupies the apartments through a rent-control lease her father signed in 1969, according to the most recent suit, which says she intends to claim that she has a waiver with the prior owners that allows her to continue with her business, whether it is or is not against local housing regulations.
The second lease at issue in yesterday’s lawsuit was held by the elderly couple Martin and Tibbie Schwartz, who until recently lived in Unit 11E.
Though the rent roll noted this lease was free market and would end Dec. 31, 2011, the Schwartzs — he is 98 and she is 94 — had an agreement from 2002, when they were moved from another apartment, that the unit would remain rent-regulated — unbeknownst to the developers, court papers say.
Macklowe and CIM sued them in housing court to remove them, and they countersued a year ago, laying out why they have the right to remain in the apartment.
However, even after the case went to State Supreme Court, it remained unclear what the couple’s rights were, so this year the developers bought out their lease for an undisclosed sum, and the Schwartzs vacated the unit. Macklowe and CIM said they lost a year in construction delays because of the dispute, and had to foot the bill for attorneys’ fees and the lease buyout.
The last lease causing the developers a headache is with the married couple Barry and Joan Shalov, who live in Unit 16E. Macklowe sued them in September 2011, claiming they were refusing to leave after their lease expired Aug. 31, 2011.
However, the couple claims they have a lease rider from 1995 that allows them to remain in the building for life. To move the construction forward, the developers inked an agreement to buy out their lease so they would vacate. However, the payment has not been made nor have they left, as of yesterday, the complaint says, although both are set to occur on or before April 30.
Correction: In a previous version of this story, The Real Deal incorrectly asserted that Murray was operating a bed and breakfast, and that she would use a waiver to defend that use. However, those are allegations raised in the lawsuit, not information known to be fact.