The Real Deal New York

Say it ain’t Shvo

The developer will face tax fraud charges in court this fall

October 03, 2016
By Hiten Samtani and Katherine Clarke

ShvoIn January 1980, Ian Schrager and Steve Rubell, the founders of legendary nightclub Studio 54, stood in court to face the music. Their offense was tax evasion, and Judge Richard Owen was not in a forgiving mood.

“Your crime,” Owen told the duo, “is one of tremendous arrogance.” He sentenced them to 3.5 years in prison, and added: “You fail to appreciate the true nature of the seriousness of a tax charge.”

Schrager served nearly two years in prison. He reinvented himself as a trend-setting hotelier, but the events leading to his fall from grace over three decades ago bear more than a little resemblance to the drama now surrounding one of New York real estate’s most polarizing characters: Michael Shvo TRData LogoTINY.

Last month, Manhattan DA Cyrus Vance Jr. indicted Shvo for allegedly scheming to evade the payment of more than $1.4 million in tax related to the purchase of fine art, furniture, jewelry and a Ferrari. The charges include criminal tax fraud in the second, third and fourth degrees, repeated failure to file taxes and offering a false instrument for filing in the first degree.

“Michael Shvo went to great lengths to defraud New Yorkers out of more than a million dollars in tax revenue,” Vance said. “This indictment puts other purchasers of fine art on notice: The purposeful evasion of New York State and City taxes is a tax crime, and those who scheme to avoid their obligations will be held criminally and civilly accountable.”

After the indictment, Shvo’s spokesperson said the developer “looks forward to his day in court, where he will mount a defense to all charges related to his art business, and is confident he will be acquitted. He has not committed any crime, nor did he act with any criminal intent whatsoever.”

Shvo was released on a $500,000 bond, chump change for a man whose art collection is valued in the millions and who owns homes in the Time Warner Center and the pricey hamlet of Water Mill. But he’s fighting the charges while also juggling several prominent development projects, and though the indictment has no connection to his real estate operations, reputation is everything in this business.

Shvo declined to comment for this story.

Real estate’s “bad boy”

The city’s brokerage community had never seen anyone quite like Shvo. As a newbie in the early aughts, he became known for his manic work ethic and an unparalleled sense of flair, pioneering tactics like 24-hour sales offices and collaborations with the likes of Philippe Starck and Giorgio Armani. As quickly as Shvo rose, he made enemies. Corcoran Group’s Pam Liebman told New York magazine in 2005 that “in my 20 years in this business, I have never seen one man inspire such across-the-board loathing.”

After the market turned in 2008, Shvo went into what he described as “semi-retirement” and worked as a marketing consultant in international hot spots. He got busy amassing a serious art collection, with works from Andy Warhol, Francois-Xavier Lalanne and Jean-Michel Basquiat.

Shvo burst back onto the New York scene in 2013 with the purchase of the Getty gas station site by the High Line for a pricey $800 per foot. He teamed up with the likes of Davide Bizzi, Howard Lorber and Russian billionaire Vladislav Doronin to amass an enviable portfolio that included a $145 million development site at 100 Varick Street, a supertall condo site at 125 Greenwich Street for $185 million and the office portion of the Crown Building for $500 million. Last November, he entered contract to purchase the office component of 685 Fifth Avenue.

This past April, he claimed to be involved in $4 billion worth of development projects. But a closer look at that figure reveals several cracks.

Missing pieces

Shvo’s projects include the Getty, a six-unit, Peter Marino-designed boutique condo with a projected sellout of about $140 million; 565 Broome Street, a 115-unit, Renzo Piano-designed condo at the 100 Varick site with a projected sellout of $651 million; and 125 Greenwich, a 275-unit Rafael Viñoly-designed supertall condo with a yet-to-be-determined sellout.

“I think in 20 years, it would be great if people said, ‘I want to live in a Shvo building,’” he told The Real Deal in October 2014.

But in the case of one project, Shvo’s involvement has been swept under the rug.

In 2014, he teamed up with Erez Itzhaki, Halpern Real Estate Ventures, Bizzi and Aronov Development to buy 100 Varick. The partners scored a $320 million construction loan from Bank of China in 2016 and sold a $135 million equity stake to Chinese institutional investor Cindat. But according to several sources familiar with the matter, the broker-turned-developer is no longer associated with the project. When reached by TRD, a spokesperson for Bizzi said Shvo no longer holds an equity stake in 100 Varick and isn’t referenced in any of its marketing materials.

At 125 Greenwich, Shvo and his partners, Bizzi and Lorber’s New Valley, raised $174 million in EB-5 funds and brought in Cindat as a limited partner.

They also scored a $500 million construction loan from Singapore’s United Overseas Bank. The loan is set to close at the end of the year, sources said. But some market observers speculated about whether Shvo’s indictment would complicate things.

“It depends on how the lenders are reacting,” said one top lawyer not involved in 125 Greenwich. “Typically, the borrowers have to make certifications to the lender. Sometimes the certifications require that the people signing say there’s been no material adverse change. The question is whether him being indicted represents a serious adverse change. They may think it does, but Shvo could object to that.”

Real estate attorney Terrence Oved said that while he was unfamiliar with the specifics of Shvo’s deals, it would not be uncommon for joint venture partners to plan for the worst.

“It’s not unusual in these kinds of partnership agreements to have provisions providing that, upon the event of an indictment or conviction, the partners have the right to treat that event as if it were an offer to sell by the indictee, which would trigger a buyout of the partnership interest. That’s not uncommon in these types of things. Whether or not Mr. Shvo’s partnerships had them, I can’t be sure.”

“If you have a good lawyer that negotiated the deal, it might be triggered upon conviction,” Oved added. “Sometimes they say ‘indictment’ because the partners don’t want to go through that whole thing.”

As for the Crown Building, a source familiar with the project said that Shvo and Doronin’s plans to convert the office portion into condos and a hotel are temporarily on hold. And at 685 Fifth, Turkish developer Gulaylar Group swooped in with a higher, $160 million offer, and sources said Shvo was paid a sum of money to walk away.

Day of reckoning

Shvo is due back in court on Oct. 19, but that date is likely to be pushed back to November, sources said. The charges he faces carry a maximum sentence of 15 years.

The DA said that between 2010 and 2016, Shvo misled auction houses into believing that art purchases he made were destined for overseas locations, which allowed him to avoid paying tax on them. Instead, they went to his offices and homes in New York.

Shvo is even alleged to have fraudulently used New York resale certificates, which allow art dealers to purchase items exclusively for resale without paying tax. In the case of the Ferrari, a 458 Spider, Shvo allegedly formed an LLC dubbed Seren LLC and registered it in Montana for the purpose of avoiding tax.

He is just the latest in a line of industry players to face tax evasion charges. This May, RFR Holding’s Aby Rosen agreed to pay $7 million to settle a tax evasion inquiry. The AG had alleged Rosen ducked taxes on $80 million worth of art purchases.

Rosen, notably, did not see the inside of a cell and didn’t admit any wrongdoing as part of his settlement. Many in the market told TRD that it’s unlikely Shvo, even if he gets convicted, will face anything more than a hefty fine.

But Rosen is a heavyweight with a multibillion-dollar portfolio and a long track record in New York real estate, while many see Shvo as primarily a branding guru. If the indictment hurts his brand, they say, what’s he got left?

It’ll be a while before there’s a resolution to the case. For now, however, Shvo’s standing tall, and his approach is perhaps epitomized by a massive artwork right above the reception desk in his swanky Fifth Avenue office. It reads, simply, “Not For Sale.”