Barnett and partner spar at 470 Broome Street
Extell head says claims of siphoning money are "nonsense"February 08, 2010 01:00PM By Candace Taylor
Sicis showroom at 470 Broome Street and Gary Barnett
Maurizio Placuzzi, the owner of Sicis, a high-end mosaic tile concern with a New York showroom at 470 Broome Street, filed an application for a temporary restraining order and injunction in New York State Supreme Court Dec. 12, 2009. The filing claims that Barnett was siphoning money from 470 Broome Development, the company he and Placuzzi had formed to convert the building, to Extell affiliates and projects.
Barnett engaged in a pattern of "looting the assets of the company by engaging in self-dealing designed to benefit other affiliates of Extell and Barnett," then concealing these activities, the application claims.
According to an affidavit filed in support of the request, Barnett did this by "causing 470 Broome Development to pay expenses it was not liable to pay (including expenses wholly unrelated to 470 Broome Development's operations and in fact related to other Extell projects.)"
Barnett told The Real Deal the allegations are "nonsense."
The application asks that Extell provide Sicis with all current and future documents created in relation to the conversion, and that Extell be prevented from paying any bills or invoices, except for common charges and taxes, without permission from Sicis.
Barnett used 470 Broome Development funds for attorney's fees and even wrote checks to the construction lender of the Rushmore, a troubled Extell project, according to Alan Fried, a partner at real estate law firm Braverman & Associates, who is representing Placuzzi. Barnett then attempted to hide these activities by instructing his attorneys at law firm Stroock & Stroock & Lavan, the law firm retained by Extell to prepare the offering plan for 470 Broome, to avoid providing documents to 470 Broome Development, the affidavit states.
"Extell was using 470 Broome to help get out of its fix with the Rushmore," Fried told The Real Deal. He added that the case "is very damning for Extell, Gary Barnett and Stroock."
Barnett said there is "not a shred of truth" to Sicis' claims, and that Sicis went to court because the company had wanted to take control of the residential units in addition to the commercial, but at a lower price than Extell would agree to.
"There's a bit of sour grapes going on here," Barnett said.
The two parties had agreed that if the conversion wasn't completed by July 15, 2008, Extell would pay his partner $1 million, according to the application. The condo declaration was allegedly not filed until December 2008, but Extell refused to make the payment, the application says.
Barnett said that Extell holds Sicis partially responsible for the delay.
Barnett and Sicis began trying to settle their dispute in arbitration in 2008, but Extell had disqualified all of the arbitrators that had been chosen, prompting Placuzzi to go to court asking for an injunction, the application says.
In a December 2009 stipulation, the parties agreed that Extell would provide all the requested documents, would give its partner advance notice of any closings in the building, and that all of 470 Broome Development's net proceeds would be kept in escrow until the matter is settled in arbitration.
Placuzzi founded Sicis in Italy in 1988. With locations in Asia and Australia as well as Europe and North America, the company is now well-known for producing elaborate mosaics that adorn walls, flooring, pools and design elements like light fixtures.
In 2004, Placuzzi wanted to purchase a commercial space for a New York showroom, and 470 Broome appeared ideal, according to the affidavit. At the time, the five-story mixed-use Soho building was owned by Intell Soho, an affiliate of Extell. Placuzzi was interested in the lower floors of the building but not the top floors, and in order for him to buy only the lower portion, the building would first need to be converted to condominiums.
Placuzzi planned an extensive build-out of the space (where The Real Deal held a holiday party in 2008} and was eager to get started. He "only wanted the lower levels, but didn't want to wait until a condo plan was written and approved because that would have delayed construction for a couple of years," Fried explained.
So Placuzzi and Extell came up with a complicated plan in which Barnett would sell the entire building to a Placuzzi-owned company called Bianca USA Real Estate, according to the affidavit. Then, the residential upper floors of the building would be leased backed to 470 Broome Development, an entity also owned by Placuzzi. Barnett would be brought on temporarily as the operating manager of 470 Broome Development to convert the top floors of the building into residential units.
The arrangement would allow Sicis to avoid transfer taxes and start work on the space immediately without having to develop the residential units, Fried said, noting, "They're not in the real estate business."
Extell had operating authority over 470 Broome Development, and according to the affidavit, agreed to front the funds for the conversion, which would be repaid from the proceeds of the sale of the condo units. Barnett would receive 75 percent of the company's net profits at the end of the project.
Almost immediately, Extell and Barnett violated the terms of the agreement and "abused their positions," the affidavit claims.
Though the operating agreement prohibited Barnett from incurring additional debt, he "immediately caused the company to take on debt," signing promissory notes for loans from Extell affiliate Strategic Soho at an interest rate of 12 percent, the affidavit says. Ultimately, 470 Broome Development paid around $2 million in interest to Strategic Soho.
These actions were presumably designed to "loot the proceeds of the sales of the Loft residential units," by funneling money to Extell and its affiliates, the affidavit claims. In other words, Fried explained, Extell's actions had the effect of "eliminating the profit, which was supposed to be split," leaving 470 Broome with smaller proceeds while directing large amounts of resources to Extell affiliates.
Meanwhile, there were "numerous other ways that Barnett and Extell misused the company for their benefit and to the detriment of 470 Broome Development and its owners," the affidavit says.
In one instance, Extell allegedly used funds from 470 Broome Development to cover shortfalls when the Rushmore was forced to provide purchasers with a refund of their down payments. The Rushmore was not named in the suit, but Fried confirmed that it is the development in question.
"In order to provide some recompense to the particular Extell entity involved in that project, Stroock forgave invoices to other unrelated Extell projects, including 470 Broome Development," the affidavit says. "Barnett then directed that 470 Broome Development pay an equivalent amount to the unrelated entity that was obligated to provide refunds."
The affidavit also claims that in order to pay attorneys' fees for its arbitration with Placuzzi, Barnett caused 470 Broome to borrow funds from Strategic Soho and incur interest charges.
"While Extell and Barnett may be free to engage in these types of transactions with respect to projects wholly owned by them, they are not authorized to do so by the operating agreement of 470 Broome Development," the affidavit says.
In addition, Extell hired another of its affiliates, Target Construction, as a general contractor, ultimately paying Target some $1.2 million in exchanging for renovating the four residential units in the building. The building had already entered into construction contracts, but Target was permitted to bill for those contractors, vendors and suppliers, and was permitted to charge an additional 15 percent premium in addition "which is unheard of in this industry," the affidavit says.
"The available facts indicate that Target was created for the purposes of improperly increasing the cost of renovations and diverting additional monies to respondents," the affidavit indicates "Indeed, the terms of the agreement were so one-sided in favor of Target that entry into the contract constitutes a breach of fiduciary duty by Barnett."
According to an invoice introduced as an exhibit in support of the affidavit, an attorney for Extell was asked to prepare a contract "skewing in favor of [the] contractor."
At the time of the affidavit, two of the four condo units had been sold, and two remained.
The case is now in arbitration, Fried said.
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Comments
Anonymous
"sour grapes" ?? sounds like a typical day in NY real estate...... sadly
Comment #1 Posted By: Anonymous 02/08/10
Anonymous
Extell is one of the best developers in the city, without a doubt. The stuff the partner claims here against Barnett are standard practices.
Comment #2 Posted By: Anonymous 02/08/10
Anonymous
Barnett should start swimming.
Comment #3 Posted By: Anonymous 02/08/10
Anonymous
If "best" means dishonest, then yes, you are correct Gary. Extell=Thieves=Greedy
Comment #4 Posted By: Anonymous 02/08/10
Anonymous
People in NY real estate have a bad reputation for a reason. Very few are honest.
Comment #5 Posted By: Anonymous 02/08/10
Richard Cranium
Longtime client Gary Barnett of Extell Development Company said Knakal has always exhibited a high level of integrity. “I have worked with Bob for about 15 years and he has sold many properties for me and to me,” Barnett said. “It’s tough to find a broker who works harder. His commitment to produce maximum results is not to be questioned. Here at Extell, we value our relationship with Bob and with the entire Massey Knakal team Birds of a feather.....etc
Comment #6 Posted By: Richard Cranium 02/08/10
Anonymous
#6 More Extell bull....where is Knakal mentioned in this article? Moron...
Comment #7 Posted By: Anonymous 02/08/10
Anonymous
Where is Tony Soprano when you need him? I'd put a hit on Barnett
Comment #8 Posted By: Anonymous 02/08/10
Anonymous
ARE YOU KIDDING ME? Did you just see the 470 Broome Street looting story re: Extell and Barnett that just came out? If Extell wanted to provide a refund to a Rushmore purchaser as part of some secret settlement agreement, why in the world wouldn't this simply be paid out of the Rushmore escrow account where downpayment money should be held? Someone should seriously check the Rushmore escrow accounts.
Comment #9 Posted By: Anonymous 02/08/10
Anonymous
Allegations are just allegations. I would reserve judgment until the litigation is completed. I don't work for him but I have done business with him and I can say that notwithstandinding the badmouthers, he is one of the good guys.
Comment #10 Posted By: Anonymous 02/08/10
Anonymous
#11 - PLEASE DEFINE 'GOOD' By that - do you mean conspiring with Stroock to change offering plans to swindle buyers out of their rights of rescission CLEARLY written in the offering plan? Or, by GOOD do you mean that he directed his Corcoran marketing team to issue bold face LIES to each and every person that walks through the door (for example, lying about the % of units sold in the building, the amenities to be delivered, the fact that there are outstanding complaints and lawsuits against the developer but the sales people say everything is kosher Maybe you are taking a page from Clinton's definition of "IS"? The facts are clear and a matter of public record.
Comment #11 Posted By: Anonymous 02/08/10
Anonymous
#12 - "good" definition was that he always paid my bills on time, he always delivered on his word, and he was a straight shooter with me. "public record" of allegations is meaningless; all i say is let's wait and see what transpires before you send him to the guillotine.
Comment #12 Posted By: Anonymous 02/08/10
Anonymous
I don't understand why you think "public record" is meaningless? Those are the facts - written in black and white. It's great that he pays you "on time" - there are 34 (known) buyers waiting over a year for their right of rescission to the tune of tens of millions of dollars that wouldn't define Barnett as "Good". Facts are facts - to the guillotine!
Comment #13 Posted By: Anonymous 02/08/10
Anonymous
If Barnett is such a great guy, why are people suing him right and left?? HUD investigating ......... I guess he did not send there his campaign contribution.....
Comment #14 Posted By: Anonymous 02/08/10
Anonymous
Hey Raj Rajaratnam of Galleon was supposedly a "GREAT" guy too - in fact, he was loved by all. Seeing a pattern here....
Comment #15 Posted By: Anonymous 02/08/10
Anonymous
great guy usually means "shares the money he steals with me"
Comment #16 Posted By: Anonymous 02/08/10
Anonymous
Say what you will about Barnett. The fact is that he always paid his bills on time and that goes a long way.
Comment #17 Posted By: Anonymous 02/08/10
Anonymous
and Charles Cohen always pays his bills..............eventually
Comment #18 Posted By: Anonymous 02/08/10
Pan Dora
watch out ...... the lid is blowing off..... facades will crumble ..... truths will be revealed......
Comment #19 Posted By: Pan Dora 02/08/10
a partner
screwing a partner....... imagine how a poor customer get treated. this is very bad karma.
Comment #20 Posted By: a partner 02/08/10
stunned
Im stunned to learn that its wrong to pay the expenses of one entity with the funds of a different entity ! I thought gaap meant there was as gap you could slip this stuff through.
Comment #21 Posted By: stunned 02/08/10
Nancy Pants
Extell is quite active so they are a nice target. I have closed many unit sales with them and they could not be nicer. My buyers on the other hand...
Comment #22 Posted By: Nancy Pants 02/08/10
Anonymous
Lawsuit by your partner. LAwsuit by buyers. Being investigated by the State of New York. Being investigated by the feds! Sounds like the walls are closing in on this nice guy! What does this say about the real estate industry?
Comment #23 Posted By: Anonymous 02/10/10
Anonymous
Barnett said there is "not a shred of truth" to Sicis' claims...just like he said, "on all of our completed projects, we do not owe one dollar. when someone is that certain, like when someone says "100%" they are hiding something...
Comment #24 Posted By: Anonymous 02/11/10
Anonymous
Doing business in this City is tough. Barnett has alawys made me money and that is good enough for me. I guess that wasn't the case with Sicis. Maybe he is the one who got greedy.
Comment #25 Posted By: Anonymous 02/12/10
Anonymous
can anyone explain why Barnett partners up with owners rather than buying their properties outright to do these developments?
Comment #26 Posted By: Anonymous 02/12/10
Benjo Saltman
Left out of this article, is the fact that Barnett is know to be one of the most honest and charitable people around. His reputation over the years to the thousands he has helped both in business and in Philanthropy should give anyone who thinks the allegations are true reason to question the truthfulness of it. Even those who don't like him, but know him even a little bit, know he is brilliant and a master strategist. The allegations made against him are those of a very stupid amateurish person. Barnett is in the news all the time, the envy of many and subjected to all types of scrutiny. Thus funneling money from one project to another in an improper fashion in a way that leaves a clear paper trail is idiocy. Those who attack him don't know him, they are either jealous or they didnt get what they want out of him and thus they retaliate by calling him dishonest or greedy. They are both Childish and malicious at the same time.
Comment #27 Posted By: Benjo Saltman 02/27/10
Anonymous
#27 - Gary - that must be your own post. I know that you like to read these things and get very upset when someone says something negative.....
Comment #28 Posted By: Anonymous 02/28/10
Anonymous
Pretty sure Barnett put the Richmond Hill house where he and his wife reside in her name. Good early thinking on his part? I get the sense we all may know very soon.
Comment #29 Posted By: Anonymous 03/03/10
Anonymous
All Rushmore escrow accts held by Stroock should be produced for review by the AG & Feds IMMEDIATELY. If Barnett wanted to settle disputes with buyers there, then why wouldn't he have simply made the reimbursement payments from the escrow accounts? Why would he and Stroock have to concoct this multi-step plan to make these payments happen? I'll bet you a whole lot of $ that delving into this deeper will provide more clear evidence of fraud.
Comment #30 Posted By: Anonymous 03/03/10
Anonymous
The reserve fund should be checked. With regard to new condos (not conversions) typically this fund is created and added to as each closing occurs. It's a common contract stipulation that an amount equal to 2-months worth of common charges is paid into the reserve fund by each purchaser at closing. Since the first several years for most new condos there is a sponsor-controlled board - this gives the developer automatic access to reserve funds. Seems to me that in buildings like Rushmore, where a reasonable cause for concern has now been established, the AG should require developers to submit complete reserve fund statements for review.
Comment #31 Posted By: Anonymous 03/04/10
Anonymous
For those who don't know, Barnett just won a case involving commission payments due back because of units at The Lucida that failed to close (see other Real Deal story). So a duly executed contract says what it says and should be enforced as written...ergo..."It kind of speaks for itself" (Barnett quote from this other article). I COULDN'T AGREE MORE. For the same reason Barnett won these commission payments back, this is also why he is going to lose the Rushmore case with the AG. 9/1/08 was the outside date; they didn't close the first unit until 2/12/09; rescission is due. It's really that simple.
Comment #32 Posted By: Anonymous 03/05/10