The Real Deal

• Email this article
• print
• Comments(19)

Tick tock for Leviev

The mogul appears to be in a race to cash out.

In July 2008, Lev Leviev's Africa Israel Investments entered a deal with Versace to convert the landmark Clock Tower building on Madison Avenue into luxury condominiums, a project that would rival the biggest conversions in U.S. history.

However, it now appears as if the only ticking clock is the time bomb ready to destroy Leviev's far-flung empire. After investing billions of dollars in New York real estate at the top of the market, he's now in a race to cash out before his lenders catch up to him.

"Africa Israel [now called AFI Group] lost 90 percent of its value [in 2008]," said Sam Heskel, executive vice president of HMS Associates, a Brooklyn-based real estate appraisal firm. "He's struggling. He's trying to sell off a lot of properties."

Just last month, Leviev settled a high-profile legal throwdown with developer Maurice Mann, who stepped down as manager of their disastrous condominium conversion of the Apthorp, a landmark Upper West Side apartment building that was facing a foreclosure threat by lenders Apollo Real Estate and Anglo Irish Bank.

Leviev and Mann are working with the Apthorp's newly named management group, the Feil Organization, to come up with a viable business plan to rescue the project from complete collapse. Sources familiar with the talks say the parties are looking at how to recalibrate prices at the 163-unit building to spark additional sales; failing that, the building may have to be converted back into a luxury rental.

A New York market analyst, who asked not to be identified, said Apollo will do whatever it can to prevent the deal from collapsing, because the real estate firm, which lost an earlier bid to acquire the building, has coveted the Apthorp for years.

"The partnership between Leviev and Mann, as far as I'm concerned, is wiped out right now," the analyst added.

Apthorp officials, including Leviev, declined to comment for this story.


Making a splash

Leviev, a billionaire investor born in Uzbekistan, entered the U.S. real estate market several years ago after expanding his Israeli-based diamond business into Eastern Europe and the former Soviet Union.

Many of Leviev's New York deals centered around a partnership formed in 2002 with Brooklyn-based developer Shaya Boymelgreen. Under the partnership, called Leviev Boymelgreen, the two investors developed thousands of residential apartments in the city, ranging from 88 Leonard Street, a 334-unit rental building in Tribeca, to a 409-unit luxury condominium conversion at 20 Pine Street in the Financial District.

However, the relationship between Leviev and Boymelgreen went south in 2006, reportedly due to a conflict over Boymelgreen's plans to expand in South Florida, and resulted in a breakup of the partnership.

Attorney Ed Mermelstein, who specializes in real estate law both here in New York and in Moscow, believes that many of Leviev's investments in New York ran into trouble because Leviev was not in the city to oversee them personally.

"The fact is, the way Mr. Leviev made money was very hands on. [But] my understanding is that in New York he left it for others to oversee," Mermelstein said.

By all accounts, Leviev made a big roll of the dice, starting with several high-profile investments in 2005 and 2006, and the fallout from those deals has already begun.

Leviev, through his partnership with Boymelgreen, as well as his own separate residential ventures, was heavily exposed to an immature market in the Financial District, which has accumulated a glut of new apartments in recent years. In fact, some critics consider 20 Pine, marketed by broker Michael Shvo, to be a symbol of overbuilding in the Financial District.

And 20 Pine, along with many of the competing luxury condominiums in FiDi, catered to foreigners and investors, who are now competing with sponsors to resell units in a declining market. Records from StreetEasy, a real estate data site, show 61 apartments for sale, at prices ranging from $630,000 to $3.65 million. The developers have faced multiple lawsuits from buyers frustrated by extensive construction delays.

AFI Group officials declined comment for this story, but the company, which is publicly traded on the Tel Aviv stock exchange, has been hurt by the international credit crisis that followed the collapse of Lehman Brothers in September.

For the first nine months of 2008, AFI Group reported a loss of 2 billion Israeli shekels ($521 million); it posted a profit of 4.7 billion shekels ($1.2 billion) a year earlier.


Changing times

Leviev's 2007 acquisition of the former New York Times building symbolizes some of the problems he faces in the U.S. real estate market. AFI Group paid $525 million for the iconic building at 229 West 43rd Street, which has been vacant since the newspaper relocated to its new headquarters, designed by Renzo Piano, at 620 Eighth Avenue.

After a $175 million renovation, CB Richard Ellis was in talks to lease the 675,000-square-foot site, now called the Times Square Building, to Viacom. However, Viacom decided to remain at its 1515 Broadway headquarters, where asking rents were hovering at $85 a square foot.

Howard Dolch, executive vice president at Lansco, said the slow economy could mean a long wait for a new corporate tenant to commit to such a large block of space.

"The question is, 'Who is relocating right now?'" said Dolch. "Right now there's more retrenchment than expansion, and more discussions about renewals than about relocation."

In November, in a move designed to help pay down its debt, AFI Group completed a deal to sell 23 Wall Street, 15 Broad Street and a 49.9 percent stake in the Clock Tower at 5 Madison Avenue to an unnamed Asian investment group for $150 million. The company also sold 49 percent of its stake in the Times Square Building for $49 million, plus the assumption of debt, which is reported to be $720 million.

The sales were expected to help AFI Group pay down $120 million in bank debt.

Leviev had been planning to market the 55-unit Clock Tower project to wealthy Russian investors, playing to a market where he has strong ties and financial relationships. However, the Russian economy has sagged as a result of the fall in energy prices and the collapse of the global credit markets.

Eric Anton, senior director of Eastern Consolidated, a Manhattan-based commercial brokerage, said that right now, Leviev's plan for the Clock Tower seems more like a vanity play than a realistic plan for the market.

"It doesn't matter who the designer is, people aren't buying," said Anton. "The guy is a billionaire, [so he thinks] he can do whatever he wants. The reality is the condo market is really hurting."

By late December, AFI Group announced that it would suspend all projects worldwide not currently under construction. In early January, the company announced plans to cut 10 percent of its work force.

Leviev's best-known residential investment was the partnership he entered with Mann for the Apthorp at 390 West End Avenue. Mann, a veteran New York developer, acquired the building in late 2006 at the height of the market for a record $426 million. Leviev later stepped in to become his partner in the investment, and the two agreed to convert the 163-unit rental building into one of the most expensive condominiums in the city, selling for more than $3,000 a square foot.

In March 2007, Anglo Irish Bank agreed to provide a $393 million first mortgage and Apollo Real Estate Finance Corp. (AREFIN) agreed to provide $135 million in mezzanine financing to help finance the deal and provide for a $95 million renovation.

Most experts considered the plan extremely risky from the start, as the Apthorp was acquired for $2.6 million per apartment, setting a record per-unit price in New York. Under the Martin Act, the conversion was a noneviction plan, which meant that despite the building's history of celebrity residents — including Nora Ephron, Conan O'Brien and Al Pacino — the new owners could not legally evict more than 80 rent-stabilized tenants, some of whom were paying less than $1,000 a month.

Tenants say the owners have since gone after rent-stabilized tenants with frivolous lawsuits, with some claiming that the building is not their primary residence and others offering more creative accusations.

"There was a lawsuit against a woman on [the top floor]," said Ron Blumer, president of the Apthorp Tenants Association. "She put some plants outside of her window and they claimed she infested the building with ants. The judge laughed them out of court."

So far, sales have been nonexistent. Court records indicate that the Apthorp signed one contract in early December for $6.1 million and had deal sheets out for two additional sales.

In December, Mann filed a $500 million suit against Anglo Irish Bank, AREFIN, Petra Fund and Guggenheim Structured Real Estate, claiming that AREFIN wrongfully declared the loan out of balance and tried to force him into making a $22 million "ransom" payment to keep the building out of default. He alleged that AREFIN's parent company Apollo Real Estate was a rival bidder for the Apthorp in 2006, and wanted to use this opportunity to snatch the building away from him.

According to court records, the lenders believed that Mann's sales projections were unrealistic based on the seizing up of the credit markets.

By late December, Leviev had rushed into court to have Mann removed as managing partner of the Apthorp. He alleged that Mann had illegally "warehoused" apartments, engaged in out-of-control spending, and rejected a November plan to hire brokerage CB Richard Ellis, which would seek a buyer for the Apthorp at the price of $552 million.

Sources close to Mann questioned whether Leviev was working in concert with Apollo and Anglo Irish Bank, as he was under tremendous pressure to raise capital for his flagging businesses.

"We think they've acted in bad faith here for an ulterior purpose, perhaps because of their financial troubles on the Israeli stock exchange," said one official familiar with Mann's thinking.

Attorneys for Mann and Leviev were scheduled to finalize a deal that would replace Mann as the managing partner with New York-based Feil Organization.

Officials familiar with Leviev's thinking say that the building would likely operate as a rental until the condo market bottoms out. Mann continues to hold a stake in the building.

Even if the Apthorp conversion can be saved, Leviev's real estate troubles will still remain — and be extensive. He remains committed to the Edge, a Las Vegas casino-hotel development whose investors include New York developer Alex Sapir. The 6,745-room hotel would be the world's largest hotel if completed, but construction is not expected to begin until 2013.

In the meantime, AFI Group has basically halted any new construction on any real estate projects around the world, and has announced plans for a new round of job cuts.

• Email this article
• print
• Comments(19)