Experts predict more partnership tension among investors in weak commercial real estate market

TRD New York /
Feb.February 01, 2010 01:22 PM

As pressure mounts on underperforming commercial real estate in New York City, partnerships are likely to rely more heavily on legal minutiae to battle amongst themselves, legal experts said.

An expected lawsuit by state Attorney General Andrew Cuomo against Vantage Properties could give ammunition to an equity partner of the major city landlord to restructure ownership or remove the landlord from its position in the partnership, legal experts speculated.

In other cases, partners are suing one another in financial disputes. Investors John Zaccaro Sr. and John Zaccaro Jr. filed suit last year against their partners at a redevelopment at 200 Lafayette Street in Soho, over how best to respond to a foreclosure action brought against their company.

Cuomo’s office filed a notice last Thursday that it intended to file a civil suit against Vantage Properties this week, alleging the company engaged in deceptive and harassing practices against some of its tenants in apartments in Manhattan and Queens.

Several real estate attorneys said it was possible that the landlord’s financial backers, which include private equity investor Area Property Partners, could use conventional clauses in operating agreements that provide for the buying out or expulsion of a managing member for offenses such as willful misconduct or gross negligence that had a serious negative impact on the company.

The attorneys, who were not involved with the Vantage litigation, added that such expulsions are rare, but could become more common as pressure mounts within commercial real estate.

“It does not happen a lot,” attorney Scott Vetri, a partner at law firm Katten Muchin Rosenman, said in an e-mail. “But it is likely to occur more often given the cycle we have been through.”

Vantage, headed by president and CEO Neil Rubler, partnered with a number of lenders, including Area Property Partners (formerly known as Apollo Real Estate Advisors), to buy more than 125 buildings with more than 9,500 mostly rent-stabilized apartment units since 2006 in, Harlem, other parts of northern Manhattan and Queens.

Area Property, which Cuomo did not name in his announcement, was the equity partner with Vantage for the purchase of two Queens portfolios with more than 4,000 units in 2006 and 2007. Area Property and Vantage declined to comment, and the language of their partnership agreements was not available.

Another financial backer, Prudential Insurance, which city records show lent a first mortgage of $175 million to Vantage and Area Property for the 2007 portfolio purchase, also declined to comment.

Real estate professionals say that lawyers are combing through agreements in all types of distressed properties looking for ways to get out of such partnerships.

Most large real estate ownership entities are limited liability companies with a managing member, typically the active landlord of the property, and passive members, who are investors.

Vetri said most partnership agreements contain provisions defining the causes that may lead to the removal of a partner as manager, but the misdeeds need to be serious.

“These triggers typically include a felony conviction as well as a determination by a court of fraud or any crime or civil action involving dishonesty, the misappropriation of funds or the breach of a fiduciary duty,” he said in an e-mail.

Thomas Huszar, a counsel at law firm Tarter Krinsky & Drogin, said that if Cuomo’s allegations were proven, Vantage’s partner could look to these types of clauses to force it out.

“It would not be unusual in these types of arrangements to see that, if proven, the alleged activities underlying the suit could constitute a material breach by Vantage of its obligations/duties to the partnership which would afford [Area Property] a series of remedies including possibly a buyout or removal of Vantage,” he wrote in an e-mail.

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