Two real estate investors filed a lawsuit seeking at least $390 million from developer Related Companies claiming the firm misled them when it partnered with the pair to buy the Far Rockaway affordable housing complex Ocean Park Apartments in 2005.
Investors David Workman and B. Tuckey Devlin, partners in an entity called DB Development, claim Related induced them into partnering with it, but then used the deal for its own political advantage.
The individuals claim Related and its subsidiary Related Apartment Preservation, assured them that if they bought the complex together, it would remove the 602-unit property at 125 Beach 17th Street from the Mitchell-Lama affordable housing program and convert it to market-rate apartments or condominiums. Such a move could have netted $200 million in profits, the suit filed in New York State Supreme Court Tuesday says. But it never happened and the property has been maintained as an affordable complex.
“[Related’s] refusal to withdraw the property from the [affordable housing program] has completely eviscerated the value of [DB Development’s] rights to ‘cash out,’” the complaint says. “The principal, if not sole, reason for refusing to withdraw from the [affordable housing program] was so that Related could curry favor with federal, New York City and New York state officials and politicians with respect to other lucrative real estate ventures,” the suit continues.
The suit cites a November 2009 interview with Jeff Blau, Related’s president, on The Real Deal Web site in which he was quoted saying, “For us, it’s about preservation, versus conversion to market rate.” Blau was not named in the suit.
The suit says, “None of this was disclosed to plaintiffs in connection with the acquisition of the property.”
Workman and Devlin’s suit was filed just a month before they have the right to demand Related buy their minority share of the company, but since it remains a rent-stabilized complex, it is worth just a fraction of what they once anticipated, the court papers say.
A spokesperson for Related said the company owns 13,000 units of affordable housing, and has never converted an affordable housing unit it its holdings to market-rate.
“Any allegation that we would entertain removing any of our affordable units from an affordable program is simply false,” the company said in a statement. The firm declined to elaborate, citing a policy not to comment on pending litigation.
An attorney representing the two investors declined to comment.
Related is one of the largest developers in the country, and builds and owns both luxury projects such as the Time Warner Center in Lincoln Square and Superior Ink in the West Village and affordable projects spread around the city such as the 1,689-unit Manhattan Plaza in Clinton.
Workman is a broker with commercial firm First New York Realty, and Devlin is an executive vice president with Hemingway Hotels and Resorts, according to its company Web site.
According to the complaint, in 2002 Workman and Devlin secured an exclusive option to buy Ocean Park for $34.5 million from then-owner Cord Meyer Development, but needed a partner to close the deal. The two-building, oceanfront property built in 1972 was part of the state Mitchell-Lama financing program, but could be removed from it in 2001 or 2002. Exiting from the program, which caps rents at affordable levels, would allow the apartments to be rented at market rates or sold as condominiums.
“Sophisticated players in the real estate market scan the wires to find these rare golden opportunities,” the suit says.
Workman and Devlin went on the hunt for partners and by November 2002, after turning down two other firms ready to partner with them to convert the affordable complex to free-market rentals or condos, they settled on Related after the firm gave its assurance it would take it out of the program, the suit claims.
In April 2003, Related and DB Development formed a partnership, with Related as the managing partner with an 87.5 percent interest, and DB with a 12.5 percent share, the complaint said.
Days later, Related signed a contract to buy the property for $34.5 million, the court papers indicate.
But on Feb. 15, 2005, just two days before the sale closed for $34.5 million, Related enrolled the complex in another affordable housing program for another 40 years, significantly limiting the value of the buildings, the court papers say.
The suit seeks at least $300 million because its share of the partnership was allegedly unfairly cut from 20 percent to 12.5 percent; another $46 million for allegedly “alienating and antagonizing” Cord Meyer which refused any additional deals; and $40 million for allegedly breaching its fiduciary duty by keeping the project affordable; and another $4 million for nine other claims.