AG investigating stalled W. 48th Street condo

Investigation comes as tower's developers sue to block debt sale
By David Jones | June 08, 2011 02:34PM

Eric Schneiderman and 306 West 48th Street

Attorney General Eric Schneiderman has begun to issue subpoenas in an investigation into the collapse of the Sorrento New York, a 43-story luxury condominium tower where a group of Irish investors allege their deposit funds were misappropriated by the developers, The Real Deal has learned.

The probe centers on whether developers, which include Esplanade Capital’s Jay Eisenstadt, and brothers Kevin and Donal O’Sullivan of Time Square Construction and Navillus Contracting, respectively, improperly co-mingled $17.1 million of deposit funds with operating money at the tower, which is at 306 West 48th Street, before a bulk purchase deal with Ireland-based Sorrento Asset Management, fell apart in 2009, according to sources familiar with the case.

The lenders, PB Capital and TD Bank, entered a tentative agreement to sell the property’s $84 million debt at a discount of at least 10 percent, sources say, and the AG is exploring whether the lenders knew about or at least turned a blind eye to the misappropriation in order to salvage the property after the developers defaulted.

“The bank is playing it a bit soft, like ‘we didn’t know [what was going on] and we want to foreclose,’” said an investor familiar with the probe.

The West 48th Street building is now the subject of a lawsuit filed Monday in the New York state Supreme Court by the developers, who allege a group of Toronto investors led by Eli Dadouch of Firm Capital used confidential information in a deal to buy the debt from the lenders, PB Capital and TD Bank. Manhattan-based broker David Yarden of David Yarden Real Estate was alleged to have arranged the deal with the bank to buy the debt on behalf of the investors.

Sources say the lenders have shown the building to dozens of investors in New York, in a bid to unload the troubled property.

Dadouch told The Real Deal that he was contacted by the developers on the property, but had nothing to do with the project, and must have been the subject of mistaken identity. Yarden did not return calls seeking comment.

As The Real Deal previously reported, PB Capital, the U.S. subsidiary of Germany’s Deutsche Postbank, filed suit in 2010 to foreclose on the property after the developers defaulted. The developers had a deal to sell the apartments in bulk to Fuerta Property, a unit of Sorrento, which would then resell the units.

As part of the deal, BridgeStreet Worldwide, also a unit of Sorrento, would operate part of the property as an extended-stay hotel and Fuerta would resell the condo units. As The Real Deal previously reported, Brown Harris Stevens in April 2009, listed a portfolio of 45 apartments at the building for $61.6 million, based on 33,285 square feet of space. The listing, which was pulled from the market in August 2009, included an optional 15-year lease agreement through BridgeStreet. A similar bulk deal was involved in the collapse of a separate project at 47 East 34th Street that iStar Financial recently foreclosed on and sold the debt to CIM Group.

Amendments to the condo offering plan filed with the AG’s office show that a group of Irish investors signed contracts to buy apartments in the 122-unit building between December 2007 and June 2008, and sources say that some of the buyers made 15 percent down payments, while others paid for their apartments in full.

After filing suit in 2010, the lenders appointed a receiver to oversee the building, and have brought in numerous investors to the property to sell the debt and mitigate their losses. But, a real estate executive familiar with the project said the lenders have been repeatedly turned down because the building “has too much hair on it.”

Sources say that the buyers have repeatedly demanded an accounting and release of their funds since the foreclosure suits were filed, but the lenders have refused to budge. The AG investigation is looking into at what point the lenders knew that the escrow funds had been compromised and whether or not they knowingly looked the other way.

TD Bank spokesperson Jennifer Morneau said it was company policy not to discuss legal matters. PB Capital, Esplanade and Time Square Construction officials did not return phone calls asking for comment. And a spokesperson for the AG declined to comment.