The Real Deal New York

Six Sigma faces allegations of financial mismanagement at West Chelsea site

Lender accusing Jason Lee's firm of skimming from construction budget at 435 W. 19th St.
By Rich Bockmann | September 20, 2018 06:00PM

Jason Lee and 435 West 19th Street (Credit: Google Maps)

UPDATED, Sept. 20, 7:37 p.m.: Six Sigma NYC’s condominium development in West Chelsea is in peril amid allegations from the project’s lender that company founder Jason Lee has been skimming money off the budget through a kickback scheme.

The development firm took the dire step of putting the under-construction project at 435 West 19th Street into bankruptcy earlier this month in order to avoid a foreclosure auction, court records show.

Six Sigma’s lender on the project, Soho-based Churchill Real Estate Holdings, said it found “serious accounting and financial irregularities” with the project, and suspects the developer of misappropriating funds from the budget and demanding kickbacks from a contractor.

“Churchill learned from a contractor on the project that [Lee] had opened an account with the contractor and, through his control of the account, misappropriated approximately $292,000 in construction financing in just three months,” Churchill’s attorneys wrote in bankruptcy filings.

Lee disputed Churchill’s claims in an email to The Real Deal, saying they were merely an attempt to seize the property under false pretenses.

“Through this process I have been subjected aggressive public character attacks, manufactured claims, unilateral actions and unfounded allegations,” he wrote. “The $60 million project is approximately 40 percent complete and we have every reason to believe a beautiful building will be delivered.”

A representative for Churchill declined to comment.

The building in question is an eight-story, 27,000-square-foot project on the trendy Western side of Chelsea with a total projected sellout of $60 million. It had originally been dubbed Highline 19 but was recently rebranded as The Pool House. Designed by Pei Partnership Architects – the firm founded by the two sons of I.M. Pei – the project sits a block away from the High Line, and each unit comes with its own private pool.

It’s the kind of project – pricey, boutique condo –that Six Sigma, which Lee founded in 2009, specializes in.

Six Sigma bought the property, formerly the site of sound-stage manufacturer City Stage, for $21 million in 2014, and financed the deal with a $29 million acquisition and pre-construction loan from Greenwich, CT-based Knighthead Funding.

The developer refinanced the project in November 2016 with a two-year, $37 million construction loan from Madison Realty Capital. The loan came with two-six month extensions and the project was expected to be finished in 12 to 18 months. Six Sigma altered the project, breaking its six full-floor units up into 20 smaller apartments.

But in February of this year, Six Sigma again refinanced the project with a $36 million first mortgage and a $4 million mezzanine loan from Churchill.

The loan came with a requirement for Lee to sign a personal guarantee, and he was expected to inject at least $1.6 million of new equity into the project.

Work on the project stalled, however, and in July the Department of Buildings hit the project with a partial stop-work order for failing to provide barriers for the storage area.

Churchill said in court documents that it started to become concerned about the project schedule and apparent delays when on July 27, Lee made his fourth draw request on the loan for steel, concrete and demolition work.

Churchill said it contacted one of the contractors on the site, who said he received only $70,000 worth of $364,336 budgeted for the project. Churchill claims the contractor explained that Lee directed him to set up a company account at TD Bank and to add the developer as a signatory.

Lee would deposit checks from Churchill into the TD Bank account, and then transfer them to another account he controlled, the lender alleges. When Churchill confronted Lee about the transfers, Lee said he directed them there because his contractor owed Six Sigma for supplies. Lee said he directed the money back into the project, but refused to provide proof, Churchill claims.

“Despite his claims that he had taken money from [the contractor] for the project, [Lee] simply refused to provide financial records supporting his claim,” Churchill said in court filings.

Churchill filed a UCC foreclosure action and scheduled sale of the mezzanine loan collateral for Sept.10. That’s when Lee threw the project into Chapter 11 bankruptcy and removed himself as manager of the development, according to the court documents.

Lee appointed Rockville Center-based attorney E. Michael Rosenstock in his place, but Churchill noted that Rosenstock is Lee’s personal attorney and questioned whether the developer really handed over control of the site.

Churchill is run by Justin Ehrlich, formerly one-half of condo developer VE Equities; Sorabh Maheshwari, formerly a principal at Onex Real Estate; and Gary Podell, a former partner at Metropolitan Realty Group. Its previous deals include boutique Soho condo projects such as 150 Wooster Street and 204 Forsyth Street, according to its website. The lender has asked the court for permission to subpoena Lee for his records, and on Thursday filed paperwork asking the court to appoint a trustee in the case.

This story was updated to include a comment from Jason Lee.