As default rates surge in New York’s increasingly volatile real
estate market, a new generation of troubled assets is being overseen by
the courts.
Since late 2008, New York area judges have placed several
high-profile condo and rental complexes into receivership, appointing
trustees to maintain the quality of the asset and make sure rental
income, taxes and common charges are not being diverted.
Some of the most notable receivership cases in the city are at the
site of last year’s crane’s collapse on East 51st Street in Turtle Bay,
the embattled Riverton complex in Harlem and at Rector Square in
Battery Park City, whose financial troubles have been chronicled on The Real Deal’s
Web site and elsewhere. Other, lesser-known buildings have seen
receivers appointed in recent months, like 174 West 137th Street, a
small rental building that defaulted on a $2.4 million mortgage loan
from JPMorgan Chase, and 215 East 3rd Street, a building that defaulted
on a $1.7 million loan from Washington Mutual.
“Our interest in receivership is mainly we think of it as a pro
bono case,” said Michael Green, president of Murray Hill Properties and
the receiver at 174 West 137th. “We could get a call tomorrow and they
say ‘we’ve settled.'”
Attorney Chris Sullivan, whose firm represents Anglo Irish Bank,
among other clients, said the situation differs today from the last
recession.
“What we’re seeing today that we did not see in the last economic
downturn is unfinished construction projects in which there is some
rental income at the property, but there remains substantial
construction work to be completed,” he said. “The property is facing
threats to health and welfare, or just to the viability of the property
itself, absent the intervention of the court.”
Indeed, Anglo Irish is involved in one of the most high-profile
receivership cases in New York — the foreclosure of the 304-unit Rector
Square.
In February, the bank filed suit to foreclose on developer Yair
Levy, who defaulted on $165 million in loans. Levy defaulted after
converting the rental building to a condominium, leaving the building
with a toxic mix of condo owners, rent-stabilized tenants, affordable
housing recipients and hundreds of unsold units (see Yair Levy: Condo king loses crown).
Veteran trust attorney Michael Miller was named by the court as
receiver on the property, which grants him the authority not only to
collect rents and common charges for the building, but to complete
construction on Rector Square’s common areas, which have been neglected
since workers walked off the job in December.
Late last month, legal sources said Miller was about to name the
Related Companies, which had originally developed the property, as the
new managing agent of the building. Sources say that several investors
have approached Miller about buying Rector Square’s unsold inventory
and reselling the units. Miller said, however, that no units would be
sold until the building was more habitable.
Like most receivers, Miller was required to post a surety bond to
protect the property from employee theft or fraud. Due to the
complexity of the case, the bond was $680,000, a figure considered high
for such cases, and he had a difficult time finding a firm to take the
risk.
Miller’s compensation was set by the court, which is generally
maxed out at 5 percent of the revenue the receiver generates from
collected rent. He says he logged 134.5 hours through March 20, which
would have generated $75,000 in fees through his regular practice.
Under the receivership payment schedule, his income is $15,000. Still
he believes the job is worthwhile.
“In terms of economics for my law practices, it’s not a lot of
money,” said Miller. “I like doing civic work. This is not exactly
that, this is sort of a meshing of the two. I have to devote enough
time to the rest of my practice so it doesn’t go down the drain.”
New standards
Since the last downturn in the 1990s, significant changes have been
made to the way guardians and receivers are selected. Scandals
involving political patronage appointments and theft during the 1990s
led the courts to require fiduciaries to account for their spending and
decisions regularly.
It also required receivers to be listed in publicly available databases. Currently there are 349 receivers listed in Manhattan.
In one of those high-profile cases, Brooklyn attorney Helene Blank
was named receiver of a condo project at 303 East 51st Street, the site
of the March 2008 crane collapse, which left seven people dead and
dozens injured.
The site had been the subject of numerous complaints by residents
in the Turtle Bay area, alleging improper zoning. Following the crane
collapse, the Department of Buildings revoked construction permits
issued to the lead developer James Kennelly.
In August, senior lender Arbor Realty Funding filed suit against
Kennelly Development Co., alleging that the firm had defaulted on more
than $70.3 million in loans.
Also as a result of the accident, more than $500 million in claims
were filed against the city, not to mention millions of additional
claims against Kennelly’s firm.
However, there was still a need to collect existing rent while
resolving the outstanding claims. As part of the order naming Blank as
receiver, state Supreme Court Judge Carol Edmead ordered that Parker
Madison Partners be named managing agent of the receiver, with Arbor
making monthly payments of $50,000 to the receiver’s account, which
included payment for the receiver, legal fees, managing agent and other
expenses.
Test case
Another high-profile receivership case involves developer Larry
Gluck, who recently defaulted on a $225 million mortgage loan for the
1,230-unit Riverton complex in Harlem.
Wells Fargo, the San Francisco-based lender, sued Gluck and his
firm RP Stellar Riverton, who refinanced the property under a $225
million loan in December 2006 from Deutsche Bank unit German American
Capital Corp. The loan is part of a massive commercial mortgage
pass-through certificate, and Wells Fargo, as trustee, alleges that
Gluck defaulted on interest payments that came due in October 2008.
The deal is being closely watched by Wall Street investors because
the Riverton loan is one of the city’s largest and most troubled CMBS
deals.
Like many who bought at the height of the market, Gluck planned to
renovate a large number of apartments into market-rate units.
Documents filed with the Securities and Exchange Commission show
that when Gluck acquired the building, the complex brought in an
average rent of $14.51 per square foot, with 92 percent of the building
rent stabilized. Gluck told investors he could more than double the
rental income to $36.68 per square foot by converting 53 percent of the
units to market rate.
“Like a lot of people, Gluck paid entirely too much for this
property,” said state Assemblyman Keith Wright, a resident of Riverton
and former head of the building’s tenant association. “He offered
people $10,000 to move out of their apartments and move into other
units. As a tenants association, we said, ‘Don’t take a sucker’s
deal.'”
Not only did Gluck fail to dislodge most of the Riverton’s
rent-stabilized tenants, he burned through the complex’s $19 million
reserve fund.
In February, the court named Seymour Boyers, an attorney and former
associate justice in the state’s Appellate Division, as the receiver.
Boyers, who did not return calls for comment, is a former city
councilman from Queens and was on the state’s fiduciary appointments
commission.
The court order gave Boyers the power to collect rents from tenants
and to lease new apartments for up to two years. Meanwhile, a February
auction of a $25 million mezzanine loan by Hartford, Conn.-based Realty
Finance Corp. was canceled.
Gluck attorney Stephen Meister said the developer was in “good
faith settlement negotiations” with the Riverton’s lenders, and felt
“positive” about reaching an agreement.
Meanwhile, Jamie Heiberger-Jacobsen, a New York real estate lawyer,
said she has recently applied to become a receiver in anticipation that
a growing number of properties will need them. “I personally haven’t
been involved in anything yet, but we’re slowly starting to hear this,”
Heiberger-Jacobsen said. “Over the course of the next few months,
you’re really going to see it.”
Ron Glass, founder of Atlanta-based GlassRatner Advisory &
Capital Group, said his firm has just opened its first New York office
at 424 Madison Avenue, because he also expects to see increased demand
in qualified receivers.
“There’s a lot of competition in all markets and more competition
is coming,” said Glass. “Today a lot of people that are underemployed
or out of work are looking at some way to generate revenue.”
However, Percy Pyne, chairman of the Pyne Cos., warns that lenders
will do almost anything to prevent a property from going into
receivership, because once that happens the ability to manage the asset
is diminished.
“I would think the worst thing for the lender and the property is
[to hand it over to a] receiver, unless there are two or three people
fighting over who owns it,” said Pyne. “Really, a receiver is a last
resort.”