Manhattan House’s financial health under scrutiny

alternate textCity Council member Dan Garodnick (left) and state Assembly member Jonathan Bing (right), have held discussions with the developer over the financial condition of Manhattan House (far right).

New details about the financing behind the massive condominium conversion at the Manhattan House are raising questions among critics and some public officials about the long-term viability of the Upper East Side project.

Documents filed with the state attorney general’s office show that in 2009, HSH Nordbank, which holds a $750 million loan on the building at 200 East 66th Street, established a special fund to help the developer, O’Connor Capital Partners, meet its monthly expenses at the property.

“My concern about Manhattan House is that one day the sponsor says that they have no money and that basic repairs and maintenance cannot be maintained,” said City Council member Dan Garodnick, who, along with state Assembly member Jonathan Bing, has held discussions with the developer over the financial condition of the building. Developer O’Connor Capital Partners has insisted the conversion is in good shape, Garodnick said.

Nordbank, which is being broken apart as part of a massive government restructuring of the lender, established a fund to help O’Connor meet its $2.7 million monthly payments at Manhattan House, according to the documents.

The disclosures, made in an August 2009 amendment to the offering plan and included in the documents filed with the attorney general’s office, reveal that after nearly two years of sales, developer Jeremiah O’Connor, managing partner at O’Connor Capital Partners, had closed only 88 unit sales in the condominium, with 487 unsold units remaining. Of the unsold units, 205 were occupied by existing rent-stabilized and market-rate tenants, and the rest were vacant and generated no additional income.

O’Connor, who helped lead the record $623 million acquisition of Manhattan House in 2006, had monthly expenses of $1.7 million to mortgage payments, plus $631,000 in common charges on unsold units and $424,000 in real estate taxes, according to the amendment.

Attorneys for the developer told The Real Deal that the lender and the developer are working together to make sure the building is properly funded, adding that the details of O’Connor’s relationship with HSH Nordbank are not anyone else’s business.

“This is a common occurrence,” said Stuart Saft, who represents the developer. “It’s in the lender’s interest as well as the sponsor’s to make sure everything is funded.” 

Saft added: “Based upon the regular discussions we have with them they consider this a performing loan and they’re very happy with it.” He said the lender and developer have agreed to contribute part of the proceeds from completed sales to the fund. The building has since closed another 20 apartment sales, according to city records, and has a number of other units under contract, but not yet closed because buyers either cannot get financing or do not want to close.

Documents show that the condominium’s reserve fund, which is held to protect the building if major capital improvements are requited, had a balance of $2.4 million.

Tenants and lawyers for numerous buyers insist this is the first time they have seen the August amendment, and fear that the developer has not been forthcoming about the true financial picture at the building.

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The Real Deal reported that Nordbank was searching for a plan to salvage the project more than a year ago, but the developer sent a letter to residents insisting that it was solvent. 

“Obviously the shortfall is considerable here between what they receive and what they have to pay,” said one legal source familiar with the building who asked not to be identified. “If that’s the case obviously there’s got to be an end game for this.”

Attorney Andrew Weltchek, who is not affiliated with Manhattan House, said the bank has likely made a business decision that it’s better to help this project survive than take it over.

“At the scale of these loans, the bank may not be able to afford to put the [loan] into default,” Weltchek said.

HSH Nordbank officials did not return repeated calls for comment, but the bank’s 2009 annual report notes that it has placed its U.S. real estate loans into a so-called “bad bank” that will include all of its non-core assets.

“In the course of its realignment, HSH Nordbank is concentrating its real estate business principally on Germany,” the annual report says. “Activity abroad, much of it in the USA, the United Kingdom, France, the Netherlands and Scandinavia, is no longer conducted within the core bank.”

Nordbank reported that at the end of 2009, the real estate portfolio within the restructuring bank was $21.4 billion.

The bank did not break out U.S. only data, but California-based Foresight Analytics shows the bank had a total of $5.8 billion in loans outstanding in the United States and $1.14 billion was listed as non-accruing, which means no interest is being paid and there is no clear expectation on the loan balance.

Earlier this month, HSH announced it would move billions of dollars in distressed loans into a so-called restructuring bank, part of a government bailout plan in Germany to rescue the shipping and real estate lender from insolvency.

Garodnick, one of the leading advocates for tenants in the $5.4 billion Stuyvesant Town and Peter Cooper Village debacle, said that Manhattan House tenants are similarly concerned about the fate of their property.

“We’ve heard from tenants who were concerned about the status of the building, the impact of any of the difficulties at Nordbank on this deal and the amount of money in [the Manhattan House] reserve fund.”

Saft says the complaints are coming from tenants looking for a discount, but Manhattan House tenants have alleged there’s a pattern of harassment by the developer against existing tenants.

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