Eli Karp’s Flatbush apartment project just said hello to a new owner.
The property’s mezzanine lender, Jeff Simpson’s Arch Companies, won a UCC foreclosure auction for equity interests in Karp’s Hello Nostrand, according to a source familiar with the matter. By acquiring the interests, Arch Companies is on track to take control of the site.
The development, at 1580 Nostrand Avenue, has been at the center of one of the most heated Brooklyn real estate battles in recent memory.
Greg Corbin, the head of bankruptcy and restructuring at Rosewood Realty, spearheaded the sale.
Karp’s Hello Living bought the site for $13 million in 2014 with plans to build an apartment complex.
But as construction started he ran into trouble with lenders. He pointed the finger at one in particular: Madison Realty Capital. In a lawsuit, Karp alleged Madison “manufactured defaults” on his loans in order to jack up interest rates to 24 percent. A website depicting Madison Realty’s Josh Zegen as a cartoon villain popped up, although Karp never explicitly acknowledged being behind it.
Madison Realty denied Karp’s allegations, claiming it was a responsible lender exercising its rights. A judge ruled in favor of Madison and dismissed Karp’s case.
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Karp put the property — which includes a completed 93-unit building and an unfinished development — into bankruptcy in December to stop the foreclosure. The tactic can be used to buy time to find rescue financing or sell a property, but Karp did neither.
Madison sold the $6 million mezzanine piece and $73 million senior loan on the property in March to Arch Companies. Four months later, a judge dismissed the bankruptcy case and the foreclosure was back on.
Arch still has some hurdles to clear before it can take possession. The lender alleges Karp entered into a master lease with another tenant without the consent of the court. The lease would prevent Arch from qualifying for a 421a tax break, according to a lawsuit filed by the lender.
On top of losing the 421a incentive, the master tenant has already been listing and leasing out apartments at the property, according to Arch Companies’ court filing.
“Simply put, borrower and master lessee have colluded in a deceitful attempt to swipe some security deposits and rent during the pendency of the foreclosure,” Arch’s lawsuit alleges.
Karp’s lawyer argues that Arch was aware of the master lease agreement months ago.
Matthew Mannion of Mannion Auctions was the auctioneer for the sale.
Karp and his attorney failed to return a request to comment. Arch Companies also did not return a request for comment.