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Category ArchiveLegal

Toys ‘R’ Us Real Estate Arm Files for Bankruptcy, Affecting $859M of Debt

With Toys “R” Us’ liquidation plans underway, one of the toy chain’s property arms has filed for bankruptcy, impacting $859 million of debt.

On March 15, after failing to reorganize around its successful stores, the toy superstore said it had to liquidate. That meant the closure of around 700 U.S. stores, as Commercial Observer previously reported. Yesterday, Toys “R” Us Property Company I, a subsidiary of the 69-year-old toy company, filed for Chapter 11 in the Eastern District of Virginia.

“Toys already had roughly $5 billion of debt,” said Adam D. Stein-Sapir of Pioneer Funding Group, which specializes in analyzing and investing in bankruptcy cases, and who is not involved in the case. “Regarding the debt against the owned properties—$859 million—those creditors will be participants in the whole Toys bankruptcy case, with the caveat that their collateral is the owned real estate.”

The rest of the company’s creditors were part of the initial bankruptcy filing and their collateral is Toys’ other assets.

The $859 million figure was noted as the outstanding principal amount as of Sept. 17, 2017 in the bankruptcy petition filed two days later. The loans were set to mature on Aug. 21, 2019.

The largest claim in yesterday’s filing, obtained via Nationwide Research Company, is $129.7 million owed to Guggenheim Partners followed by $107.9 million owed to J.P. Morgan Chase and $107.8 million to H/2 Capital Partners.  A spokeswoman for J.P. Morgan declined to comment.

The local attorney representing Toys in the bankruptcy didn’t immediately respond to a request for comment, and nor did Toys’ counsel or a Toys spokesperson.

Source: commercial

Citing Customer Abuses, Regulator Orders Wells Fargo Not to Grow

Wells Fargo, America’s largest originator of commercial real estate loans, was shackled into unprecedented regulatory handcuffs on Friday, when the Federal Reserve condemned the bank’s leadership for allowing a series of sales scandals to fester unchecked.

The measure, submitted to the company’s board of directors on the last day of Janet Yellen‘s tenure as the Fed’s chairwoman, prohibits Wells from growing its balance sheet beyond its size at the end of 2017. The order is indefinite, pending the Fed’s determination that Wells has put its house in order.

The Fed faulted Wells’ board of directors for failing to prevent one of the largest consumer finance scandals in recent memory. Between 2011 and 2015, employees of the bank, struggling to earn steep incentives and to meet unrealistic sales targets, opened more than 2 million unauthorized accounts for unwitting individual clients.

More recently, the bank acknowledged that its auto lending division had forced hundreds of thousands of customers to buy car insurance that they didn’t need.

“It is incumbent upon the board of directors…to oversee an adequate risk management framework for the entire firm,” Michael Gibson, the Fed’s regulatory chief wrote, in a letter to the Wells Fargo board. “As events of the past few years have confirmed, Wells Fargo’s board’s performance of [its] oversight role did not meet our supervisory expectations.”

In the bank’s 2016 annual report—its most recent—Wells Fargo reported $507 billion in outstanding U.S. commercial and industrial real estate loans, including real estate mortgages and real estate construction and lease financing. The bank also won master servicer agreements on more than 60 percent of new commercial mortgage backed securities deals that year.

In addition to the growth prohibition, the Fed’s order demands that the bank submit plans to improve board oversight and regulatory compliance within 60 days, and to undergo a review of its progress by the end of September, 2018.

In a statement, the bank’s CEO, Timothy Sloan, pledged that Wells Fargo will respond proactively to the penalties.

“We take this order seriously and are focused on addressing all of the Federal Reserve’s concerns,” Sloan said. “It is important to note that the consent order is [related]…to prior issues where we have already made significant progress.”

By market close on Monday, Wells’ shares had fallen more than 8.5 percent below their closing price on Friday.

In a conference call with investors that day, the bank said that by curtailing deposits from financial institutions and commercial clients, Wells would still have the bandwidth to write new commercial real estate loans.

“We’re continuing to serve customers, make loans—including commercial real estate loans—and take deposits and will meet the requirements of” the Fed’s order, a Wells Fargo spokeswoman wrote in an email.

Christopher Whalen, the banker and consultant behind Whalen Global Advisors, opined that the Fed deserves some blame itself for fostering the environment that allowed Wells’ scandals to metastasize.

“The Fed has created this problem by letting these banks get so big,” Whalen said, citing the Fed’s giving its blessing to 2008 marriage of Wells Fargo and Wachovia. “It’s all because the Fed is paranoid about the treasury market. If they let primary dealers go down, there would be no one left to sell Uncle Sam’s debt.”

On the other hand, according to the analyst, the order could be a blessing in disguise for Sloan if he uses the growth limit as an excuse to cut bank on less profitable segments.

“Wells is gigantic,” Whalen said. “Telling them they can’t get any bigger, you’re doing them a favor.”

A representative from the Federal Reserve did not immediately respond to a request for comment.

Source: commercial

Rudin Wins Back $350K in Real Estate Taxes From City: Judge

The city owes Rudin Management Company $350,000 plus interest in real estate taxes collected for a public park Rudin donated to the city, a court has ruled.

The Supreme Court of the State of New York judge said in his Jan. 16 decision, made public last Wednesday, that the developer should not have been held responsible for paying taxes on a public park for the 18 months after the city had taken over its operation even though the city had not officially received the deed for it.

Rudin’s attorney, Joel Marcus of law firm Marcus & Pollack, said the judge supported his argument “that the handover and dedication of the park had the same legal significance as a deed conveyance as far as exemption was concerned. Notwithstanding that legal argument, even if taxable, it was of zero value because of the easement agreement in favor of the city; so that no tax should have been collected during the period of the Rudin ownership and the two tax years appealed.”

The issue dates back to April 2011 when Rudin and  joint venture partner Global Holdings bought the Hudson Square submarket site where St. Vincent’s Hospital had been (it closed in 2010) out of bankruptcy for $260 million, according to court documents and The Wall Street Journal. That included one site on which North Shore-LIJ would erect a medical facility, one where Rudin would build  The Greenwich Lane residential condominium at 155 West 11th Street and one for a triangular-public park, St. Vincent’s Triangle.

In March of the following year, the New York City Planning Commission gave Rudin the green light for the project so long as the company “convey[ed] an easement to the city for perpetuity for use of the park as open public space…surrender[ed] all future development rights for the park space” and “convey[ed] title to the park to the city parks department upon substantial completion of the park,” among other conditions, court documents indicate. It was later determined that St. Vincent’s Triangle, across from the former St. Vincent’s Hospital main campus at 7-15 Seventh Avenue would include an AIDS memorial sculpture.

Rudin built the park and handed it over to the city gratis on Aug. 21 2015 (with the city and Rudin issuing a joint press release about the park’s opening), but the city did not take the deed until Feb. 15, 2017, when the sculpture—for which the city paid $3.6 million—was done. During that 18-month period the city “was in full control of the park…and it was open for public use, but the city refused to take formal title by accepting a deed from” Rudin, court records indicate, because the sculpture wasn’t completed.

The city maintained that so long as the property was technically in the name of the developer it was fully taxable, but Rudin’s attorney argued that the property was restricted to park use in perpetuity and had “no potential for private sale or income production” because the title was committed to the city, so the “value should be assessed at zero,” according to the recent court filing.

A Greenwich Lane spokeswoman responded to a request for comment on the case with the following statement: “We are proud to have built and donated this beautiful community park to the City of New York, which includes the land that the NYC AIDS Memorial sits on. The park, which opened to the public in 2015, is a gathering place for all New Yorkers to enjoy.”

New York City Law Department, the attorney for the city, didn’t immediately respond to a request for comment.

Source: commercial

Clipper Equity Scores Victory in Rent-Stabilization Case at 50 Murray Street

Six months after a judge ruled in favor of 40-plus tenants that Clipper Equity unlawfully deregulated 421-g units at 50 Murray Street, a higher court has overturned the decision in a big win for residential property owners and developers.

Over 40 tenants alleged in a June 2016 lawsuit that David Bistricer’s company overcharged them on rent at 50 Murray Street between West Broadway and Church Street while receiving millions in tax breaks as part of the 421-g tax exemption program (which caps rent increases as per the Rent Guidelines Board). They alleged that their apartments were subject to luxury deregulation, which allows landlords to deregulate units once the rent exceeds a set sum, today $2,700.

New York’s State Supreme Court sided with the tenants in a July 2017 decision, as reported by The Real Deal.  The landlord took the case to the Appellate Court, which TRD said made it the first 421-g case to reach that level of the court system.

Yesterday, the Appellate Division reversed the Supreme Court’s ruling and declared that the apartments had been properly deregulated and were not subject to rent stabilization, as the tenants had argued. As explained in an internal memo from law firm Rosenberg Estis, which submitted an amicus curiae, or friend of the court, brief to the Appellate Division on behalf of the Real Estate Board of New York, apartments in buildings receiving Real Property Tax Law 421-g tax benefits “can use luxury deregulation in the same manner as other rent-stabilized apartments.”

“It is a significant decision for owners of buildings in Lower Manhattan for which they had received 421-g benefits,” Rosenberg & Estis attorney Luise Barrack told Commercial Observer. “The Appellate Division’s decision reversed the Supreme Court Judge who had ruled that the tenants’ apartments had been wrongfully deregulated and had sent the case to a special referee to determine the amount of the rent overcharges and the attorney’s fees and costs incurred in litigating the case. This decision will allow the owner of the building in question and all other buildings that received 421-g benefits to luxury deregulate apartments in those buildings.”

In 1995, then-Mayor Rudolph Giuliani proposed the Lower Manhattan Revitalization Plan (LMRP) in hopes of turning around the decline of Lower Manhattan. The 421-g program, which provided tax benefits to owners of underutilized office buildings that converted either all or part of their buildings to residential apartments, was part of the LMRP. The law provided that apartments in 421-g buildings would be subject to rent stabilization (like other tax incentives), including its luxury deregulation provisions.

Attorney Adam Leitman Bailey of his eponymous firm and who has nothing to do with the case spoke to the significance of the decision: “The decision…allows landlords the freedom to rent out their apartments and have received this tax benefit with the ability to seek luxury decontrol when appropriate. This is the opposite result of those receiving tax benefits from J-51 or 421-a programs. This has also been a rare victory for landlord groups putting in friend of the court briefs who have lost almost every tax benefit case in recent years.”

JJ Bistricer, an executive vice president at Clipper Equity, didn’t immediately respond to a request for comment, and nor did a spokesman for REBNY. The tenants’ attorney, Serge Joseph of Himmelstein, McConnell, Gribben, Donoghue & Joseph, wasn’t immediately available to comment.

Source: commercial

Friend of the Court: REBNY Is Not Afraid to Dip Its Toes in Legal Matters

While it may not be a litigious body, the Real Estate Board of New York is willing to get down and dirty in the legal system when needed.

The 122-year-old trade association doesn’t jump into the ring on every real estate-related legal case; it picks ones that have potentially serious impact on REBNY’s 17,000-plus members.

“In terms of examining the cases, [they] range from tenant behavior to smoking to construction,” explained Carl Hum, the general counsel for REBNY. “We have to be vigilant about all of these different areas of law. They touch upon the industry. They touch upon our membership and they touch upon how buildings are managed and constructed.”

In 2017, REBNY was involved in six legal cases—one as a plaintiff and the rest as a nonlitigant. In those five cases, REBNY filed amicus curiae, or “friend of the court” briefs (from someone who is not a party to the case), to convey its members’ strong opinions on the matter. In two of the cases, REBNY came out victorious, and the other four are ongoing. Commercial Observer takes a brief look at the six.

Keeping New Construction Decisions With City Agencies

A group of Upper West Siders had a beef with the New Jewish Home (previously called Jewish Home Life Care) and its plans to erect a 20-story nursing home and rehabilitation center at 125 West 97th Street between Amsterdam and Columbus Avenues.

Called the Living Center of Manhattan, the new building is slated to be the first nursing facility in New York City based on the Green House elder care model and will replace the nonprofit’s current outdated nursing home at 120 West 106th Street.

Parents from the adjacent Public School 163 and residents of three neighboring buildings were upset about the environmental impact the construction would have on them and filed a lawsuit in 2015. They wanted the New Jewish Home to redo its environmental review of the project to reduce dust and noise, according to a DNAinfo story at the time.

The plaintiffs “challenged the issuance of a certificate of need” by the state health department, “which constituted authorization to construct a proposed nursing facility,” according to REBNY’s Sept. 20, 2017, friend-of-the-court brief on behalf of the nursing home. Before giving permission to New Jewish Home, the New York State Department of Health conducted a Final Environmental Impact Statement, or FEIS. The lower court annulled the agency’s authorization, claiming it “failed to take the requisite ‘hard look’…for potentially significant adverse construction impacts,” REBNY’s filing states. The Supreme Court Appellate Division’s First Department (which covers Manhattan and the Bronx) reversed the decision, emphasizing “that it is not the province of the courts to second-guess the thoughtful deliberations of agencies and that those decisions must stand unless arbitrary, capricious or unsupported by the evidence,” the brief notes.

REBNY took a stand out of fear the case “would undermine the integrity of the [New York State Environmental Quality Review Act] environmental review process,” the brief says.

Hum said that REBNY “felt that this was important to weigh in on the city’s land use procedures and [to reaffirm that the] EIS was done properly. We wanted to uphold the EIS.”

The Court of Appeals made its determination on Dec. 13, 2017, according to Richard Leland, a partner at Akerman and REBNY’s attorney in the case. The court upheld the validity and appropriateness of the EIS, a coup for REBNY.

Following the decision, REBNY President John Banks said in a statement, “This ruling reaffirms the consistent approach to environmental review in New York City’s land use procedures. The board filed a friend-of-the-court brief in this case because we thought it was important to uphold this approach.”

As for REBNY’s involvement, Bruce Nathanson, the senior vice president of the New Jewish Home, said in a statement provided to CO, “REBNY was extremely helpful in conveying to New York’s highest court the need for established and predictable environmental review procedures to ensure that both developers and nonprofit institutions like ours know what is expected in an EIS. REBNY made the point, from a practical development perspective, of how important it is to know that compliance with the detailed procedures set out in New York City’s CEQR [or City Environmental Quality Review] Technical Manual should be sufficient to establish that an EIS complied with law.”

A spokesman for New Jewish Home said that while the EIS matter was settled, the nonprofit organization is awaiting a decision on an unrelated case.

“Once that’s been adjudicated a construction schedule will be determined,” he said.

Responsibility for Compensation When Construction Workers Injure Themselves Off-Site

Another case where REBNY flexed its muscles involved an accident in connection with the construction of a Tribeca high-rise condominium.

In 2012, ironworker Robert Gerrish tripped and fell at a work site in the Bronx.

“He was bending and cutting steel rebar to be used for the construction of a new building located at 56 Leonard [Street in Manhattan],” court documents read. Since Alexico Group owns 56 Leonard Street and Lendlease was the construction manager, Gerrish sought to hold the landlord and Lendlease liable under New York’s Scaffold Law, a labor law.

Lendlease subcontracted with Collavino Structures (one of the defendants), which subcontracted with Gerrish’s company, Navillus Tile (nonparty), for the Bronx work. Collavino leased space in the Bronx Yard from Harlem River Yard Ventures (nonparty) for the construction work. Alexico and Lendlease were being charged with not “providing reasonable and adequate protection and safety” at the yard.

Gerrish sued Alexico and Lendlease for labor law violations. In April 2015, the New York County Supreme Court dismissed the plaintiff’s labor law claim. Last February, the Supreme Court Appellate division, first department, reversed that decision.

In October, REBNY filed a brief with the New York State Court of Appeals, contending that “the Appellate Division erred in concluding that the trade contract between Lendlease and Collavino provided a nexus to impose liability on appellants for an alleged violation of labor law that occurred on property that 56 Leonard did not own and where Lendlease did not supervise or control the work side.”

The organization further said the ruling would have a “detrimental effect on the real estate, construction and insurance industries by expanding their liability to an uncontrollable, limitless degree and driving up the cost of construction and insurance in New York to the state’s detriment.”

This case awaits an outcome.

A spokesman for Lendlease said the company does not comment on pending litigation. A spokeswoman for Alexico Group didn’t respond with a comment.

screen shot 2018 01 16 at 12 56 02 pm Friend of the Court: REBNY Is Not Afraid to Dip Its Toes in Legal Matters
LEGAL EAGLES: REBNY has flexed its muscles in legal cases involving construction of an Upper West Side nursing home at 125 West 97th Street, top left, a construction injury at a site affiliated with the building of 56 Leonard Street, right, and a rent-regulation issue stemming from a tenant at 285 West Fourth Street, bottom left.

Let the Conversions Recommence!

Last June, REBNY appealed a 2016 ruling that upheld the city’s moratorium on hotel conversions into condominiums.

The issue relates to a bill that Mayor Bill de Blasio signed into law in June 2015 banning the conversion of more than 20 percent of the space in Manhattan hotels with at least 150 keys into other uses. Its intention? To try to cap the number of hotel owners turning their properties into residential condos.

Having 29 hotel owners as members, REBNY filed papers with the Appellate Division in June 2017.

“For those 29 REBNY members, Local Law 50 limits their right to use their property to realize its full-market value,” the appeal indicates.

The board also claimed that the law shouldn’t have been passed as it was a land-use matter It should have been under the purview of the City Planning Commission rather than the City Council, REBNY said.

“We believe the trial court’s findings were in error,” Banks said in a statement provided to CO. “We are confident the appeals court will find this restriction on hotels unconstitutional, circumvents city land use procedures, constitutes an unlawful taking and is without legitimate public purpose.”

The case is ongoing, according to Hum.

Whether a Minority Partner Can Dissolve a Partnership

REBNY gave voice to a case that it fears could alter the nature of partnership agreements, which are commonplace for holding and operating real estate (particularly because of the tax advantages they offer).

In a case against Marc A. Malfitano, the majority partners of Poughkeepsie Galleria Partnership in Upstate New York said that Malfitano didn’t have the right to terminate their partnership agreement.

While a lower court sided with the majority owners, the Court of Appeals decided to take up the case.

This past June, REBNY, and other real estate organizations, filed a brief with the Court of Appeals, saying, “Allowing a minority partner to deviate from the express terms of the partnership agreement in his dealings with the partnerships poses a significant threat to the stability and viability of real estate partnerships across the entire real estate industry throughout New York State—and the country.”

The case is scheduled for oral arguments on Feb. 13, according to a REBNY spokesman.

Rent-Regulation Redux

This March, the Court of Appeals will determine if over 100,000 homes may return to rent-regulated status.

That is something that REBNY is fighting, landing squarely in the corner of landlord Alan Wasserman, the owner of 285 West Fourth Street, who faces a lawsuit from tenant Richard Altman over alleged rent overcharges. Altman claimed his unit was subject to rent stabilization and the landlord said otherwise.

In April 2015, the Appellate Division of the Supreme Court’s First Judicial Department decided in favor of the landlord and dismissed the case, but on appeal, the tenant won with the court “eliminat[ing] post-vacancy deregulation (deregulating an apartment after it became vacant by lawfully raising the rent above the deregulation threshold),” according to New York Law Journal. In the first part of last year, REBNY filed a brief to support Wasserman.

On March 22, the Court of Appeals will issue a decision, REBNY’s spokesman said.

primaryphoto6 Friend of the Court: REBNY Is Not Afraid to Dip Its Toes in Legal Matters
UP IN SMOKE: REBNY supported the co-op board at 300 East 54th Street in a secondhand smoke case filed against the board by a tenant. Photo: CoStar Group

Can a Co-op Board Be Responsible for Secondhand Smoke From Another Unit?

In January 2017, REBNY got involved in a secondhand smoke case in Sutton Place.

A shareholder at Connaught Tower at 300 East 54th Street, Susan Reinhard, claimed in a 2013 lawsuit that she was entitled to a 100 percent, eight-year maintenance abatement to exceed $120,000, plus reimbursement of legal fees, because secondhand smoke from another apartment was seeping into her pad, and the co-op board didn’t remediate the situation.

A Manhattan Supreme Court judge ruled in her favor in 2016. The court held that “building owners are capable, and tenants are incapable, of providing smoke-free apartments by imposing strict no-smoking policies or by constructing or rehabilitating buildings so that smoke cannot travel between apartments,” as per REBNY’s amicus curiae.

REBNY took issue with this premise, saying that the decision did not reflect the fact that “cooperative boards are not legally empowered to ‘impos[e] strict no-smoking policies,’ ” according to its amicus curiae. It also disagreed with awarding the maintenance abatement to Reinhard as habitability damages as she “had no intention of using the apartment as a primary residence but rather only as a pied-a-terre.” The warranty of habitability policy, REBNY said, “guarantee[s] adequate shelter in one’s home, i.e., the place where one resides.”

Regarding wider implications, REBNY argued that if the lower court’s decision was upheld, it would “require all residential buildings—including cooperatives and condominiums which…can only act by a supermajority vote of apartment owners—to guarantee that its residents will not smell smoke (or any unpleasant odor which is allegedly attributable to smoke) in their apartments.”

Finding that Reinhard did not produce sufficient evidence that the odor made her apartment uninhabitable, REBNY scored a victory when the Appellate Division reversed the lower court’s decision last May.

Source: commercial

Q&A: Cassin & Cassin’s Michael Hurley at CREFC Miami

Just as breakfast wrapped up on the first day of the Commercial Real Estate Finance Council’s January conference on a windswept morning at the Loewes Miami Beach Hotel, Commercial Observer stole half an unbilled hour for a breezy conversation with Michael Hurley Jr., newly promoted managing partner at Cassin & Cassin. Pushing back against some antsy developers we spoke with last week, Hurley discussed why he thinks New York investors won’t quit the local scene anytime soon.

Commercial Observer: What are you working on down here when you’re not meeting with reporters?

Michael Hurley: It’s an opportunity for us to meet with clients that we otherwise wouldn’t have access to in New York. All of our clients are here, so it’s a great sponsorship opportunity for us. We catch up with existing clients, and meet new people. We’re here to network.

Any questions you’re hoping to developing your thinking on?

When it comes to the business cycle, I’m looking for more insight into what inning the experts think we’re in, and how they feel the tax reform is going to impact commercial real estate finance. It would make sense that the measures taken [in the reform] would be good for commercial real estate investment.

Everyone seems happy to have escaped the weather up north for a few days. Do you think industry sentiment is moving away from the city in general?

I don’t sense a move away from New York. People feel that New York is the safest place to invest your money. If anything, there’s maybe a move away from some of the sand states [in the American Southwest]. The concerns there are overdelopment, oversupply and decrease in demand. And the retail sector is certainly an issue too. Was it Macy’s that just said they would lay off 5,000 people? That’s a major issue.

Source: commercial

City Reaches $1.2M Settlement With Landlord Accused of Illegal Airbnb Rentals

After being sued by the City of New York for allegedly allowing illegal short-term rentals in his apartment buildings, a Midtown landlord will pay a record-breaking $1.2 million to the city as part of a settlement in the three-year-long lawsuit.

Owner Salim Assa of Assa Properties will have to shell out the cash within 30 days, under the terms of the agreement reached with city lawyers yesterday. The settlement prevents Assa from “advertising, booking, permitting, conducting and maintaining” rentals of less than 30 days, which are prohibited in apartments under state law, in his four residential properties at 15 West 55th Street, 19 West 55th Street, 334 West 46th Street and 336 West 46th Street.

The landlord will also be forced to appoint professional property managers to operate the buildings and collect rents for the next three years rather than do it himself. But if he sells the buildings, the new owner will not be required to keep the property manager on. Finally, the city reserves the right to make unannounced inspections in the buildings to ensure that neither tenants nor Assa are flouting the law by short-term subletting their apartments on the sly.

Despite the financial hit, the settlement represents a small victory for Assa. In October 2017, he faced the possibility of defaulting on mortgages totalling $81.5 million for two of the four buildings when a state supreme court judge ruled that a receiver would manage them. A $1.2 million penalty doesn’t seem like much of a hardship by comparison.

The Mayor’s Office of Special Enforcement, which investigates illegal Airbnb cases, touted the settlement as the largest financial penalty ever imposed on a landlord in an illegal hotel nuisance abatement lawsuit. The second-largest was in 2013, when the city won a million-dollar settlement against Smart Apartments, a hotel operator that rented illegally converted apartments to tourists across more than 50 buildings in New York City.

“By exacting steep penalties and requiring landlords to hire law-abiding property managers, we will stop property owners who fail to obey the law,” said OSE Director Christian Klossner in a statement. “This case is a good example of the work we do to protect permanent housing, New Yorkers and visitors from the dangers of illegal hotels.”

The nuisance abatement law was originally created in the late 1970s to combat prostitution in Times Square. However, city enforcement agencies and the New York Police Department have used nuisance abatement actions to shut down illicit activity of various stripes, including drug dealing in apartments, bodegas selling alcohol to underage kids, and illegal hotels.

“We are hotel owners here in New York,” Assa said in a prepared statement, referring to his Cassa Hotel & Residences in Hell’s Kitchen and the MAve Hotel in NoMad. “It would be against our self-interests to knowingly let tenants turn to Airbnb, a service which competes directly with established and regulated hotels in the city. We also support initiatives to keep tenants safe by ensuring that all residents are subject to full background checks, and Airbnb does not enforce these standards.”

Source: commercial

Tribeca Clock Tower Building Case Opens Up Potential for More Interior NYC Landmarks

A state appellate court decision issued this week involving the historic Clock Tower Building at 346 Broadway in Tribeca will make it easier for the city to landmark the interiors of buildings and reinforce the requirement that interior landmarks must be open to the public.

Yesterday, a five-judge panel upheld a March 2016 decision that prevented developers Peebles Corporation and Elad Group from converting the unique clock tower at 346 Broadway into a residential condominium. The giant mechanical clock is the largest of its kind in New York City and sits atop a late 19th-century, 13-story office building designed by McKim, Mead and White between Leonard Street and Catherine Lane.

A group of local historic preservation organizations—including Tribeca Trust, Save America’s Clocks and the Historic Districts Council—sued Peebles and the city in June 2015 in Manhattan Supreme Court in an effort to block the conversion of the clock tower suite. The city’s Landmarks Preservation Commission issued a certificate of appropriateness in May 2015 that allowed the developers to renovate the clock tower, electrify its mechanism and turn it into a condo, which wouldn’t be accessible to the public. The local activist groups filed suit a couple months later and ultimately scored a victory in Manhattan state supreme court.

Lynn Ellsworth, chairwoman of the Tribeca Trust, proclaimed, “The victory is ours and it is sweet.”

“What’s really exciting to me is that the public will still have access to the clock tower,” she said. “There’s all kinds of easy ways for the developer and owner to do that, and they should have done it from the beginning.”

When contacted for comment, the city Law Department responded, “The court was divided in its ruling, 3-2. We are evaluating next steps.”

Although the clock tower had been open to the public since 1918, the Peebles Corporation sought to convert it into a triplex penthouse. The move would be a clear violation of city rules surrounding interior landmarks, which require that such spaces must be open to the public regularly. The owners of the landmarked Four Seasons Hotel sued the city over the public access issue in an unrelated case in 1993, and the courts decided that a landmark interior must be open to everyone on a “ordinary or habitual” basis.

“I think what’s significant about this case is that it’s set a new standard, contrary to the practice for over 50 years,” said Frank Chaney, an attorney at Rosenberg & Estis who was cited in the appellate decision. “While for an interior landmark being customarily open and accessible to the public was a requirement of being a landmark, it was never the obligation of the owner to keep it that way. This decision says once open and accessible, the designation requires the owner to keep it open and accessible now and forever.”

However, the decision doesn’t spell out how often a historically protected space must open to the public. It could open once a month, once a year or once every couple years. The ambiguity means that an exact time frame for public access will probably be fought out in court at a later date, Chaney explained.

Conversely, the decision also opens up the possibilities for what kinds of spaces can be landmarked. Historic places that are only occasionally open to the public for events and tours—like the Yale Club and the Masonic Hall—could now qualify for landmark designation. The previous rules mandated that an interior landmark be open to the public on a regular basis, and any owner that wasn’t willing to do that could not have their property considered for landmark protection.

Chaney also wondered whether owners that open up their historic buildings every once in a while will start shutting out the public, because they’re afraid their buildings could be landmarked.

“If this decision results in them being concerned that ‘If i keep doing this am I going to get landmarked? [Then] maybe I better not let people come up here anymore; maybe I better close this to the public,’ ” he said.

Peebles and Elad did not immediately return requests for comment. The two developers purchased the Neo-Italian Renaissance property from the Bloomberg administration for $160 million in 2013. They filed plans with the state to renovate the building into 151 luxury condos, 35 of which have to be sold by August 2018 or the city can take back the property, The Real Deal reported earlier this year. The firms sued each other last year, each alleging that the other had attempted to sabotage the project. Those lawsuits were recently settled, and the owners began marketing the condo project under the name 108 Leonard earlier this month.

Source: commercial

Lender Moves to Push Defaulting Soho Developer Into Bankruptcy

Churchill Credit Holdings, a small Manhattan real estate lender, has filed a petition for the U.S. Bankruptcy Court of the Southern District of New York to push a Soho lot’s developer into involuntary bankruptcy, according to court papers obtained via Nationwide Research Company.

The lender claims that it is owed nearly $14 million from 74 Grand St. Equities, a corporation whose only asset is a small lot. The site, at 74 Grand Street, between Wooster and Greene Streets, was slated to house a six-story, four-unit residential condominium with ground-floor retail, according to Churchill’s website.

But according to the bankruptcy petition, the site—originally slated for mid-year 2018 completion—remains vacant and unimproved this month, with construction stalled. Meanwhile, Churchill claims in court documents that the developer began to miss loan payments in August on three separate rounds of funding, with an unpaid balance that now exceeds the lot’s appraised value, $12.5 million.

“Normally when a developer is in distress and is not paying the senior lender, or the senior lender is worried about not getting repaid, the lender tries to foreclose on the property,” said Adam Stein-Sapir, a co-managing partner of Pioneer Funding Group, which specializes in analyzing and investing in bankruptcy cases, and who is not involved in the case. “But in this instance, they filed an involuntary bankruptcy case. That’s unusual.”

Stein-Sapir speculated that the move for bankruptcy—a more onerous process than a foreclosure sale, because it requires the participation of at least three creditors—could have been triggered by an apparently ongoing ownership dispute surrounding the lot.

Details remain fuzzy, but Churchill’s petition refers to a question of whether the property’s ownership changed once Churchill extended the developer’s credit. Property records provide little additional transparency. Churchill and its attorneys did not immediately return a request for comment and 74 Grand St. Equities wasn’t immediately reachable.

All sides seem to agree that the lot was initially owned by Gayle Dunne and Sean Dunne, who spun it out into a closely held limited-liability corporation while remaining the owner’s agent for the construction process. But, the bankruptcy petition alleges, after the Churchill financing closed on March 3, 2006, Gayle Dunne and another Dunne family company, Mountbrook, may have shuffled the lot’s equity ownership among several new stakeholders.

“I think [the reason for the bankruptcy petition] is because of the ownership disputes,” Stein-Sapir said. “I’m speculating a bit here, but if they just went to foreclosure sale, these ownership disputes could present issues.”

Sean Dunne, a prolific Irish developer, has faced strife in the past decade both in his native country and in the U.S. In a 2014 report it called “The American Maze of a Bankrupt Empire,” The Irish Times detailed how failed ventures had led to Dunne’s debts of $942 million in 2014. The newspaper wrote that Dunne spent almost 400 million euros (about $475 million) on properties in Dublin in the mid-2000s, which crashed in value during the financial crisis.

To meet U.S. bankruptcy law’s requirement that three creditors join the petition for involuntary bankruptcy, two other firms involved in the construction, Equity Environmental Engineering and Damo Construction Company, participated in the filing as well. Equity Environmental claims that the developer owes it about $12,000, and Damo alleges debt of $41,000.

Now, the 74 Grand developers will have a year and a half to suggest a reorganization plan.

“But they can get many, many extensions,” Stein-Sapir said. “The U.S. bankruptcy code is very debtor friendly.”

Source: commercial

Regulators To Clarify Which Real Estate Loans Are Considered Dangerous

A proposed rule on how banks should calculate the amount of equity they need to hold to compensate for construction loans and other precarious debt could bring transparency to a years-old regulatory tangle, according to a report by EY.

The rule, known as high volatility acquisition, development and construction, or HVADC, “clearly achieves its purpose of clarifying the definition” of volatile construction loans, wrote the author of the report, Joseph Rubin, a principal at EY. Even so, Rubin warned the clarification might force banks to treat a yet wider swath of loans as risky, raising their costs of compensating for the potential downside.

Though it will be implemented by the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department’s Office of the Comptroller of the Currency, the regulation’s logic stems from an international review of banking practices that played out in Europe after the financial crisis.

In 2013, concerned about how quickly construction and development loans had rotted on banks’ balance sheets during the financial crisis, the Basel Committee on Banking Supervision updated its model regulatory guidelines with the Basel III standard, nudging banks to account for their debt assets more conservatively.

Among stacks of other measures, the watchdog suggested requiring that banks overweight construction and development loans on their balance sheets. In counting these loans at 150 percent of face value, banks would need to compensate by holding a correspondingly higher level of equity to achieve the required ratio of equity to assets, reducing the risks they’d face if a large group of their borrowers defaulted. The Federal Reserve implemented the construction-loan rule for U.S. banks, along with most of the rest of the recommendations.

But the U.S. rules for construction and development lending that emerged from the agreement, called high volatility commercial real estate, or HVCRE, were difficult to interpret, according to EY.

“There were many questions that came out of the original rules,” Rubin said in an interview. “The problem is that since real estate lending is so specialized, how to apply to the rules to any particular structure often gets complicated.”

Such was the confusion that U.S. bank regulators saw fit in 2015 to offer a clarifying document answering banks’ frequently asked questions about the regulation—nearly four dozen of them.

Finally, in September, the trio of regulators responsible for the rules announced that a rewrite could be in order. Under their proposal, the definition of risky loans that should be overweighted in banks’ accounting would expand to include any loan that primarily finances or refinances acquisition, construction or development with a handful of exceptions for small residential properties and agricultural and community development.

If just over 50 percent of a loan finances these activities, it should be included, the proposed rule states. The current regime leaves that question ambiguous.

To compensate for the broader scope of debt that would qualify, the loans would be counted at 130 percent of their value, instead of 150.

In its report, EY remains agnostic on what the effects would be, noting that much depends on whether banks would pass on any higher capital costs they face to borrowers, or simply accept the changes as an increase in “the cost of doing business.”

Rubin said he would be watching closely to see how the changes propagate through the real estate industry.

“Many banks today are very well capitalized. [The proposed rule] may or may not impact them,” he said. “As always, [borrowers] will shop around, trying to find the lowest price. If prices rise across the board, that will impact profitability.”

Other analysts wondered whether the new rule would also stir regulators to take a harder line against granting exceptions.

Christopher Whalen, a bank analyst and the chairman of Whalen Global Advisors, explained that though the capital regulations appear binding, banks that maintain a genial relationship with regulators can often angle for a hall pass, winning approval to maintain a mathematically riskier balance sheet that the letter of the law permits.

New York Community Bank, for example, a lender that originates commercial real estate and multifamily housing debt, is “way over guidance” on the quantity of multifamily debt on the ledger, Whalen said. Under the existing framework, the analyst explained, the bank has worked with the FDIC to clear its positions, but it remains uncertain whether that flexibility will remain available under the new set of rules.

“There are a lot of banks out there who are way out of limits,” Whalen said. “It will be interesting to see if banks like that have to change their business model.”

New York Community Bank did not respond to a request for comment.

Bankers hoping for regulatory generosity have until Christmas to submit their comments on the proposal to the rulemakers, who analysts expect will announce their next move early in 2018.

In the meantime, taking a broader view, Whalen was optimistic about the underlying risk profile of banks’ construction and development activity—especially when it comes to multifamily housing.
“In major urban areas, these multifamily projects, they’re well constructed and maintained,” Whalen said. “There’s always an investor base for that.”

Source: commercial