How a Manhattan board and sponsor turned
a cautionary story into a fairy tale.
Most sponsor stories involving condominiums and sponsors or investors end up as cautionary tales. Not the saga of the Sheffield. This one is a fairy tale – and no less instructive to any other co-op or condo board dealing with sponsors, developers, or investors who take over an ailing building. The moral: when both sides act reasonably, everybody wins.
“There’s often so much contentiousness between board and sponsor,” observes veteran real-estate attorney Rob Braverman, the managing partner of Braverman & Associates, who represented the unit-owners. “But here there was a big problem for everyone, and everyone put their heads together, thought creatively, and put things together in a way that made sense.”
“We couldn’t have gotten luckier,” says Larry Wagner, who spearheaded the owners group at the mixed-used condo, The Sheffield, a 597-unit building at 316-328 West 57th Street in Manhattan’s Hell’s Kitchen. “This building could have gone into receivership, or bankruptcy, or somebody could have bought it who didn’t want it as a condo. And these guys came in and wanted to do the right things.”
“These guys” are the partners in Fortress Investment Group, a real estate investment trust that acquired the building at auction in August 2009. The Sheffield had become infamous by then. Built in 1978 as a nearly 850-apartment rental building designed by Emery Roth & Sons (the General Motors Building, the Pan Am Building, the World Trade Center), it was purchased in 2005 by Kent Swig, president of Swig Equities, and two other major investors. Swig managed the building and oversaw its conversion to a condo called Sheffield57. And, for reasons covered extensively in the press already, the next four years were a fiasco.
Wagner, fellow owner Ju Rhyu, and others, living amid construction hell, a lack of services, unpaid vendors, mechanics’ liens, and unfulfilled offering-plan promises, formed the Sheffield Owners Association. “We had a lot of meetings and mailings, a lot of standing around in the lobby making our little group available to the owners,” Wagner recalls. “We tried to make it very clear how bad our situation was and what needed to be done. If the sponsor has no money, you can jump up and down all you want, but they’re not going to give you everything. But there are legal remedies we can take to ensure that what can be done is done.”
These roughly 70 unit-owners filed a lawsuit on May 1, 2007, and then met with representatives of the New York State attorney general’s office, which regulates co-op and condo conversions. As usual for such ad hoc groups created to fight a sponsor or developer, most but not all of the members paid for the professionals used out of their own bank accounts.
“We explained [to all the owners] that unfortunately this is going to cost additional out-of-pocket [funds],” says Wagner, “but compared to the investment you already have in your building, this is a small amount, and we’re not here to spend your money recklessly. It’s human nature to say, ‘Why isn’t everyone contributing?’ but at least those of us on this committee were really focused and went forward with this. And Rob worked with us a little as well [on fees]. We all were trying to fight the good fight. I wasn’t sitting there looking at my neighbor saying, ‘I can’t believe this person didn’t contribute.’”
By this time, Swig’s partners were fighting Swig in court as well. He was faced with legal, economic, and public-relations pressure. He had added seven fictional stories to the number of floors, leading to City Council bills to outlaw such practices, and there’s even a YouTube video of a marching band he’d hired to try to drown out a condo-owner rally (http://www.youtube.com/watch?v=HPF1U2J8SbA).
Swig defaulted on his loans. On August 6, 2009, Fortress acquired the building – at the time including 212 unsold units – in a fire-sale deal. The company paid off the $32 million outstanding principal of the original $418 million purchase price, plus the roughly $70 million face value of a “mezzanine loan,” which fills a gap between a borrower’s equity and the senior mortgage. This $102 million equaled roughly 38 percent of the $272 million still owed on the project overall. And even paying just 38 cents on the dollar, Fortress was the only bidder.
Aside from Fortress changing the star-crossed building’s name back to The Sheffield, the new sponsor took the reasonable and logical step that many often ignore: he actually spoke with the people living in the building. At that juncture, says Wagner, the owners “indicated some of the issues that the building had, such as the fact that there was no board. Kent had chosen not to form one. Fortress clearly saw this as an issue for themselves as well.”
Two months after Fortress took over, the investor held a general election. A Fortress representative became president of the nine-seat residential board, and Wagner, 55, a former CFO in the financial-services industry and now head of LJW Consulting, became vice president of and also served on the overall building board. (There is also a third, commercial board, handling the retail-business owners.)
Wagner remembers the board’s first meeting: “We had a pretty long agenda, going over problems in the building. For example, our vendors [and staff] were not being paid, so we were on the precipice of losing everybody from doormen to porters and even having [the] fuel supply just being shut off. The [never-completed] amenities in the offering plan would have been nice, but we weren’t thinking about that. We were just making sure vital services were going to continue, and we wanted to make sure Fortress really understood from our perspective what was happening in the building.”
“Among the many problems the building faced,” says Braverman, “was a provision in the offering plan whereby the top two floors were to be redone and made into a high-end amenity space with a pool, a spa, a restaurant, and a lounge area overlooking Central Park. Swig had represented that the sponsor would be building out that space” – even affirming that to the attorney general’s office, says Braverman. “But, in fact, what the offering plan said was that the space would be purchased and developed by a third party [like a health-club chain] that would buy and build out the space and sell memberships to the general public.”
“A lot of these things existed at one point or another,” says Wagner, “but demolition was done by Swig and nothing [new] put in place, so three floors” – the two-floor amenity space and a 59th-floor terrace – “were unusable.”
What to do? Observes Wagner: “We said, ‘What did the first offering plan specify – what’s legally obligated?’ And then, ‘What makes sense for us as owners to have in this environment?’ Some of the things they originally wanted in 2006, like a restaurant, might not make sense in 2009. We sat down and went through that with Fortress and with Rose Associates [the new managing agent and, as it happens, the building-owner who’d sold it to Swig and partners in 2005] and came up with a list of what makes sense.”
Here’s where the directors got creative in a way that could inspire other boards. Fortress agreed to build out the space with input from the residential board. The board, at the completion of construction, would purchase the amenity space from Fortress for a dollar. Over the next several months, both parties devised a complex agreement in which the sponsor retained the architectural firm CetraRuddy to work with the board’s design committee to tailor the amenity space to the residents’ specifics.
As progress moved further along, someone had a brainstorm: why not take some of the space planned for a lounge and turn it into two rental units to help the condo association defray some of the amenity-space operating costs? “I think it was Fortress that came up with the idea, and we thought it really made sense,” Wagner says. “We always have the option to make it an amenities space again.”
“We were also able to convince the sponsor to pay for a portion of the [amenity-space] operating expenses over the first three years,” notes Braverman. And this, the lawyer acknowledges, even though “a lot of sponsors would have said, ‘Fine, we’ll build out the space,’ and then just put up some sheet rock and paint, throw in a couple of elliptical machines and treadmills and said, ‘See ya, have a good time!’”
Fortress, fortunately, was better than that – and, in what people call “enlightened self-interest,” was being pragmatic as well as ethical. “The building had a lot of bad publicity,” Wagner says, “and the attorney general’s office had its sensors up. [Fortress also] didn’t want to go into an isolation booth, building something out without [our] input and then presenting it two years later” as a fait accompli. Adds Braverman: “They have 200 units they want to sell. They have an investment in this property and they’re looking to sell units – and they’ve been selling at a very good clip.”
But, as we all know when it comes to that peculiar animal called real estate, emotions like pride, vices like greed, and failings like shortsightedness can trump common sense, logic, and reasonableness. Not here, though. “I’ve known them for two years,” Wagner says of the Fortress liaisons. “They’re good guys and good businessmen. And if you’re a good businessman you’re not going to do something like throw together an amenity space on the cheap because you’re not going to get the best product.”
“We changed something that was very dire to something that’s a real selling point for the building,” says Braverman. Or as Wagner puts it succinctly: “This really is a story about how things can go right.”