December 24, 2008 - Apthorp Building, New York NY

Gem Magnate Leviev and Mann Realty Spar Over New York Condo Conversion

Israeli diamond merchant Lev Leviev became an overnight sensation in Manhattan real estate last year when he paid prime prices for the old headquarters of the New York Times and the Apthorp, a tony apartment building on the Upper West Side.

Now both projects are suffering. The Apthorp's partners are warring in court, the condominium-conversion project is in danger of defaulting, and only one unit has sold in the six months since the $1 billion project was announced, according to court documents and interviews with people familiar with the project.

Prices at the Apthorp building in New York, courtyard pictured above and exterior at left, have fallen from nearly $3,000 a square foot to $2,150 a square foot in the past six months. Prices at the Apthorp building in New York, courtyard pictured above and exterior at left, have fallen from nearly $3,000 a square foot to $2,150 a square foot in the past six months. Prices at the Apthorp building in New York, courtyard pictured above and exterior at left, have fallen from nearly $3,000 a square foot to $2,150 a square foot in the past six months.

On Friday, Mr. Leviev filed an emergency injunction to wrest control of the development from its current managing partner and 50% owner, Maurice Mann, owner of New York property firm Mann Realty. Legal papers filed by a unit of Mr. Leviev's Israel-based company, Africa Israel Investments Ltd., charge Mr. Mann has "run amok as manager" of the project, spending operations money on his personal legal fees and allowing employees to live in the Apthorp's vacant apartments.

Theodore Steingut, Mr. Mann's attorney, declined to comment on the injunction because he hadn't seen it. But he said "sniping" from Africa Israel had made the project's management more difficult, and that many of Africa Israel's claims are in error.

Meanwhile, the former Times building, vacated when the newspaper moved to a new development nearby, remains largely unleased even though the building's renovation is complete.

Mr. Leviev is one of Israel's richest and most famous entrepreneurs. A Russian emigrant, he built a diamond distribution empire second only to De Beers, according to his company.

But this year, Mr. Leviev's leverage has hurt him. Africa Israel shares have fallen more than 80% in the past year and plummeted 20% in the past month alone, to $4.25 Tuesday on the Tel Aviv Stock Exchange. In the fall, Africa Israel announced a $475 million third-quarter loss because of falling real-estate values, mainly in Russia, and sold several of its New York assets to pay down debt.

These included half its stake in the Times building, which an unnamed investor is buying for $50 million plus an assumption of half the building's $720 million debt. Mr. Leviev paid $525 million for the 780,000-square-foot landmarked building in 2007, triple what the New York Times Co. had sold it for just three years earlier.

The 16-story building recently completed a $200 million renovation, according to a person briefed on the project. All floors are listed as available on its Web site, and some Midtown Manhattan office-leasing brokers said they hadn't heard of any deals. The Times building's leasing agents at CB Richard Ellis declined to comment.

The Apthorp's troubles appear to be a combination of the collapsing market and internal strife. In March 2007, Mr. Leviev and Mann Realty paid $426 million for the residence. With 163 units, it was built in 1908, and former residents have included Conan O'Brien, Cyndi Lauper and Rosie O'Donnell. At the time, some of the units were renting for more than $20,000 a month, but the new owners decided to convert the building to condos.

The conversion proceeded with Mr. Mann as the managing partner. Anglo Irish Bank Corp. provided a $385 million loan and Apollo Real Estate Advisors LP gave a $135 million mezzanine loan to purchase, renovate and market the development. Last summer, the developers began offering condos at nearly $3,000 a square foot, placing the building's sell-out value at approximately $1 billion. But as the real-estate market plummeted, Apollo began objecting to the project's budget, saying its business plan no longer made sense because of falling prices and cost overruns. In August, Apollo made a capital call of $12 million to bring its loan back in balance. It was paid.

In the first week of December, Apollo made another $22.7 million capital call. Apthorp's management, controlled by Mr. Mann, responded with a $500 million lawsuit, claiming the repayment request was an improper "ransom" payment and accusing Apollo of trying to take over the Apthorp at a bargain price.

Mr. Mann quickly dropped the suit, but it infuriated Mr. Leviev, who moved to oust Mann Realty as manager. On Friday, Mr. Leviev filed a request for an emergency injunction in New York Supreme Court demanding that Mr. Mann submit to an arbitration proceeding to choose a new third-party manager for the project.

Mr. Leviev alleges in court documents that Mann Realty's "woeful mismanagement has jeopardized the viability of the entire project, putting the loans in serious danger of imminent default."

After Jan. 9, Apollo may declare the loan in default, according to Mr. Leviev's attorney, Y. David Scharf. "The project could be brought to a grinding half," he said. Apollo declined to comment. Meanwhile, the Apthorp has cut prices. The condos are being offered at an average price of roughly $2,150 per square foot, according to listing aggregator StreetEasy.com.

Original Story - Wall Street Journal

Updated Story - January 13, 2009

It is one of New York’s grandest apartment buildings, a blocklong limestone behemoth with a sprawling courtyard and vaulted entries that has been home to the rich and famous since 1908.

But today, the Apthorp on the Upper West Side stands as a cautionary tale in messy condo conversions, with ambitious plans that have soured, a bitter dispute among owners and the looming threat of foreclosure. At the moment, the owners cannot even agree on whether, if the case comes to arbitration, to use Orthodox or Conservative rabbis.

The management turmoil has created frustration for residents who have spent two years watching neighbors take buyouts or leave because they could not afford the rising rents. Christine O’Neal, a longtime resident, said that as many as half of the building’s apartments seem to be empty.

“It’s lonely,” Ms. O’Neal said. “Even the staff, the elevator men and doormen are nervous. They’re all afraid of losing their jobs.”

Purchased by investors at the height of the real estate boom in 2006, the management’s conversion plan appears unrealistic about meeting its sales and revenue goals, one lender is quoted as saying in court documents in the lawsuit between the owners. That lender, Apollo Real Estate Advisors, could begin foreclosure on Thursday if the owners do not resolve their internal dispute, one group of investors says in the court papers.

By Monday night, lawyers were negotiating a deal that would force one of the owners, Maurice Mann, to surrender management of the building to another, the Feil Organization, people familiar with the negotiations said.

“The negotiations and litigation are ongoing, as they have been ongoing for the past few weeks,” said Y. David Scharf, a lawyer representing Africa Israel USA, another owner that supports the removal of Mr. Mann. The company is led by Lev Leviev, the chairman and controlling shareholder.

By Monday afternoon, Mr. Mann denied that he had given up any management of the building. In court records, he said that he had made progress removing 17 rent-stabilized tenants from the building and that the lenders were just using their troubled businesses as an excuse.

“Right now, I am still the general partner of this deal,” Mr. Mann said. “I control the Apthorp 100 percent.”

The original operating agreement for the property required that if problems arose and the board members could not reach unanimous agreement, they would handle the case through arbitration in a rabbinical court, or beth din. But so far, the two sides have been unable to agree on what branch of Judaism they want to hear their case: Mr. Leviev wants an Orthodox panel and Mr. Mann wants a Conservative panel. The sticking point is over which branch would have the greater experience in commercial matters.

If the two sides do not reach an agreement by Wednesday, a lawyer for Mr. Leviev says he will ask a State Supreme Court judge to decide what kind of rabbi should arbitrate the case. An Apollo spokeswoman declined to comment.

The Apthorp was built by the Astor family and modeled after the Pitti Palace in Florence. In more recent years, it has been home to celebrities like Nora Ephron, Rosie O’Donnell, Conan O’Brien and Al Pacino.

Like many condo projects in New York City, the Apthorp was sold with hopes that it would generate the profits that other coveted buildings had reaped.

Mr. Mann, a New York-based landlord, contracted to buy it for $426 million in November 2006. By the next spring, he had attracted Mr. Leviev’s company and others, including Ralph Braha, the Feil Organization and Joe Nakash, chairman of Jordache Jeans, to invest.

Court records show that the owners borrowed a $385 million first mortgage from Anglo Irish Bank. (Public records do not show that Mr. Mann has missed any mortgage payments or had any problems with his first mortgage.)

The owners also took out a $135 million second mortgage, known as a mezzanine loan, with Apollo Real Estate Advisors. But that meant buyers would have to pay at least $2,500 a square foot for the owners to cover their costs, according to data tracked by the real estate firm StreetEasy.com. That is considerably more than other buildings in the neighborhood are asking today.

But by the time the Apthorp’s owners started selling the condos in 2008, the economy had soured. StreetEasy.com says the data shows that no buyers have reached a contract on the building.

After the sale of the building, Mr. Mann was put in charge of handling the leasing, condo conversion and condo sales at the building. But Mr. Leviev’s executives grew concerned about how he was managing the project. On Oct. 6, the owners met to talk about having Mr. Mann resign and perhaps sell the project, court records show.

Mr. Leviev’s executives decided to sue Mr. Mann in December when they found out that Apollo had rejected Mr. Mann’s business plans as “extremely unrealistic given current market conditions” and “lacking backup or basis for some of the projections.” The lender asked Mr. Mann to submit a new plan by Dec. 7 and gave him a deadline of Dec. 16.

In court papers, Mr. Leviev said Mr. Mann had removed so many residents from the project that it could have created concerns with the state attorney general’s office for a practice called “warehousing.” Mr. Leviev also said Mr. Mann was placing his employees in Apthorp apartments, including some of the penthouses.

“Mann is hell-bent on this path of destruction, and his reckless conduct is destined to result in the lenders refusing to work with the parties in this challenging market, the ultimate foreclosure of the loans, the failure of the condominium conversion,” those court records say.

Updated Story - New York Times