Questions surface about controversial Manhattan House financing

By Vanessa Londono and Gabby Warshawer - February 13, 2007
The Real Deal

While the Upper East Side's massive Manhattan House is slowly being converted from rental to condo, questions remain about the project's controversial financing structure, which involves securitization bonds.

Fitch Ratings released a statement yesterday flagging the property's loan, noting, "Fitch is concerned about delays at the Manhattan House...The Manhattan House loan is secured by a 583-unit multifamily rental building...As of the January 2007 remittance, there had been no sales or contracts signed for any of the units."

Contracts and sales for the conversion, however, cannot occur until the project is approved by the New York State Attorney General's Office, an approval that Manhattan House's owners expect to occur shortly.

Manhattan House's owners said the project was not experiencing delays.

"There has been no delay in the Manhattan House project. We are awaiting approval from the Attorney General and until Manhattan House receives that approval, there can be no sales or contracts signed," they said.

The first condo conversion bonds appeared in 2005, but relatively few investors have utilized the securities. Real estate experts have warned that the financing could be problematic if a conversion is unsuccessful.

Manhattan House's owners Richard Kalikow and Jeremiah O'Connor obtained $450 million in securitization bonds underwritten by Credit Suisse to finance the conversion of the building. The condo's mortgage loan was sold with other loans to investors backed by the condo building itself.

"The Manhattan House is among the first condo projects of its size to get financing," said Neil Shapiro, partner at the law firm of Herrick, Feinstein.

According to tenants of the Manhattan House, when Kalikow and O'Connor used securitization bonds to fund the condo conversion, details were released to the public by independent rating agents before the proposal was reviewed. Tenants argue that this violated the Martin Act, which governs condo conversions.

"The issue has been resolved," said Jin Lee, chief financial officer for Kalikow's company, Manchester Real Estate. "To have a loan financed in the public market, rating agents will do their own independent underwriting reports of the building. We can't stop them from doing their own decisions and judgments but that's not what our offer is."