June 17, 2007
By JOSH BARBANEL
New York Times
BREAKING up is hard to do, particularly for the developers of one of the most ambitious and expensive condominium conversions ever: the redevelopment of the Manhattan House, a complex with 582 apartments on a full square block on East 66th Street and Third Avenue.
The state attorney general approved sales at the $1.1 billion conversion this spring. But sales have been stalled while the project’s general manager, N. Richard Kalikow, a real estate investor and developer, has been feuding in court and out with his partner, Jeremiah W. O’Connor Jr., the managing partner of O’Connor Capital Partners, a private equity firm.
Last week, a State Supreme Court judge ordered that one partner buy the other out, under the terms of their agreement. But lawyers for Mr. Kalikow immediately filed a notice of appeal, and in the meantime are attempting to block the judge’s order.
Mr. O’Connor asked the court to order the buyout, while, according to associates, Mr. Kalikow was trying to put together investors to help him take over the huge project and refinance it.
The project has long faced legal challenges from angry tenants who have been living in the building during a year of messy renovations. But the court papers show that the project has also been troubled by cost overruns, along with disputes over the marketing campaign, access to the project records and even its Web site design.
The project is being marketed by Prudential Douglas Elliman, but with the sponsors in disarray, there have been no reports of contracts signed at Manhattan House. While most developers prefer to build with other people’s money, the papers show that for many months the construction has been paid for by regular “capital calls,” in which the partners provide cash to meet construction costs. The project’s lender refused to provide construction loans after the partners were unable to work out an agreement to provide a $30 million letter of credit to deal with the cost overruns, court papers say.
Yet with the huge demand for luxury apartments in Manhattan and with prices on the rise, it is not clear whether the dispute reflects financial distress or a struggle by one side or the other to capture a greater share of the rising potential profits.
In the court papers, Mr. O’Connor’s lawyer, Max R. Shulman, argued that Mr. Kalikow and his team had mismanaged the project, and with the partners unable to agree, Mr. O’Connor had the right to demand that Mr. Kalikow either buy him out or agree to be bought out. “It cannot be known how many sales and how much revenue have been and will continue to be lost as a result,” he said in court papers of the management.
But Mr. Kalikow’s lawyer, Mitchell A. Karlan, said the objections were a ruse, raised in bad faith to force Mr. Kalikow out of the deal and capture all the profits just as sales were beginning.
He said the issues raised in court were many months old and were brought up just before the final approved offering plan, known as the “black book,” was distributed to tenants in the building, triggering the beginning of sales. Once sales began, Mr. Kalikow’s share of the returns would eventually rise to as much as 40 percent from about 20 percent, he said.
The court decision would give Mr. Kalikow the first right to buy out his partner, and if he refused, Mr. O’Connor could buy him out. But because Mr. O’Connor and his investors put far more cash into the project than Mr. Kalikow did — $119 million versus $31 million, according to court papers — Mr. Kalikow would have to raise more money for the buyout.
Under the ruling last Tuesday by Justice Bernard J. Fried of State Supreme Court in Manhattan, Mr. O’Connor was required to post a $30 million bond to cover any potential damages that might eventually be owed to Mr. Kalikow under future court rulings. Once the payment is made, Mr. Kalikow will be given 30 days to decide whether to buy out Mr. O’Connor or give up his own interest in Manhattan House. At the hearing, Mr. O’Connor’s lawyers said they would post the $30 million in a few days, but that was before a notice of appeal was filed.