Manhattan House condo loan meets market resistance

Syndication of Condo-Conversion Loan Lags
Commercial Mortgage Alert
September 28, 2007

HSH Nordbank is struggling to syndicate a $700 million floating-rate loan it originated for the recapitalization of the troubled Manhattan House condo-conversion project.

The German bank plans to retain the roughly $300 million subordinate portion and sell the rest, according to market players. But while Bank of America has agreed to take down $100 million of the senior portion, HSH has not yet been able to place the balance.

Some lenders, like Metropolitan Life, are still studying the loan. Others, like Calyon, have decided to bypass it, put off by a legal dispute between the owners, opposition from angry tenants and the general market uncertainty.

"I actually like the property," said one lender. "It’s got great potential. But with everything else hanging over it, I don’t know."

"This is a very illiquid environment," another banker said. "It’s a tough time to be in the market with something like this."

HSH’s loan was part of a restructuring last month that allowed Jeremiah O’Connor of O’Connor Capital Partners to buy out his partner, New York developer Richard Kalikow.

The duo purchased the tony property in 2005 from New York Life for $625 million, with the goal of converting the 583 apartments into condominiums.

But O’Connor and Kalikow fought over the management of the conversion, leading to a lawsuit. In June, a New York State Supreme Court judge ruled that one partner would have to buy the other out to resolve the dispute.

At first, Kalikow agreed to buy out O’Connor. But then, on Aug. 1, Kalikow announced that O’Connor would buy him out instead. Last month, Kalikow filed a lawsuit accusing O’Connor and condominium-sales broker Prudential Douglas Elliman of colluding to undermine his position in the deal and seize control of the project.

The Manhattan House complex consists of five linked towers, each with its own elevator bank, driveway and private street-level gardens. The property sits on a full block between East 65th and East 66th Streets, stretching from Second to Third Avenues.

Kalikow and O’Connor financed their acquisition and part of the conversion with a $672 million loan from Credit Suisse and Lehman Brothers. The $450 million senior portion was securitized via a $2 billion pooled offering (Credit Suisse First Boston Mortgage Securities Corp., 2005-CND2) that was one of the first CMBS issues backed solely by condo-conversion loans.

Tenants attempting to block the conversion last year complained to the state attorney general that the information disclosed to investors in the securitization should have been withheld until the release of a preliminary prospectus for the condo sales. They have also accused the owners of harassing tenants in the approximately 250 rent-stabilized units.

Renovations to the first 30 units began earlier this year. The conversion will encompass everything from studios to four- and possibly five-bedroom condos, with the top-floor units reserved as penthouses.

Units will range in size from 600 sf to 2,400 sf. In response to demand for larger units, some apartments could be combined to create units of up to 3,600 sf.