is there a discernible market impact to long-running litigation over defects in luxe Flatiron loft development?

some Manhattan loft topics never get old, though they do repeat

The story about the 2010 new Manhattan loft development at 141 Fifth Avenue in the heart of the Flatiron district in yesterday’s The Real Deal, Savanna wants claims dismissed in suit over 141 Fifth Avenue, is a fascinating peak into an age-old problem I’ve blogged about before: there is a delicate dance by a condo board in a newly converted or newly built residential building when problems such as leaks, faulty windows, or other construction defects emerge. On the one hand, you want the problems fixed by the developer and/or contractors on their dime; on the other hand, going public with the dispute can cut the market value for unit owners who want to sell, at least until such problems are resolved.

I don’t know much more about this particular building than is reported by David Jones in TRDNY or is evident on StreetEasy, but the article and the sales history in the building provide another opportunity to ponder how this sort of thing impacts owners and potential buyers. There are due diligence concerns and potential mortgage hurdles for buyers; there are potential assessments, refinancing problems, and likely resale problems for owners; and boards have to weigh both unit owner interests in maintaining liquidity in their units and the imperatives to get the problems fixed, as inexpensively for the condo as possible.

these particular new development loft allegations and issues

TRDNY has only a summary of the allegations, but maybe there are not many fans of seeing the quotes that are probably in the court pleadings about these (to me) tantalizing subjects: “widespread problems with water infiltration, heating, plumbing, electrical, façade, terraces and the roof“. You just know (if you’ve seen these kind of pleading before) that there is likely to be a more or less dramatic description of  some of these problems (something like “mud spurting from their bathtubs“, for example). There are only 34 units, and with so many different kinds of problems it is likely that most units have been impacted to some degree, rather than if, for example, there were only a problem with terraces, or only a problem in windows on one side of the building, or electrical problems in only one line of units.

As often happens in these things, anyone involved in the building that someone is accusing of having done anything wrong is, in turn, pointing fingers at everyone else involved, likely saying these things in Expensive Legalese: I didn’t do anything wrong; if I did anything that someone thinks was wrong, someone else is contractually responsible for the consequences instead of me; if I did anything wrong that I am (sadly) responsible for, others did more things wrong; nyah, nyah, nyah….

The timeline suggests that the condo and the developer may have been on the same side in 2011:

“Savanna [the developer], in a 2011 lawsuit in Manhattan Supreme Court, alleged that J Construction [the construction manager], CetraRuddy [the architect] and other subcontractors were responsible for designing and installing defective windows at the luxury property, forcing the developer to hire new contractors to replace them at the cost of $2.4 million”.

But by 2013 there was all-out war, with a classic litigation circle jerk:

“The board originally filed a $2.5 million lawsuit against Savanna in April 2013 alleging fraud, negligence and breach of contract, claiming that design and construction defects exceeded the defective windows, and also sought to replenish a $1.9 million fund designed to correct defects at the property.”

It seems the board discovered more problems after April 2013:

“The amended complaint [by the board], filed in January 2014, raised the lawsuit claims to $7.5 million, alleging widespread problems with water infiltration, heating, plumbing, electrical, façade, terraces and the roof.“

Keep those dates in mind when we review the sales history and talk more about due diligence, below.

of course we have seen this before

I’d have sworn there were more relevant posts in the Manhattan Loft Guy archives, but so far I’ve only found a couple. In my March 22, 2011, when a condo board sues a developer, must resales die?, I did a longish overview of the factors that boards consider when problems are both extensive in scale and beyond punch lists in scope. That post was occasioned by a New York Times article about a very frustrated (non) seller in a Brooklyn condo described as “one of the first condominiums finished in the building boom” (that was 2005) that had what then looked like a $4.7mm problem. That (then, non) seller paid $735,000 when she bought from the original buyer in October 2007 and by the time of the New York Times article had been trying to sell for a year already:

“[reporter Christine] Haughney’s unfortunate seller is a researcher-by-day, bass-player-by-night who has been trying to sell for a year. The listing history shows that she started at $775,000 and dropped twice (to $669,000) before accepting the offer for $632,500 in December that Haughney notes.”

But that same listing history link (the history now concluded), shows that it was not until May 2012 that the researcher/bass player sold, for $590,000. That December accepted offer at $632,500 either evaporated and a new buyer found, or got re-negotiated.

The history of the controversy in that Brooklyn condo is useful here, as it is likely to be typical of the stages through which these controversies play out. That timing could hardly have been worse for that seller, and I wondered then (still do!) how she was caught by surprise. The 141 Fifth Avenue saga probably included these or similar steps:

Unknown to the seller (!), the condo board was then on the verge of suing the developer, after a series of unit owner complaints, two engineering reports, negotiations with the developer, the board’s complaint to the New York State Attorney General’s office, and (obviously) a lack of resolution.

I’d have thought that any unit owner paying even a little attention would have known that there were potentially major problems at least by the time of the engineering reports. And I wonder what the 141 Fifth Avenue unit owners knew, when, about the “widespread problems with water infiltration, heating, plumbing, electrical, façade, terraces and the roof” that became the basis of the 2013 lawsuit.

The other relevant post from the Manhattan Loft Guy archives was my July 25, 2013, is the hyper-local Manhattan loft market at 80 John Street up more than 5% in a year?, in which I did a somewhat comprehensive review of sales in a 2007 new development in the Financial District that went through litigation against the sponsor (and, others, ahem), as I hit in my my January 8, 2013, the baths get a little crowded, as another South Star loft at 80 John Street clears below sponsor sale. By July last year, the hyper-local market in that building seemed to be recovering from the litigation history, and I addressed there the way that (finally getting to) litigation can be a helpful thing for marketing (at least compared to the immediate pre-litigation mess):

Maybe the suit actually being brought solidified things enough to make it easier for buyer attorneys to assess risk (thereby, to grease the hyper-local market), or maybe the overall Financial District small-loft market is just more solid in 2013. Whatever, just sold for 7% more than the sellers paid when they bought it from the sponsor on August 9, 2007.

In that building, 10 of 12 sales in 2012 were below the sponsor sale prices in 2007, while to that point in 2013, 4 of 7 sales beat that performance.

In broad terms, by 2012 The Market seemed to be discounting for the litigation history at 80 John Street (and holding it against sellers) while in 2013 The Market was (beginning) to treat the controversy as legacy issues rather than then-active problems.

everyone did the diligence that was due, right? Bueller??

The sales history at 141 Fifth Avenue is … interesting. (Remember the timeline above, with 2011 lawsuit by developer, then the board against the developer in April 2013 and the amended complaint that raised the ante to $7.5mm 8 months ago.) This post is getting to be much too long, so I won’t take the time (or the word count) to go into detail on the 141 Fifth resales, but I see only 2 in 2011 (3, but the last one was not publicly marketed) and (most interesting) none from the end of 2011 until July 2013. My working assumption would be that The Market during those 18 months did not like the uncertainty over the allegations flying around (or, that unit owners refrained from trying to be sellers, in anticipation of that market reaction).

The two 2013 sales were in July at $1,733/ft (put together this and this) and $1,876/ft last October. Compare that range to the sale of #7C in May at… (wait for it) … (while you’re waiting, recall that the ante was raised to $7.5mm in January 2014) … $2,548/ft. Maybe there is something about the light or views from these units to account for some of this difference (the #7C broker babble doesn’t suggest so), but it sure looks to me as though The Market in 2014 is much more comfortable with the litigation issues than it was in 2013. (Assuming The Market was properly informed this year, as it had to have been with all these public records floating around.)

I assume the May 2014 #7C buyer LLC at a 36% dollar-per-foot premium to the October 2013 sale was, in fact, fully informed about the January litigation (did I mention that it was for $7.5mm?) when it signed the contract in April. How could it not have been???

The litigation status as of the April contract for #7C looks like it fits my surmise about the potentially beneficial impact of litigation in a long-contested sponsor mess, quoted above, and now again:

Maybe the suit actually being brought solidified things enough to make it easier for buyer attorneys to assess risk (thereby, to grease the hyper-local market)….

the babbling doesn’t read that way

TRDNY summarized the amended complaint in January as “alleging widespread problems with water infiltration, heating, plumbing, electrical, façade, terraces and the roof” and claiming up to $7.5mm in damages. The broker babble for the #7C sale may have been written when the listing first went live (in October 2013, before the amended complain, but 6 months after the original complaint), but the surviving copy on StreetEasy was ‘live’ for about 3 months after the amended complaint was filed. Cynical observers of the Manhattan Residential Real Estate Complex might be amused by what follows, but others won’t be. 

That broker babble describes the loft as “beautifully crafted” and the building as featuring “fully restored ornate 1897 terra cotta detailing, copper cupola and curved plate glass storefronts“; to sum, “this is a highly detailed home for sophisticated palates“. Not a word about “widespread problems with water infiltration, heating, plumbing, electrical, façade, terraces and the roof”. One assumes that the agent fully informed every serious potential buyer about the litigation, and I don’t meant to suggest this agent did anything wrong. (There but for the grace of God go I ….) But the textual contrast between “beautifully crafted” and “fully restored” on the one hand, and “widespread problems” is … jarring. 

Any careful buyer would know Something Is Up from the babble, however, even if that buyer was not represented by a buyer agent. You saw it, right? The babbling ends with:

Please note: there is a monthly assessment of $1,998.18 through December 2014.

Likely, everyone is going to ask about that, if for no other reason than that the assessment exceeds the monthly common charges for the unit. Perhaps that is how they are funding the litigation; regardless, it is almost certainly related to the problems that resulted in litigation.

things have always been thus

Of course, the possibility of sponsor litigation, or of construction defects, is an inherent risk in all new development purchases. Always has been, in fact.

Maybe the sponsor goes bankrupt (or, the well-heeled Brand Name developer’s thinly capitalized LLC formed to shield the developer from liability succeeds in doing exactly that) and fails to fund the reserve fund. (Remember that April 2013 allegation that the 142 Fifth Avenue sponsor failed “to replenish a $1.9 million fund designed to correct defects at the property“?) Or maybe the sponsor’s contractor’s failed to put in windows that, you know, closed, or roofing that was, you know, sealed, etc, etc. Stuff Happens. Not every time or to every buyer, but often enough to be a risk factor.

Those in the MRREIC with long memories will remember that sponsor litigation was a common fact of life in the wave of Manhattan coop conversions in the late 1970s into the 1980s. The small coop of which I was board present for ten years was but one example: a circa 1978 conversion into 18 residential coops on top of two floors of commercial space retained by the developer, to which the coop (eventually) took ownership in settlement of litigation with the then broker developer. Stuff Happens. And, over time, it almost always works out.

I will close this over-long post with one more summation: the fascinating thing about the condo highlighted by TRDNY yesterday is that someone paid a huge premium over past sales during as yet unresolved litigation over “widespread problems”.

I admire their fortitude and wish them only good fortune.