Representing the Lender, Adam Leitman Bailey, P.C. Is Given One of the Largest Due Diligence Projects in New York City History
Adam Leitman Bailey, P.C.’s due diligence team was given five business days to investigate a building portfolio of over 1100 condominium units, educate the borrower on the process of deregulation and what pitfalls to expect, and determine whether the seller was withholding information about the buildings’ participation in the J-51 and 421a tax benefit programs. Adam Leitman Bailey, P.C. revealed that all the buildings, not just two of them, as was represented by the seller, at some point in time enjoyed J-51 tax benefits which means that despite the expiration of those benefits, market tenancies may actually be rent-stabilized. Adam Leitman Bailey, P.C. found that management misrepresented the building’s income on its rent roll, skewing the monthly rental rates in favor of an income higher than what was actually realized. Adam Leitman Bailey, P.C. also found that recently vacated units that would otherwise be ripe for deregulation would fall under rent stabilization if the owner chose to avail itself of the J-51 tax benefits that were expected to be approved within the next two weeks. Adam Leitman Bailey, P.C. also revealed a history of management mistakes that potentially exposed the building to overcharge liability and treble damages. Adam Leitman Bailey, P.C.’s findings, at a minimum, informed the lender about the collateral but at best, saved the lender from relying on collateral that is substantially less than its perceived value.
What brought this client to Adam Leitman Bailey, P.C. was that on the eve of closing, the seller surprised the buyer with news that two of the seven buildings in the sales portfolio were subject to the J-51 tax benefit program made famous by the Roberts v. Tishman-Speyer case. Not only does this late, yet incredibly vital, news come on the eve of closing to open up rent-regulation issues that fell outside its already complete due diligence investigations, but it begged the question of what else could this seller have withheld in negotiations of this deal. Exposure of the buildings’ participation in the J-51 program meant that not only are the covered units not subject to luxury decontrol, that is, deregulation of an apartment once the legal rent hits $2500 and the annual household income exceeds $200,000, but that any recently vacated units or units they expect to vacate in the near future would fall under rent-stabilization coverage thereby reducing the building’s forecasted future income.
Adam Leitman Bailey, P.C. quickly strategized and decided that the most efficient way to tackle the questions presented by the client within the strict, limited time frame available was to take an educated sampling of the units by reviewing the buildings’ Division of Housing Rent Registration Reports and Case Lists, quickly extracting and closely evaluating those units that, in our experienced eye, appear to be poorly managed and presented a problem for future deregulation and/or litigation, and reporting our findings a Lender’s Risk Assessment Report presented to Adam Leitman Bailey, P.C.’s client.
A Lender’s Risk Assessment Report offers a lender the opportunity to see the full potential of its collateral while also unveiling those issues that could severely diminish its value. The history of building management, the history of violations issues against the buildings by the City of New York and the propriety of management’s past reporting to the Division of Housing and Community Renewal are among the factors considered in Adam Leitman Bailey, P.C.’s assessment, together with the individual unit review and evaluation described above.