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The Condo Conversion Crunch

By Adam Leitman Bailey


By: Julie Satow

September 5th, 2013

On first blush, it looks like Carol Cohen, a top residential broker in Manhattan who has counted the fashion designer Vera Wang and the publishing scion Lachlan Murdoch as clients, has a great setup. She lives with her husband in a sprawling two-bedroom apartment on a prime block on Park Avenue, for which she pays about $3,000 a month in rent, far less than the $9,500 a month a nearby two-bedroom on Park Avenue costs.

But her building… is becoming luxury condominiums, with units priced as high as $27 million. And in a fairly transparent attempt to push Ms. Cohen out of her apartment, the developer is suing to have her investigated for tax fraud…

Ms. Cohen is by no means alone in her experience… Other tenants who have had to battle the developer in court include the grandchildren of the former landlord; a Holocaust survivor; a nonagenarian couple, one of whom suffers from dementia; and a plastic surgeon. The developer has even sued the former landlord, the Katz family, arguing that it did not accurately represent the nature of its leases with many of the tenants.

As the condominium market surges, with prices that continue to beat those attained during the last real estate peak in 2007, many developers have been targeting rental buildings for conversions, particularly on streets with the cachet of Park Avenue. And when developers are willing to go to great lengths to wring every last dollar from an investment, impassioned lawsuits often result and the toll can be destructive.

That was the case during the last boom cycle, when several marquee developers, including… Kent Swig, tried to convert longtime rental buildings into luxury condominiums with varying degrees of success. [The property was acquired] in 2011 in a $360 million transaction, one of the highest prices paid for a conversion since the height of the last real estate bubble. That is strong incentive to empty the building of as many tenants as possible so as to increase the number of converted units. A two-bedroom of a similar size and on the same floor as Ms. Cohen’s rental, for example, is in contract for $3.75 million, according to Streeteasy.com.

Like most conversions, [Cohen’s building] is under a non-eviction plan, meaning tenants who choose not to buy their apartments cannot be evicted and can continue to rent.

As for Ms. Cohen, the 1,600-square-foot rent-stabilized apartment that she shares with her husband, who suffers from a heart condition and is over 80, costs $3,060 a month, according to court documents. In 2004, the unit’s rent went above the rent stabilization limit of $2,000 a month (that limit has since been raised to $2,500) and the Katzes began filing petitions to deregulate the apartment. The landlord asked the state to investigate Ms. Cohen’s income, arguing that as a top Manhattan broker, she earned more than the $175,000 income cap that was then allowed for rent-stabilized homes (that cap has since been raised to $200,000).

Once deregulated, the apartment would no longer be subject to regulated rent increases and could be rented at market rates. Ms. Cohen has denied that her income and that of her husband exceeded $175,000.

In 2010, after these petitions were rebuffed several times, the landlord filed a suit alleging that Ms. Cohen had lied about her income for years to avoid paying a market-rate rent. In December of that year, The New York Post reported on the lawsuit, calling her a “cheat” in its headline, and the following day Ms. Cohen’s employer, the Corcoran Group, terminated her, according to a lawsuit that Ms. Cohen filed against the brokerage firm.

After being informed of her firing, Ms. Cohen was escorted from the premises, her boss “refusing to permit her to gather personal belongings and her list of business contacts,” according to the suit. Ms. Cohen says she was never able to retrieve those valuable contacts and has sued Corcoran for $3 million in damages.

Ms. Cohen has since found employment at Brown Harris Stevens, but she seems to have sold little real estate in recent years, with just one completed deal so far this year and no current properties for sale, according to Streeteasy. Ms. Cohen declined to comment through a spokeswoman at Brown Harris Stevens. Corcoran also declined to comment.

The case brought by the Katz family against Ms. Cohen was eventually dismissed, but earlier this year, [her building] filed a new claim against Ms. Cohen, alleging that she hid her income, and sued the state attorney general’s office and the New York State Homes and Community Renewal agency to compel a further investigation, including a request for a subpoena of the Corcoran Group’s payments to Ms. Cohen. Ironically, the suit cites the $3 million in damages that Ms. Cohen attempted to recoup from the Corcoran Group as proof of her high earnings…

While these cases are still pending, several have already been settled, including the one brought by the elderly couple, Martin and Tibbie Schwartz. Age 97 and 93, respectively, at the time of the suit last year, they had lived for more than five decades in the building and Mrs. Schwartz suffers from dementia. The couple argued they had a right to their apartment but have since moved out after settling for an undisclosed amount.

“These landlords don’t care if there are people still living in the buildings — they redo the plumbing, tear out the walls, major construction that would drive anyone insane,” said David Rozenholc, the lawyer for the Schwartzes. “It used to be that a developer who bought a building to convert would redo the lobby, maybe some other minor improvements, while there were still tenants living inside. Now, they tear the building up and as long as they have the right permits, the city Department of Buildings really doesn’t care.”

Perhaps the most notorious case was that of Mr. Swig…

Mr. Swig tried to convert the rental building at 322 West 57th Street, which he branded Sheffield57. He made headlines for, among other things, hiring a marching band to drown out protesting tenants; renumbering the floors to make the building appear 57 stories tall; and for being hit on the head with an ice bucket during a heated argument with a former business partner.

Mr. Swig… eventually lost the building in a foreclosure. Several other developers faced a similar fate, including the original developers of the Apthorp, a landmark building on the Upper West Side. At the Manhattan House, another huge condominium conversion that began in the last real estate cycle, the developers remain locked in a suit with some 35 tenants who, seven years after the conversion began, still have not left their homes.

“No better means exist for increasing the value of a building than by evicting and buying out tenants,” said Adam Leitman Bailey, a lawyer who represents [another tenant]… who was born in the Krakow ghetto and who recently negotiated a settlement with the developer and will be vacating his apartment. “One of the greatest battles during the last 70-plus years has not been in the air or the battlefield but in the apartments in desirable neighborhoods.”

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS