Developer To Complete Construction Of A Stalled Project And Resolve Construction Defect Claims Involving Three Condominiums
Control Of Condominium Board Handed Over To The Unit Owners
Restitution Of $2 Million To The City Of New York For Misuse Of 421-G Tax Benefits
Schneiderman: “Developers That Flout Their Legal Obligations To Homebuyers Will Be Held Accountable.”
NEW YORK – January 19, 2015 – (RealEstateRama) — Attorney General Eric T. Schneiderman today announced a settlement with several subsidiaries of the publicly-traded conglomerate Africa Israel Investments Limited that requires the developer to complete 15 Broad Street in Manhattan, which has been stalled for nearly a decade and surrender control of the building to the condominium owners, to resolve defect claims at three condominiums in Manhattan and Brooklyn, and to pay $2 million to New York City to compensate for improper receipt of tax benefits.
“Today’s settlement is a warning to property developers in New York State,” said Attorney General Schneiderman. “Those who collect the enormous profits that flow from offering real estate securities in New York will not be allowed to shirk their obligations to purchasers and the public. My office will not allow developers to walk away from their promises.”
The agreement was reached with AI Properties and Developments (USA) Corp., Africa Israel’s operating company in the U.S; its parent, AI Holdings (USA) Corp.; 15 Broad Street, LLC; 15 Broad Street Managers, LLC; 20 Pine Street, LLC; 20 Pine Street Managers, LLC; 85 Adams Street, LLC; and 85 Street Managers, LLC, a group of Africa Israel subsidiaries that were involved in the development of condominiums at 15 Broad Street and 20 Pine Street in Manhattan and at 85 Adams Street in Brooklyn. The Africa Israel affiliates developed the three properties as part of a joint venture with Jeshayahu “Shaya” Boymelgreen. The investigation against Mr. Boymelgreen and his associates is ongoing.
The Martin Act, New York’s blue sky law, requires developers of real estate securities such as cooperatives and condominiums to disclose the terms of the offering to purchasers in an offering plan. The law also gives the Attorney General broad enforcement powers to compel developers to fulfill their legal obligations and promises made in the offering plan. For example, developers are required to complete construction of their projects by procuring a the permanent certificate of occupancy promised in the offering plan, and they must set aside money necessary to complete the project.
The 15 Broad Street property is a 400-unit condominium that sits directly across the street from the New York Stock Exchange and includes 23 Wall Street, a landmarked property and the former headquarters of J.P. Morgan. The Africa Israel-Boymelgreen joint venture undertook renovation of the building in 2002. The property received a generous tax exemption and abatement under Section 421-g of the Real Property Tax Law designed to spur conversion of office buildings in lower Manhattan to residential use to revitalize the Financial District.
By 2008, Africa Israel had sold all the condominium units under the offering plan, grossing at least $360 million. Up until the units were sold, as the property owner Africa Israel collected the 421-g tax break on each unit. However, they then abandoned all efforts to complete the renovation and failed to procure the legally-required permanent certificate of occupancy, a clear-cut violation of the Martin Act. Moreover, with the development left unfinished, the iconic 23 Wall Street has remained untenanted and almost completely unused for eight years, robbing the City of the neighborhood revitalization that developers were supposed to deliver in exchange for the 421-g tax break. Current estimates indicate that it will take at least two years and require more than $750,000 to attain the permanent certificate of occupancy.
Under the Martin Act and regulations, developers are legally required to maintain an escrow account with funds sufficient to attain the certificate. Here, the developers drained those funds from the account before attaining the certificate yet continued to represent to purchasers that the funds were set aside. In addition, under the terms of the offering plan, Africa Israel was required to surrender control of the board to unit owners when the permanent certificate of occupancy was obtained. As a result of their failure to secure a permanent certificate of occupancy, Africa Israel continued to control the building’s board of managers despite the fact that they no longer owned any property in the building. Africa Israel then used its board control to delay and derail a lawsuit filed by condominium unit owners against the developers seeking damages for construction defects at the building.
In February 2014, the Attorney General obtained a court order barring AI Properties and Developments (USA) Corp., AI Holdings (USA) Corp., 15 Broad Street, LLC, 15 Broad Street Managers, LLC, and Boymelgreen from conducting real estate securities offerings in New York pending a public fraud investigation of the 15 Broad project before a State Supreme Court Justice. Under the February 2014 order, these respondents were also ordered to collectively deposit with the court $470,000 in monies that they improperly took from the escrow account set up to maintain the funds necessary to secure the completion of the condominium. They were also required to surrender control of the board during the pendency of the investigation.
Today’s settlement agreement requires Africa Israel to escrow with the Attorney General the funds needed to secure a permanent certificate of occupancy for the property and to obtain that certificate by April 1, 2018. If the company fails to do so, it is required to pay the unit owners $20,000 in restitution for each 90-day period that goes by without the required certificate of occupancy. The agreement also requires Africa Israel to permanently surrender control of the 15 Broad board .
The developers will also compensate the City for the receipt of 421-g benefits by depositing $2 million into the Affordable Housing – AG Settlement Fund, which was established in June 2014 to help finance affordable housing for low-income New Yorkers. The restitution in this agreement brings the total in the Fund to more than $9.5 million.
The agreement also resolves claims relating to a condominium at 20 Pine Street in Manhattan, a 409-unit condominium that the Africa Israel-Boymelgreen joint venture began developing in 2004. Africa Israel had sold all the units in the 20 Pine Street offering by 2013, collecting at least $500 million in gross revenue. However, just like they did at the 15 Broad Street property, Africa Israel walked away from its obligation to complete the renovation and failed to procure the legally-required permanent certificate of occupancy. And, as at the 15 Broad Street property, they drained the funds required to secure the permanent certificate of occupancy from the escrow account that they were required by law to maintain.
Like at 15 Broad Street, under the terms of the 20 Pine Street offering, Africa Israel was required to surrender control of the board to unit owners only when the permanent certificate of occupancy was obtained. As a result, the failure to secure the permanent certificate of occupancy allowed Africa Israel to control the 20 Pine Street building’s board despite the fact that they did not own any property in the building. And, as with 15 Broad Street, Africa Israel used its board control to impede a lawsuit filed by unit owners against the developers relating to construction defects at the building.
It was only after the Attorney General went to Court and secured the February 2014 Order that the developers of the 20 Pine Street property did the work needed to secure the permanent certificate of occupancy. The certificate was issued in June 2014 and the developers surrendered control of the board shortly thereafter. However, until today’s settlement, Africa Israel had not resolved the construction defects claims brought against it by unit owners.
Finally, today’s settlement also resolves claims relating to a condominium at 85 Adams Street in downtown Brooklyn. That property is a 79-unit development that the Africa Israel-Boymelgreen joint venture began developing in 2004. The developers sold all units in the property by 2008, grossing at least $60 million. In 2009, unit owners sued Africa Israel, alleging serious construction defects at the property, including an almost complete lack of the fire-rated construction required under the New York City Building Code. As at 15 Broad Street and 20 Pine Street, Africa Israel has failed, over a number of years, to resolve the defect claims.
The settlement requires Africa Israel to establish a restitution escrow with the Attorney General. The funds in this escrow will be released to unit owners at the 15 Broad Street, 20 Pine Street and 85 Adams Street buildings in the event that Africa Israel does not resolve the construction defect claims at the three buildings by a date certain.
The agreement also provides that if Africa Israel fails to comply with its terms, the company agrees to be permanently barred from engaging in any securities-related business or activity in or from New York State. Also under the settlement, Africa Israel agrees to pay the Attorney General $250,000 to cover the costs of its investigation.
A copy of the agreement can be found here.
The investigation was led by Assistant Attorney General Elissa Rossi, Erica F. Buckley, Chief of the Real Estate Finance Bureau, and Executive Deputy Attorney General for Economic Justice Karla G. Sanchez.
