The sale of the mortgage tied to the Brooklyn condo Warehouse 11 has taken a new and seamy turn.
The 120-unit building's developers, Yitzchok Schwartz and Isack Rosenberg, defaulted on their $45.6 million mortgage with Capital One earlier this year, prompting the bank to offer its loan in the nearly complete project to interested buyers.
Now Capital One has launched a lawsuit to wrench control of the property from Schwartz and Rosenberg on allegations the pair has looted the building’s appliances and let it fall into decay from exposure to the elements.
Capital One hired a team from the real estate brokerage firm Massey Knakal led by the firm’s chairman Bob Knakal last spring to begin marketing the note in an attempt to clear the troubled deal from its books.
According to a lawsuit filed by Capital One, members from Knakal’s team noticed during an inspection of the building a few months later in July that fixtures and appliances that had previously been installed in the units had suddenly gone missing.
In documents filed in State Supreme Court, two of Massey Knakal’s brokers who were working on the sale, Jonathan Hageman and Elysa Berlin, describe that in preliminary visits in April and May, nearly all of the dozen or more apartments they examined had “some combination of household appliances, such as stoves and refrigerators.”
“On or about July 22, 2009, I again visited the premises, with a team of colleagues, to observe its condition in order to market the loan to prospective purchasers,” Hageman recounts in a statement contained within Capital One’s suit. “I observed during this visit that none of the units that I visited… contained any household appliances.”
Hageman said that his colleague Elysa examined more apartments than he did that day and “reported that she saw very few appliances on the premises." He concluded “that numerous appliances have been removed from the premises between in or about May, 2009 and July 22, 2009.”
On yet another visit in August, Elysa says that she discovered even more missing items, including a stove that had been taken on the ground floor and a bathroom sink fixture that had been removed from another apartment she inspected on the second floor.
Elysa said that the Massey Knakal team couldn’t finish inspecting the property, which is located just south of McCarren Park at 204/214 North 11th Street, that day because an enraged Schwartz locked most of the units and then “forced us to remove ourselves from the Premises.”
Elysa said that the Massey Knakal team was locked into the building and eventually “had to exit through the back doors through the parking lot.”
Capital One’s complaint concludes that the theft was perpetrated by Schwartz and Rosenberg or by “individuals permitted access to the premises by the defendants.”
But stealing hasn’t been Capital One’s only issue. The suit alleges that water has been collecting in the fallow property’s basement since at least January and has caused damage, including mold.
In court documents, Jean DeLuca, a vice president and on-staff engineer at Capital One, remembers two inspections in January in which he “observed water in the basement of the building” including a pool in one area that was four inches deep.
“Almost all the areas observed were noted to have a water presence, including the stairwells,” DeLuca states. “The areas that were not observed were about 10 percent of the rooms, which were locked and inaccessible.”
“Mildew was visible in various areas throughout the cellar level,” DeLuca recalls. “As a result, there was a strong mildew odor in the cellar and on the first floor.”
DeLuca said that Schwartz provided a host of excuses for the problem at the time, including a claim that one of the building’s doors had accidentally been left open, allowing the freezing temperatures outside to cause a pipe to burst.
“Schwartz’s account is implausible,” DeLuca said, stating that the damage was inconsistent with such a rupture. DeLuca said that he noticed haphazard attempts to conceal the water problem, including painted areas “to try to cover areas of mildew” and waterlogged drywall in storage rooms that were “removed and replaced with green-board.”
Capital One is seeking to have the property placed into the hands of a receiver, an entity that will take control of the building until the bank can sell the loan. According to the bank's complaint, Schwartz and Rosenberg's theft at the property along with the water damage will have a negative impact on the value of its mortgage.
So far, Capital One's request has been stalled as the case was moved from State Supreme Court to Bankruptcy Court last month because Schwartz has filed for bankruptcy.
In more recent documents last month, lawyers representing Schwartz and Rosenberg have argued that bankruptcy protections should block Capital One from proceeding with the sale of the mortgage and that the pair deserve a right of first refusal on the note. According to the pair's lawyers, they claim that rival bidders have been willing to pay about $34 million, a price that would allow the pair to substantially reduce their debt.
As for the alleged stealing and water damages at the property, a lawyer for the two stated that Capital One’s claims were “ludicrous.”
“Why would they damage their own 98 percent-completed project when they stand to reorganize themselves and profit and get back on their feet?” The lawyer asks.
“On the question of the second allegation they made about removing appliances, I mean in and of itself it’s sort of ludicrous,” the lawyer states. “One, there were no refrigerators at the premises and… two, there was a burglary in the facility… and that was reported immediately to the police.”
In addition to the loan with Capital One, Schwartz and Rosenberg have a roughly $15 million mezzanine loan with the real estate investment group RCG Longview and have racked up numerous mechanics liens and other judgments on the property.