NEW YORK CITY—Looking beyond the soap opera-like headlines of the proposed sale of Starrett City, real estate attorney William P. Walzer says, “It is so competitive to get property these days that people buy limited partnership interests as a way of leveraging decision makers to sell to them.”
Walzer, a partner at Davidoff, Hutcher & Citron is not involved in the Starrett City lawsuit, so in a GlobeSt.com interview provided an impartial assessment of the case.
Within the group of plaintiffs, trying to stop the sale of Starrett City, the largest federally subsidized housing complex in the country, Walzer points to two substantial corporations: Belveron, LLC, based in San Francisco, CA and LIHC (Lower Income Housing Corporation), based in Portland, ME. Together they own a 12% interest in Starrett City.
Belveron and LIHC tried to top the offer of Brooksville Co. and Rockpoint Group of $850 million for residences and not less than $30 million for the retail assets. Belveron and LIHC offered $905 million, later upping their offer to $25 million more than whatever aggregate purchase price was offered.
Walzer explains the essence of the complaint as twofold: The plaintiffs allege that the process by which the sellers, Starrett City Associates, marketed the property and selected the buyers was flawed. They also claim that the process of getting the Starrett City Associates limited partnership’s consent to the sale was flawed because relevant information was not disclosed and not considered.
However, Belveron and LIHC’s interest in acquiring the property, that is also known as Spring Creek Towers, is almost impossible to overlook.
So is the dramatic backstory.
As reported in the New York Times, real estate mogul Disque D. Deane left his wife to marry his daughter Marjorie’s college classmate. After he died, his widow, Carol Deane, gained control of Starrett City Associates, as the general managing partner. She was estranged from Disque’s four children, including Marjorie who had felt betrayed by the affair.
Carol hired Doug Harmon, a Cushman & Wakefield broker, well-experienced in this sector of the real estate market. He found the buyers who signed a purchase agreement for the sprawling 46-building, 5,881-unit Brooklyn housing complex.
As a subplot, President Donald Trump had inherited a 4% interest in the housing complex, making more than five million dollars in income from the development last year, as reported by Bloomberg. The federal government subsidizes the complex, and the Department of Housing and Urban Development, headed by Trump appointee, Ben Carson, would need to approve its sale. With the current sale agreement, Trump stands to gain approximately $14 million, according to the New York Times.
GlobeSt.com, the Real Deal, the New York Times and other publications reported on the multiple conflicts of interest.
This comes into play as Carol had worried that media attention about Trump’s connections to the development could discourage potential buyers.
The plaintiffs allege that by not having an open bidding process and Harmon’s finding only one buyer, Starrett City failed to maximize value for the shareholders. They point out that Starrett City did not even consider the higher offer of Belveron and LIHC.
The plaintiffs also claim Carol did not fully disclose that Harmon was retained to find a buyer but instead she represented that he was working on a recapitalization. All of these actions, they plead amount to breaches of fiduciary duties of loyalty, candor, disclosure and care owed to the plaintiff partners.
Walzer responds, “When you are dealing with a special property like this, you really don’t have to put it out to the world and have some bidding. That doesn’t make a lot of sense. The main thing is you want to pick a buyer who is qualified and able to close and who will get approved by HUD.”
In 2007, government agencies blocked the sale of Starrett City for $1.3 billion, fearing the developer would flip the low income housing into market rate developments. Thus, too high of a price could also scuttle a deal of this nature. The sale would need to be approved not only by HUD but also by New York’s Division of Housing and Community Renewal because the property receives Section 8 benefits.
“She’s in an impossible situation, if you think about it,” says Walzer. “It’s got to be low enough to obtain consent of the government agencies but high enough to satisfy all the partners, so it’s really a tough spot for her.”
He also points to the business judgment rule in which judges are averse to second guessing the business decisions of corporate directors or general partners unless it is shown that the person did not act in good faith and did breach a fiduciary duty.
As for the 15,000 residents of the complex, Walzer says this raises large social policy issues if the complex is removed from the affordable housing regime. “They don’t want too high a price because then it wouldn’t get approval.”
Referring to people who depend upon subsidized housing he asks, “Where are they going to live? Regular people hardly have any place to live anymore.”
The defendants received an extension to Dec. 1, 2017 to file their answer to the complaint.