Harry Macklowe has the perfect real estate deal for the harried chief executive who rides the Metro-North rails into the city every day from the bucolic horse country of northern Westchester County. The developer is shopping around drawings of an elegant new skyscraper he wants to build, just a block from Grand Central Terminal, on the southwest corner of 42nd Street and Madison Avenue.
The proposed tower, designed by the architectural firm of Skidmore, Owings & Merrill, is said to be a beauty. There’s a garden in the lobby, and the floors above are vast enough for the trading operation of any self-respecting investment bank.
There’s only one problem: Mr. Macklowe may not actually own the site.
That’s what Credit Suisse First Boston Corporation alleges in a lawsuit filed in U.S. Bankruptcy Court in Manhattan. C.S. First Boston financed many of Mr. Macklowe’s recent purchases and it lent the developer $105 million to acquire several nondescript buildings on Madison Avenue between 41st and 42nd streets that he hopes to demolish to make way for his new, $400 million skyscraper at 310 Madison. In return, the bank got a 50 percent stake in the deal.
But the lawsuit charges that Mr. Macklowe lost his rights to the properties after he failed to close a deal with the investment bank to restructure nearly $300 million in debt on several of his midtown holdings.
Mr. Macklowe has refused to give up on the site without a struggle. C.S. First Boston charges that before the restructuring talks broke off, Mr. Macklowe transferred ownership of the development site to a corporation under his control.
Mr. Macklowe is notorious for playing rough. Over the years, he has made headlines for his legal shootout with Martha Stewart over the dividing line between their neighboring East Hampton homes and his company’s middle-of-the-night demolition of a single-room-occupancy hotel in Times Square in 1985.
This time, however, the developer may be playing hardball out of desperation. According to the lawsuit, along with his problems at 310 Madison, Mr. Macklowe has defaulted on his C.S. First Boston-backed mortgages at 2 Grand Central Tower and 540 Madison Avenue. The latter building was the site of a catastrophe little more than a year ago when roughly a ton of bricks rained down on a Sunday afternoon during the Christmas shopping season and resulted in the closing of Madison Avenue between East 54th and East 55th streets for several weeks.
According to the lawsuit, the developer’s insurance company is refusing to cover an estimated $5 million in claims arising from the brick shower. The company believes the incident was caused by “faulty design, materials and workmanship.”
C.S. First Boston’s attorneys said Mr. Macklowe, who has countersued the investment bank, is trying to pull one of the oldest shenanigans in the real estate trade: He is seeking to tie up 310 Madison in court until he can get his hands on enough cash to make C.S. First Boston go away.
Mr. Macklowe clearly would be in a better position to send the investment bank packing if he could land a tenant willing to sign a 25-year lease at his proposed skyscraper. Industry insiders said executives at a number of large corporations are interested in the tower, but are said to have serious reservations about entrusting their development needs to Mr. Macklowe.
When he unveiled his plans for 310 Madison last spring, Mr. Macklowe seemed to be on the verge of putting his troubled past behind him. He had clawed his way to the top of the Manhattan real estate world in the 1970′s and 1980′s, only to be branded a pariah because of the Times Square hotel mishap. If that wasn’t bad enough, he lost some of his prime holdings when the real estate market crashed in the late 1980′s.
Regains His Footing
In the last few years, however, Mr. Macklowe regained his footing and joined forces with C.S. First Boston to embark on an expansionist binge. Indeed, he was doing so well last May that he registered with the Securities and Exchange Commission to issue an initial public offering with Lehman Brothers Inc. The I.P.O. was supposed to have reaped more than $520 million.
Mr. Macklowe planned to use this geyser of cash to finance his plans for 310 Madison, a project that might have restored his reputation as one of the city’s pre-eminent developers.
The story of his acquisition of the site is classic Harry Macklowe. The owners of 310 Madison filed for bankruptcy in 1996. Mr. Macklowe forced his way into the picture when he bought a loan on the property for $60 million in August 1997. C.S. First Boston lent him $105 million to do the deal, and it became a 50-percent partner.
The owners, led by real estate mogul Edward Strasser, weren’t pleased by Mr. Macklowe’s appearance. They tried to keep him from getting control of the property by joining forces first with real estate investor Andrew Penson and later developer with George Klein.
It didn’t work. In the end, Mr. Macklowe and C.S. First Boston outmaneuvered their adversaries in bankruptcy court and carried the day at 310 Madison.
Then things really got interesting. C.S. First Boston claims Mr. Macklowe agreed to name the bank the prime mortgage holder on the property as part of the loan agreement.
However, the bank has said the developer attempted to file a plan in bankruptcy court that would have violated the agreement. The bank was so taken aback that it threatened to sue.
Instead, C.S. First Boston tried to get the developer to behave by wielding a different sort of club. At the time, Mr. Macklowe and C.S. First Boston were in the midst of negotiations to restructure nearly $300 million in loans held by the bank on 310 Madison, 2 Grand Central Tower and 540 Madison Avenue.
Mr. Macklowe hoped that his I.P.O. windfall would enable him to purchase the bank’s partnership stakes in the three buildings. So to mollify his indignant lenders, he agreed to put 310 Madison under the C.S. First Boston’s control until the negotiations were completed, according to the bank.
The plan was approved by Judge Cornelius Blackshear of U.S. Bankruptcy Court after a June 10, 1998, hearing.
In the following weeks, two important things happened. Instead of putting 310 Madison in C.S. First Boston’s hands, Mr. Macklowe transferred the property to a limited partnership under his control, the bank has said.
At around the same time, Mr. Macklowe abandoned his plans to issue the I.P.O., probably because the stock prices of publicly traded real estate companies had tumbled.
Things have been rough for the developer since then. He failed to close on purchases of 717 Fifth Avenue and 625 Madison Avenue. And his efforts to buy 460 Park Avenue also fell apart.
In the wake of these busted deals, real estate insiders are wondering if Mr. Macklowe is having financial difficulties. Howard Rubenstein, a spokesman for Mr. Macklowe, insisted nothing could be further from the truth. “He’s not experiencing cash-flow difficulties,” Mr. Rubenstein said.
Peter Hauspurg, chairman of Eastern Consolidated Properties Inc. and a friend of Mr. Macklowe, agreed. “Harry’s a very complicated guy and he has a number of different things going on. The biggest cards [in Mr. Macklowe's game] have yet to be played.”
Not Enough Money?
Nevertheless, on Oct. 26, Warren Cole, president of the Macklowe Organization, informed C.S. First Boston that the company didn’t have enough money to close the $300 million loan restructuring. According to C.S. First Boston, the closing would have required Mr. Macklowe to put up a mere $4 million in cash, a pittance for the developer in better days.
“It’s apparent now that Macklowe does not have the resources to develop the property and that third-party equity sources are not available to him,” Peter Smith, a C.S. First Boston vice president, said in an affidavit.
The bank filed suit in bankruptcy court to wrest the property away from Mr. Macklowe and force him to live up to his obligations. The case is full of inflammatory charges.
C.S. First Boston says Mr. Macklowe has been siphoning cash from 310 Madison and emptying the buildings in preparation for demolition even though he has yet to resolve his differences with the investment bank.
It says the developer owes $2 million in unpaid interest from 540 Madison Avenue. Even the falling bricks at 540 Madison and Mr. Macklowe’s alleged insurance problem are mentioned. According to C.S. First Boston, Mr. Macklowe is having problems getting coverage for the incident because he bought insurance from a low-rated company, another violation of his loan agreement.
Mr. Macklowe has countersued C.S. First Boston. His attorneys insist his loans are not in default and C.S. First Boston has perpetrated a fraud to get its clutches on 310 Madison. Over the fierce objections of the bank’s lawyers, they have successfully agitated for the case to be heard by a mediator.
C.S. First Boston’s attorneys said Mr. Macklowe is simply stalling for time. “They believe somehow they will gain time and they will find a savior who will drop out of heaven to come up with $4 million that Mr. Macklowe needs to close [the restructuring deal],” fumed Dale Schreiber, an attorney for the bank, at a recent hearing. “That’s all it takes. Under the term sheet, there is almost $300 million in credit extended on these buildings and Mr. Macklowe cannot come up with $4 million, which he apparently had in June 1998.”
Even so, Mr. Macklowe is circulating his lovely architectural drawings and prospective tenants like CIBC Oppenheimer & Company and Ernst & Young L.L.P have given them serious consideration. According to real estate sources, the companies would have been willing to enter into a development partnership with C.S. First Boston.
But those sources said such blue-chip tenants simply aren’t interested in doing business with Mr. Macklowe. Mr. Macklowe has always been dogged by trouble, they added, and his legal brawl with C.S. First Boston has done little to change that perception.
Meanwhile, the battle rages on. “There are a lot of issues that we are still not in agreement on,” said William Adamski, a C.S. First Boston managing director.
For his part, Mr. Rubenstein said those who whisper that tenants are avoiding 310 Madison Avenue because they had been frightened off by Mr. Macklowe don’t know what they are talking about. “That is not accurate,” Mr. Rubenstein said. “He’s always had wonderful relationships with his tenants.”
Who knows? Maybe one of these days he’ll even find one bold enough to sign a lease at 310 Madison. “I don’t care what anybody says about Times Square,” Mr. Hauspurg said. “Forty-second and Madison across from Grand Central Station is a better business location. Especially if the guy who is making the decision is a C.E.O. from Bedford.”
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