Macklowe’s Last Stand: Battles First Boston at 42nd and Madison

When Credit Suisse First Boston Corporation snatched one of Manhattan’s prime development spots away from Harry Macklowe last summer, forcing the black-hat developer to his knees beneath a debt of nearly $300 million, the bankers made just one mistake.

They left Mr. Macklowe a toehold.

Now the bank, which agreed months ago to sell the property to another developer for $150 million, is accusing Mr. Macklowe, who retains a tiny interest in the property, of “purposely trying to delay or scuttle” its deal. And Mr. Macklowe is back in a familiar place-court-fighting to keep C.S. First Boston from once and for all prying his grip from a property where he planned to build his crowning glory, a $400-million, 38-story skyscraper overlooking Grand Central Terminal.

It is, those who have watched his career agree, a vintage Macklowe performance: sly, litigious, and, above all, tenacious.

This, after all, is a onetime real estate broker who clawed his way into the clannish world of Manhattan’s skyline shapers. Who made his reputation by illegally demolishing a Times Square fleabag hotel in the dead of night. Who’s feuded with mayors, business partners, even made Martha Stewart an object of sympathy in a long-running legal feud over the property line between their East Hampton homes. Whose longtime second-in-command, Warren Cole, is now suing him, claiming Mr. Macklowe swindled him out of $18 million.

Yet for a developer who’s built a career on winning at all costs, Mr. Macklowe’s latest gambit has the distinct air of a lost cause. Even his latest victory-on April 11, a New York State Supreme Court judge temporarily blocked C.S. First Boston’s attempt to remove Mr. Macklowe-seems likely only to delay the inevitable.

So why keep fighting?

“It’s not like you just give up when you have a chance to put up a tower like this,” volunteered one Macklowe associate. Big developers leave skyscrapers as their legacies, and Madison Plaza, at 42nd Street and Madison Avenue, was to be Mr. Macklowe’s first large-scale project in years. The 62-year-old developer may also have another incentive to hang on: He’s lately been grooming his son, William S. (Billy) Macklowe, 32, to take over the company.

“The plans for this building, Harry conceived of them and-this is just speculation-to have it taken away in the design stage, when the market is terrific, is hard to take,” the associate said.

Then again, Mr. Macklowe has never been known as a sentimental man. As the deal stands now, Mr. Macklowe stands to make millions if he finishes assembling the jigsaw puzzle of properties and development rights necessary to build the skyscraper. If C.S. First Boston finalizes the deal itself, Mr. Macklowe is out of the money.

Neither Mr. Macklowe, C.S. First Boston, nor either side’s attorneys would comment on the dispute. But some familiar with the Madison Plaza deal believe Mr. Macklowe’s dithering is an attempt to squeeze the bank for more money, or even an increased ownership stake.

“He’s Dracula,” said one prominent Manhattan real estate figure familiar with the deal at 42nd and Madison. “You have to drive a stake through his heart to kill him. Only he doesn’t have a heart.”

Back to Life

Mr. Macklowe has made a career out of coming back when the naysayers have left him for dead.

A college dropout, he first entered the real estate scene in the late 1960′s, as a broker for Julien J. Studley Inc. Even then, aggressiveness in pursuit of a deal was his calling card.

Leonard Stern, real estate mogul and former owner of the Village Voice , still remembers how, more than 30 years ago, Mr. Macklowe convinced the Japanese electronics giant Panasonic to move its U.S. headquarters to property Mr. Stern owned in Secaucus, N.J.

“The Japanese at that time did not look favorably [on the idea of] moving into the Meadowlands of New Jersey,” Mr. Stern said. “He hired a helicopter, flew over and filmed the site, looking over to the skyline of Manhattan. Then he flew over to Japan, showed the video and made the deal.”

“He made a million-dollar commission,” Mr. Stern said, “and I got major tenants.”

Starting in the mid 1960′s and early 70′s, Mr. Macklowe began developing properties himself. An art collector and avid sailor, Mr. Macklowe has made a reputation for his development creativity, and for his willingness to break some sails against the winds of public opinion.

“He is a very ingenious man,” Mr. Stern said. “He is very creative, and I really think there are very few people in this city who are his peers in the real estate business from an intellectual point of view.”

But his career has been notable as much for its setbacks as its comebacks.

His late-night demolition of the Times Square S.R.O., without permits or, he has always maintained, his knowledge, made Mr. Macklowe a symbol of the excesses of the 1980′s real estate boom, and cemented his reputation as an outlaw developer. (A grand jury investigated, but never indicted him.) The Hotel Macklowe, which rose on the site, was lauded by the architectural critics. But Mr. Macklowe lost it to the bank when the real estate market soured. By 1990, his net worth was negative $134 million, according to Mr. Cole, his longtime top deputy.

That, Mr. Stern said, was the fate of “virtually every real estate guy who was first generation, [who] wasn’t second and third generation and had property they’d inherited where the mortgage was paid off.

“He got hit, Trump got hit. A lot of guys got knocked out.”

But not Mr. Macklowe. Through the 90′s, he put the pieces back together, and, by 1998, his net worth was back up around $300 million and he was planning an initial public offering of his holdings, expecting to raise more than $500 million.

Mr. Macklowe was on the comeback trail, and Credit Suisse First Boston, led by its buccaneering head of mortgage securities, Andy Stone, was pulling the wagon, lending freely to finance his ambitious plans, including one to build a skyscraper at 42nd and Madison.

In an all-night bargaining session in July 1997, Mr. Macklowe wrested the majority of the property on which to build his tower-now a pair of vacant office buildings and several smaller properties, including a McDonald’s-from a group of investors who had defaulted on their loans and filed for bankruptcy. The price was $60 million. C.S. First Boston put $105 million toward the project in exchange for half ownership.

Mr. Macklowe had Skidmore, Owings & Merrill draw up architectural plans for his skyscraper, which included an atrium and indoor garden.

At the time, Mr. Macklowe was borrowing heavily-C.S. First Boston had loaned him money to buy 2 Grand Central Tower and 540 Madison Avenue-but the I.P.O. was to offset his short-term debt.

Then the Asian financial crisis hit, the market for real estate stocks collapsed and the I.P.O. was canceled. C.S. First Boston, overextended in the Manhattan real estate market, reined in its real estate division. Mr. Stone departed stormily. With credit tightened, Mr. Macklowe suddenly found himself unable to come up with enough money to close a deal to refinance $300 million in C.S. First Boston loans. Signing a major anchor tenant for the building might have made those problems go away, but none was forthcoming, in part, industry sources said, because they were wary of Mr. Macklowe’s reputation.

In a settlement agreement signed last July, Mr. Macklowe gave up the Madison Avenue site in return for just $14 million, and the bank’s agreement to refinance his loans. He kept 2 Grand Central Tower and 540 Madison Avenue.

But the agreement left him a hand, however weak, in the game. Mr. Macklowe retained a 5 percent ownership stake in the site, and C.S. First Boston agreed to make its “reasonable best efforts” to assure that whoever built Madison Plaza would refer to Mr. Macklowe as a co-developer.

A second concession, however, would form the heart of the current dispute. Because Mr. Macklowe claimed he was already far along in negotiations to buy the five small parcels of land necessary to form the base of the building, as well as additional development rights from surrounding buildings that would allow additional height, C.S. First Boston agreed to make Mr. Macklowe its agent in putting together the package of properties for sale. Mr. Macklowe stood to make $9.5 million for completing the sales, or more if he brought them in under budget.

Mr. Macklowe quickly closed deals for three of the outstanding properties, turned them over to C.S. First Boston, and was paid an undisclosed amount.

At the same time, C.S. First Boston was nearing an agreement to sell the property, for a reported $150 million, to Toronto-based Brookfield Financial Properties. Brookfield offered the deal-closing ingredient that had eluded Mr. Macklowe: a major tenant, the Canadian Imperial Bank of Commerce.

No Done Deal

There was one major snag, however. C.S. First Boston had offered Brookfield a 1.1-million-square-foot office building. C.S. First Boston only owned land and development rights sufficient to build an 880,000-square-foot building. And Mr. Macklowe had not yet turned over the outstanding parcels or development rights, without which the building would have to be shorter and irregularly shaped.

A December deadline to close the deal between Brookfield and C.S. First Boston passed. Angry letters went back and forth between Mr. Macklowe’s lawyers and C.S. First Boston’s lawyers.

“Your failure to satisfy the [agreement] in a timely manner … has already delayed the pending transaction significantly, at great cost and expense to C.S.F.B.,” the bank warned in a Jan. 14 letter to Mr. Macklowe. Mr. Macklowe’s attorney shot back a letter denying he had missed any deadline, and threatening legal action if the bank tried to close the deals without him.

In late January, Credit Suisse First Boston asked a court-appointed arbitrator to declare it had “no further obligations” to Mr. Macklowe. Mr. Macklowe sued to keep the arbitration hearing from going forward. On April 11, a New York State Supreme Court judge ruled for Mr. Macklowe, on the technical grounds that the bank had not properly notified him of their complaints.

The ruling should only delay the hearing, but delay may be Mr. Macklowe’s friend. In court documents, C. S. First Boston accuses Mr. Macklowe of desiring to keep “its development plans in limbo for an unlimited period of time,” while demanding “payment, extensions of time, and other unwarranted concessions” from the bank. Some speculate he may want the bank to pay him to go away.

Even so, the deal seems likely to move on without him, sooner or later. Peter Rosenthal, a spokesman for Brookfield, said the developer is ready to finalize the deal. (Then again, Mr. Rosenthal said the same thing to the Daily News back in December.)

“The 900,0000-square-foot building works just fine for Brookfield and for the tenants they’re negotiating with,” Mr. Rosenthal said, adding that they expected to close “within 30 to 45 days.”

By all indications, Mr. Macklowe isn’t sitting still in the meantime. With money from other lenders, in the last year, he’s completed and fully sold a new condominium development at 76th Street and Lexington Avenue. He’s completed a major renovation of an office building at 400 Madison Avenue. And he’s currently building a 300-unit apartment building at 26th Street and Avenue of the Americas in Chelsea.

He hasn’t given up on building a signature office tower, either. One industry source said Mr. Macklowe has recently been scouring the city for another large commercial site.

The Son Rises

At the same time, he has been moving to change the public face of the Macklowe empire. Last year, he forced out Mr. Cole, who, as president of the company since the late 1980′s, presided over Mr. Macklowe’s return from the brink. By last September, however, Mr. Cole was gone, and Mr. Macklowe was refusing even to allow his former employee to move into an apartment he had purchased in one of his buildings, a lawsuit alleges. Mr. Cole’s wife was pregnant with their first child at the time.

In a complaint filed last October, Mr. Cole claims that Mr. Macklowe fired him after a dispute over ownership stakes he was promised in 10 properties, worth $13.8 million. Mr. Macklowe, the complaint alleges, also failed to repay the $4.7 million Mr. Cole loaned the company “when Mr. Macklowe’s business was cash-starved, which was often.” (Mr. Macklowe has asked a judge to dismiss the case, saying that his agreements with Mr. Cole were not legally binding.)

Since Mr. Cole’s departure, Mr. Macklowe has promoted his son, Billy, to executive vice president of the company, and moved him into Mr. Cole’s old office. As he spends more and more time away from the company-Mr. Macklowe is building a multimillion-dollar yacht in the Netherlands, associates said-the younger Mr. Macklowe is already taking a stronger hand in running the company.

Like many second-generation developers, Billy Macklowe is smoother around the edges than his father, those who know him say, and is eager to improve the company’s public image. The younger Mr. Macklowe shows an ease in the public eye. It would be hard to imagine Harry Macklowe slicing and dicing on the Food Network’s cooking game show Taste Test , as Billy Macklowe, an accomplished chef, did a few years ago.

But those who know him have trouble seeing Harry Macklowe settling into a sea-going retirement. He just loves the bricks and mortar too much.

“His son is more active, sure,” said Mr. Stern. “But, you know, Harry’s still Harry.”