A Tribeca Break-Up: Goldman, Sachs and Hot-Shot Developer

Glenn McDermott lives downtown. He is round-faced, affable and casual, and he likes to share tales of his years scuffling to make it in the music business, hanging around the margins of fame and partying with the likes of David Bowie and Mick Jagger. “He’s as anarchic as you can be and still be a developer,” said an admiring Grid magazine editor, Peter Slatin.

He’s the last guy you’d expect to close a $50 million real estate deal with Goldman, Sachs & Company’s secretive Whitehall Street Real Estate Fund. But he did, and that’s how Mr. McDermott, 42, became, as he put it one recent Saturday afternoon, while nursing a hangover with coffee, green tea and a turkey sandwich, “the biggest developer in Tribeca.”

Goldman was looking for a route into Mr. McDermott’s home turf, the area below 23rd Street in Manhattan he calls, with proprietary flourish, “The Zone.” Mr. McDermott, after just four years in the development game, was looking for the financing that would make him a big player. It was a match made in a market where downtown lofts were going, pre-sold, for a couple million dollars each, and where everyone-from the biggest investment bank to the most inexperienced downtown hipster-was trying to cash in. It was a disaster.

On April 10, Mr. McDermott and the Whitehall fund signed an agreement to become partners on three downtown developments-two residential buildings in Tribeca and a combination office and residential building on Astor Place.

Just four months later, it all fell apart. On Aug. 21, Mr. McDermott and Whitehall dissolved their relationship through a private settlement, after Whitehall allegedly found almost $500,000 in revenues missing and got wind of charges that Mr. McDermott had diverted $2.6 million in joint-venture funds to unrelated projects. As part of the settlement, Whitehall took control of the three properties.

On Sept. 15, the other investors in the projects-led by Eugene Mercy, a former Goldman, Sachs partner who’s now a principal of Granite Capital (and a man Mr. McDermott calls a mentor and “a father figure”)-sued Mr. McDermott in New York State Supreme Court for the allegedly misallocated $2.6 million. About $1 million of this, Mr. Mercy claims, Mr. McDermott spent on personal expenses. Mr. Mercy had financed Mr. McDermott’s projects, introducing him to the people at Whitehall, and assembling a separate investor group of friends, family members, coworkers and old Goldman cronies-including Port Authority of New York and New Jersey chairman Lewis Eisenberg (also Mr. Mercy’s partner at Granite Capital), John D. Gilliam, the chief investment officer of the Robert Wood Johnson Foundation, and John C. Whitehead, former deputy secretary of state in the Reagan administration.

Mr. McDermott says he is guilty of no wrongdoing and calls the disputes “a perceptual thing.” A spokeswoman for Goldman Sachs calls them “fraud.” Mr. Mercy declined to be interviewed.

By all accounts, the suits at Whitehall wanted Mr. McDermott as their man in The Zone, but they didn’t want to do business his way. Whitehall is a family of “opportunity” funds worth $7.2 billion that has primarily taken on short-term, stable projects like turning around Rockefeller Center and putting it up for sale. In this fast-and-loose real estate climate, Mr. McDermott was gobbling up properties and juggling a dozen different projects. He was relying on cheap labor to do his jobs, and was being picketed by the unions. He wanted to lure young, new-technology companies. He was high-concept. He was “hyper-leveraged,” said one developer. Whitehall was a by-the-book, bottom-line outfit. It’s hard to believe the two parties ever even took a meeting.

Mr. McDermott said everything would have worked out fine, if the guys from Wall Street had just understood how things work downtown. “This is Gene and I in what I would call the classic Greek father-son dispute,” he said. “I’m one of the quickest-rising entities-clearly downtown-and one person wants to slow down and one person wants to speed up. The person who wants to slow down needs a mechanism to try to get the other side to slow down … You don’t want your son to drive the car fast? What do you do? You take the keys away.”

Asked whether, in retrospect, he wished he had done anything differently, Mr. McDermott laughed: “I wish I was born to one of the Rockefellers.”

Scoring the $50 Million

Mr. McDermott was born poor, to Irish and Italian immigrants in Borough Park. Sitting in the Broadway offices of his company, Glen D. McDermott Projects (or GDM), he told his story: At 18, he moved to the city with just $3,000-and a Porsche. He wanted to be a rock ‘n’ roll star. He ended up booking gigs and bartending at the Mudd Club, the legendary hangout of the Talking Heads-Ramones-Blondie era. He met Jagger and Bowie and Warhol. He managed a band he met at an open-mike night.

Burned out, he got out of music and into construction-mostly designing light fixtures and similar features for clothing stores and restaurants. He went to work for a big firm, Herbert Construction, and became a vice president. He said along the way he picked up “an M.B.A. in high, high, large-dollar real estate.”

But like everyone else in the real estate business, he wanted to develop properties of his own. He left Herbert Construction in 1994, bought and sold a few downtown loft buildings and turned a nice profit. Then he found a more challenging project, converting 27 Great Jones Street to residential lofts. Gene Mercy had invested in the project and was impressed by its success. “He couldn’t believe anyone would want to live there, and I sold [the lofts] immediately,” for about $1 million apiece, Mr. McDermott said. Mr. Mercy was impressed, and he took Mr. McDermott under his wing. “Gene believed in me,” Mr. McDermott said. “Everybody looked at the [real estate] marketplace, especially downtown, as a place to invest.”

Mr. Mercy knew real estate: He had been the head of mortgage securities at Goldman Sachs in the 1980’s before going to Granite Capital. He and Mr. McDermott struck a deal: Mr. McDermott would find the properties and develop them, and Mr. Mercy would come up with the money.

In 1997, they did their first deal. Along with his attorney, Mark Wallach, and real estate financier Arthur Fefferman, Mr. McDermott focused on a former coffee and tea warehouse at 62 Beech Street. Developers had long dreamed of turning the warehouse into lofts, but had never been able to convince its owners, the Ponte family, to sell. But family patriarch Angelo Ponte had recently gone to jail for his involvement in the mob’s garbage-hauling cartel. “I met with one of the Pontes, and we struck up a friendship,” Mr. McDermott said. He offered more money than other developers had. The family sold. Though not yet completed, 30 of the apartments in the $40 million Fischer-Mills building have sold at prices ranging from $790,000 to $4.8 million, said Mr. McDermott.

By the time Mr. McDermott decided to make his next move, Mr. Mercy had some really big money lined up. Mr. McDermott had identified three properties that were primed for development: 124 Hudson Street, where he planned a 9-story, $60 million condo development overlooking the Holland Tunnel; 3-9 Hubert Street, where he planned a 12-story apartment building; and a building at 21 Astor Place, which had both office and residential space.

Mr. Mercy put together a group of old friends from Goldman Sachs: Mr. Eisenberg, Mr. Gilliam, Mr. Whitehead, Robert Downey (formerly the head of the firm’s public finance division) and William Gruver (now the mayor of Eagles Mere, Penn.). Also in the consortium were members of Mr. Mercy’s family and Ordell Safran, a llama breeder living in Berkshire, England. Altogether, the group pledged $4.6 million to Mr. McDermott’s projects.

Late last year, Mr. Mercy used his old contacts at Goldman Sachs to bring in one of the biggest wallets in the business: Whitehall. “[Mr. Mercy] told them ‘We’re doing this,'” Mr. McDermott said. “They had some interest in some assets and knew about Fischer Mills because everybody did and does, and said they wanted to invest with us in the marketplace.”

Mr. McDermott wowed his deep-pocketed investors with big talk and big plans. He talked about design, and he fancied himself something of an artist. Earlier this year he started a civic organization, Society B23 (as in “below 23rd Street”) to protect the downtown culture. “Wear black or go back” is the group’s motto.

Most of all, he told his investors, he knew The Zone. “My thing about The Zone is very simple,” Mr. McDermott said. “The blur between where you work and where you live is blurrier than ever, and will continue to be that way. Work should be life, life should be work, they should be simpatico.”

In Mr. McDermott’s estimation, The Zone runs north from Tribeca to 23rd Street, but he talks about it more as a hip, knowing state of mind. “New York is really a small community,” he said. “A guy from Razorfish or MTV or whatever … we all know each other, likely have worked with each other at some point in our lives, crossed social paths.”

Whitehall took the bait. They would put up 90 percent of the money; Mr. McDermott’s company, GDM, and Mr. Mercy’s group would put up the rest; and each would get a corresponding ownership stake. GDM stood to make more money from development fees and other incentives if the projects succeeded.

A Stack of Lawsuits

At the time his partnership was forged with Whitehall, Mr. McDermott was already under siege by several creditors. In late 1999, he was held in contempt of court and fined $250 after he failed to pay his part of a $90,000 settlement in a dispute with a broker, Paul Slayton, over a finder’s fee. Lawrence Jemal, whose family owned the Nobody Beats The Wiz electronics chain before it went bankrupt, and who Mr. McDermott describes as a “friend,” was chasing him for $400,000, the balance of a loan on which he allegedly defaulted. The General Credit Corporation, primarily a check-cashing business, went to court three times last fall to collect from Mr. McDermott on three loans-two for $90,000 and one for $150,000-according to court records.

By the beginning of this year, Mr. Slayton and Mr. Jemal had been paid back, according to their attorneys. An executive from General Credit did not return phone calls, and Mr. McDermott said he could not recall the status of those loans.

While few knew the details of Mr. McDermott’s problems, many in the downtown real estate community were watching him, and wondered whether he was overplaying his hand. “We saw a guy who was an ego guy, who was growing his office by leaps and bounds,” said one former business associate. “A guy who was going to blow up.”

“Everyone looked at what he was doing and thought it looked reckless,” said one developer. “It appeared as if he had play money.”

But somehow Whitehall had joined up with him-and, for the time being, the partnership was enjoying nearly immediate success. The commercial portion of the Astor Place building, which had stood empty for seven years, was leased out in 90 days, Mr. McDermott said. Twenty-two units of the $60 million 124 Hudson Street development were sold out in three months.

But Mr. McDermott still had problems. For one, the construction-industry unions were giving him trouble. Mr. McDermott often employs non-union subcontractors on his jobs. “Our view is that it’s the owner’s choice whether the project is union or non-union,” he said. The unions retaliated by filing grievances with the National Labor Relations Board. In March, they embarrassed him in front of his colleagues by picketing a speech he gave to an industry luncheon at the Cornell Club.

He had also gotten into trouble with some purportedly dangerous people. Two allegedly mobbed-up contractors were suing him, accusing him of defaulting on a total of about $200,000 in loans from a residential renovation at 354 Broadway. GDM Construction had been the general contractor on the project and ended up in a turf war between factions of the Lucchese and Bonnano crime families. Earlier this year, Manhattan District Attorney Robert Morganthau started taking a hard look at the project as part of an investigation into big-rigging and mob influence in the construction industry. Mr. McDermott says he told the D.A.’s office what he knew.

When Mr. Morganthau indicted 38 people and 11 companies last month, Mr. McDermott was not implicated, but two subcontractors he used were-Terra Firma Construction Management and Commercial Brick Inc. “Construction is a dirty business,” Mr. McDermott said.

In July, the owner of 354 Broadway, Yolanda DeArtega, filed suit against Mr. McDermott, alleging that he failed to pay subcontractors (protesting that he didn’t have the money) and also that he used funds from the project “for purposes unrelated to the renovations.” She is asking for $1.8 million in damages. Mr. McDermott explained this as part of doing business: “The general-contracting business in general is just a litigated world.”

And by last summer, the partnership with Whitehall began to fray. “They did not understand that this is not the Upper East Side,” Mr. McDermott said. “Brick is supposed to show, and it should look aged.” When Mr. McDermott secured an office tenant, Jupiter Communications, for the Astor Place building, Whitehall, like many commercial landlords, was wary of renting to a technology company. “They did not understand that Jupiter is the Lexis-Nexis of the new economy. Hello! Wake up! So I had to battle.” Jupiter signed a 15-year lease in March.

He and Mr. Mercy were fighting, too. Mr. Mercy, who is in his 60’s, said he wanted Mr. McDermott to slow down his buying. Mr. McDermott wanted to get started on half a dozen other deals: an eight-story building at Hudson and Laight streets; a vacant lot at Broadway and Grand Street, where there was talk of a hotel; a couple of properties on Bond Street; an investment in re-developing the city-owned Essex Street Market. He wanted to do more projects with the Pontes. He was talking about buying the massive estate of eccentric West Village landlord William Gottlieb.

The Missing Millions

According to Mr. Mercy’s lawsuit, he took a close look at GDM’s books in late July and found that $2.6 million of his investor group’s money, meant for the Hubert Street building, was missing. He claims that part of the money was invested in six of Mr. McDermott’s pet projects, in which Mr. Mercy and the other investors had no ownership stake. Nearly $1 million of this money “had been used as ‘equity to office’ and for his own expenses,” the lawsuit claims. Mr. McDermott denies any wrongdoing. “In an operation like this,” he said, “you’re always going to have an operational deficit.”

A rival developer agreed. “He was a little loose,” he said, speaking of Mr. McDermott, “but sometimes investors like loose people, because those people hit home runs.”

Meanwhile, Whitehall had discovered $484,323 in rental revenue missing from the Astor Place building, according to the lawsuit. On Aug. 21, they signed a confidential agreement severing all ties with Mr. McDermott. Mr. McDermott and Mr. Mercy’s group got to keep their 10 percent ownership stake in the Astor Place and Hudson Street buildings. But Mr. McDermott had to give up control of the projects, and the potentially lucrative development fees that went along with it. The partners lost their stake in the Hubert Street building altogether.

Mr. McDermott cast the decision to part as mutual. “We’ve agreed with Goldman to divorce in what I consider a very pleasant agreement,” he said.

Goldman Sachs has its own version of what happened. According to Kathleen Baum, a company spokeswoman, Mr. McDermott’s projects were subjected to routine monitoring. “Because of that, this fraud was detected at an early stage,” she said, adding that Goldman has since gotten its money back.

When presented with Ms. Baum’s rendition of events, Mr. McDermott grimaced: “They publicly said that?”

Next, Mr. Mercy turned against Mr. McDermott. His lawsuit asks that Mr. McDermott be forced to pay back the $2.6 million and the missing rental money (Mr. Mercy says he reimbursed Whitehall), and that Mr. McDermott turn over his interests in the six properties to the investor group. Mr. McDermott described the lawsuit as simply a way for his partner to pull in the reins on his expansion. “It’s unfortunate, but Gene decided to take the road less honorable,” Mr. McDermott said.

Mr. McDermott chalked up the disputes as an inevitable price of doing business. “I don’t think there is a developer in this city, from the largest to the smallest, that hasn’t taken some pain with the growth,” he said.

Lately, other downtown developers have been getting calls from Mr. McDermott’s associates, asking if they’d be interested in buying some of his properties. Mr. McDermott denied that he was liquidating his assets-“We’re well-capitalized,” he said. He talks about opening four or five high-end spas-places to meet, “take a schvitz, walk out and go have a saki”-and promises “a revolutionary downtown residential concept coming out in the next 18 months that will knock your socks off.”

“I want a financial partner who is sensitive to what the creative person is doing,” he said, “and understands it’s not much different from a being a fashion designer or a musician.”

Even now, after his failures have been laid bare, many people in the downtown real estate community have sympathy for Mr. McDermott. Mr. Mercy and Whitehall may have put up most of the money for his development, they say, but Mr. McDermott took all the risks. When Mr. McDermott screwed up, Whitehall, Mr. Mercy and company just rolled right over him. Now, having pushed Mr. McDermott out of the picture, Whitehall stands to rake in even more profits from his three deals.

For now, Whitehall is administering the properties themselves. They proceeded on the 3-9 Hubert Street project, completing the purchase of the property on their own on Sept. 22. Their building at 124 Hudson Street is supposed to be completed in May 2001, and they have continued the renovation of the residential portion of the 21 Astor Place. Even in The Zone, it’s Wall Street’s world.