Toxic-Mold Gold: Shoddy High Rises Sold With Flaws

Did you hear the one about the guy with the Park Avenue apartment full of toxic mold? He couldn’t find anyone to buy the place for $15.5 million, so he jacked up the asking price last week to $18 million.

Mold! To the highest bidder!

At 515 Park Avenue, real-estatedeveloper Richard Kramer would have you believe that recently, his apartment went up in value by $2.5 million even as he and the condominium’s board of managers continue to fight multimillion-dollar lawsuits against the building’s developers and sponsors, in which they allege that the 43-story tower is plagued with a mold infestation and major construction deficiencies.

Mr. Kramer wouldn’t comment on his efforts to sell the place. But most owners at 515 Park are hunkering down for the long legal showdown that is currently wending its way through the court. And in that respect, the residents of 515 Park are not alone, according to officials in the state attorney general’s office who mediate disputes between developers and the buyers of their new condominium units.

At the Empire Condominium, on East 78th Street, some angry residents claim that buckling wood floors and spontaneous floods have become a way of life. At Franklin Tower, on Franklin Street in Tribeca, large portions of the building’s brick façade need to be replaced, as do wide swaths of the tower’s fire-proofing insulation. And at the Ice House on N. Moore Street, also in Tribeca, residents only last year won restitution from their sponsor for money they paid out of pocket to ameliorate what they claim was shoddy construction.

Though the specifics vary from building to building, the common denominator in each case seems to be a construction and development industry that, in its effort to throw up high-rise residential buildings as quickly and cheaply as possible, cuts corners wherever it can. It’s a problem with far-reaching historical roots in New York’s construction business, but its symptoms have been exacerbated in recent years by New Yorkers’ increasing willingness to spend millions of dollars-and sometimes tens of millions-on apartments that exist only in blueprints. With that kind of demand, it’s no wonder that builders are so giddy to sell out and move on.

The Virtual Open House

They were just as giddy to buy when the real-estate market was at the height of its speculative hype. The Feb. 24, 1999, issue of Real Estate Weekly gushed that 515 Park was “perhaps the most opulent residential condominium ever built.” It was quite a boast, considering that it came eight months before the tower was actually completed. Such was the buzz that surrounded the first new apartment building to rise on Park Avenue in the last 60 years.

Starting in May of 1998, the building’s sponsors, William and Arthur Zeckendorf, were using computer-generated virtual-reality tours to lure buyers into the building. What buyers were promised was nothing less than a new standard in New York luxury living: expansive, well-appointed rooms, private wine cellars, staff apartments on the lower floors, a residents-only gym, a library off the lobby and an in-house dining room with a caterer’s kitchen.

The New York Times said the tower “is meant to fulfill the fantasies and affectations of the underserved super-rich.”

Sales began in the fall of 1998, and by February of 1999, about 30 of the building’s 38 units had been sold. The Zeckendorfs announced, with great fanfare, that some units had gone for a then-record $3,000 per square foot. Takers included New Jersey Senator Jon Corzine, former Vivendi chief Jean-Marie Messier, Broadway impresario James Nederlander, EMI chief Alain Levy, music producer Antonio (L.A.) Reid and Christie’s owner François Pinault. By April 2000, the building had sold out. Perhaps even more remarkable is what happened next: Many buyers made quick millions by flipping their raw space to other eager beavers, some of whom followed suit in another round of flipping. Asking prices in the building soon crested $30 million. It wasn’t the first flip-fest New York had ever seen, but it was easily the most feverish.

To all outward appearances, the building was a sure bet for investors and a trophy address for its residents. But court documents show that those who actually moved in soon learned otherwise. Although the public only heard of the building’s problems last December, when the news broke about Mr. Kramer’s lawsuit, court documents reveal that the tower’s earliest residents became aware of construction-related deficiencies soon after they moved in.

“Unit holders began to advise the sponsor of design and construction defects as early as the Spring of 2000,” the board members’ lawsuit alleges. “The Condominium attempted to communicate with the representatives of the sponsor and the other responsible parties about the various defects that had come to light, but ultimately, these efforts were to no avail.” Mr. Kramer, the German-born head of the Washington, D.C.–based Republic Properties, moved with his family into the building in January 2001. According to the board members’ suit, they were told almost immediately about the building’s “horror stories,” court documents relate.

Conditions at the buildings continued to worsen, and by September 2001, the suit continues, the board of managers notified all the unit holders that “the building suffered from systemic problems regarding condensation leaks that would require consolidation of piping, installation of secondary condensation pans and spray insulation on pipes in the building.”

Basically, water was seeping into the building from a variety of places: cracks in the foundation, poorly insulated pipes and walls that were improperly sealed. This led to flooding in many of the building’s units. According to Mr. Kramer’s suit, the resulting mold infestation eventually “forced the evacuation of eight of the building’s thirty-eight condominium units, including the Kramer unit, as well as the quarantining of various common areas as potential health hazards.” The infestation also allegedly made Mr. Kramer’s wife and 3-year-old daughter seriously ill.

By Dec. 26, 2002, residents had had enough, and the building’s board of managers filed suit against the Zeckendorfs, along with a slew of contractors, subcontractors and others involved in putting up the building. Five days later, the Kramers filed their own suit, not only against the Zeckendorfs and their construction partners, but against the board of managers as well. It was this latter lawsuit that made the news and effectively brought sales in the building to a crashing halt.

According to the attorney general’s office, board members at 14 New York buildings sought relief from their sponsors in 2002. The settlements in those cases amounted to a total of $6 million in cash or other forms of payment. The year before that, 11 buildings extracted a total of $1 million from their sponsors or developers, and in 2000, 12 buildings received a total of $5.6 million.

“In my view, the quality of construction over the years has declined,” said Assistant Attorney General Oliver Rosengart, whose office mediates these kinds of complaints. “The labor force that does this work has become less skilled … and, to some extent, the amount and quality of materials used in buildings has declined.”

Paul Fernandez, chief of staff at the Building and Construction Trades Council of Greater New York, said Mr. Rosengart was painting the industry with a broad brush, and that most reputable developers do strive to uphold high building standards. Still, Mr. Fernandez admitted, there do exist many builders with no such scruples.

“The major problem is this underbelly of the industry,” he said, “where you have a preponderance of the work being done by contractors who are, in a lot of ways, utilizing irresponsible practices-whether hiring unskilled labor to do the work, or just flagrantly violating applicable laws and regulations.”

Pam Liebman, the chief executive of the Corcoran Group, said she urges people to simply take a look at the developer’s track record and closely examine the offering plans and blueprints. But even then, there will always be some kinks.

“New construction sometimes has problems-it’s just the nature of the beast,” said Ms. Liebman. “There are some very simple and fixable issues that may come up that are not necessarily a huge detriment to the buyer if they are properly taken care of.”

But according to Fred Peters, president of Ashforth Warburg Associates, the most damaging construction deficiencies-like water damage-often don’t come to light until it’s too late, and thus even the most vigilant buyers can end up getting stung.

“If the subcontractor fails to insulate the pipes, there’s a very good chance that the developer himself doesn’t know that,” Mr. Peters said. “So while it might seem attractive in principle to trash the broker or developer or both for their collusion in the situation, more often than not they’re without knowledge too about what’s actually going on.”

Wild Inflations

Advocates for developers said that some of the lawsuits are frivolous-and that a healthy dose of melodrama is often applied in cases where minor construction flaws with easy remedies are found.

“It’s important to note that in many of these cases, while there clearly are buildings that have had problems, it is also true that certain unit-owner groups have wildly inflated the extent of the problems and the alleged costs of remediation,” real-estate lawyer Scott Mollen said.

Mr. Mollen represented the sponsors of Franklin Tower during their negotiations with the building’s board of managers. The 17-story former office building, which stands at 90 Franklin Street, was converted into 25 luxury apartments in 1999. Mariah Carey has a triplex penthouse unit, and TV handyman Bob Vila has a floor-through apartment directly below her.

In June of 2001, residents there filed a formal complaint with Mr. Rosengart’s office, in which they alleged that the building had many defects which the building’s sponsor-Corn Associates, in which Robert A. Levine is a principal-hadn’t disclosed to the original buyers. An independent engineer later confirmed that those defects included window leaks, loose bricks in the building’s façade and drainage problems with the air-conditioning. Corn Associates went on to agree in principle to pay $1 million in restitution.

At the Empire Condominium, a 31-story tower on 78th Street off Third Avenue that was completed in late 2000, the promise of high-end luxury units attracted buyers like Yankees slugger Jason Giambi, real-estate magnate Steven Witkoff and YES cable-network chief Leo Hindrey. The 77 sponsor units ranged in price from just under $1 million to $6 million, and many buyers signed a contract after seeing only blueprints and a sample apartment. As was the case with 515 Park, many owners made quick millions by flipping their apartments shortly after buying. Those who stayed, however, soon discovered a host of problems not only in their own units, but in the building’s superstructure, according to a complaint before the attorney general’s office. Some of their complaints, like improperly caulked moldings and sloppy mortar work, were relatively minor. Others, like buckling wood floors and massive flooding problems, were more serious.

In a March interview, Mr. Rosengart of the attorney general’s office told The Observer that it was the aggregation of many small flaws that became costly to residents.

“Most of the items are relatively minor, but in sum total, it amounts to a lot,” he said.

The firm responsible for the Empire’s construction, RFD Third Avenue Associates, helmed by developers Aby Rosen, Michael Fuchs and Trevor Davis, ended up squaring off with angry residents in Mr. Rosengart’s office, and a settlement is currently being negotiated.

A similar case cropped up in Tribeca at the Ice House, located at 27 N. Moore Street. Shortly after the building’s conversion in 1999, residents of the building, who included Billy Crystal, sportscaster Warner Wolf and Martha Stewart’s daughter Alexis, filed suit against the building’s developer, citing shoddy construction work and sub-par finishes on the apartments. (Singer Marc Anthony flipped his apartment early, though his representatives have said it had nothing to do with residents’ claims about the building.)

By February of 2002, Mr. Rosengart’s office-which had taken up the case-reached a settlement with the developer, Jack Lefkowitz, whereby the building’s condo board gained control of 6,000 square feet of commercial space on the ground floor to help pay for the necessary repairs. Since then, Mr. Wolf has sold his apartment for $4.45 million.

Mr. Mollen, who represents numerous developers across the city and writes a weekly real-estate column for The New York Law Journal , said that sometimes, residents go overboard on their cost estimates-and in the process, run the unintended risk of seriously damaging the building’s financial health.

“They could be doing enormous harm to their neighbors by giving the outside world the impression that their building has significant problems way beyond reality,” he said.

For Mr. Kramer, who is both trying to sell and filing suit, it’s worth millions to prove Mr. Mollen wrong. And there are some reasons for hope. Just last week, 515 Park saw its first sale in months: The unit belonged to Goldman Sachs executive W. Thomas York Jr. and was listing for $7.9 million. Mr. York couldn’t comment on the deal, because Goldman Sachs, as an investor in the building, has actually been named as a defendant in the board of managers’ lawsuit. But a source close to the deal said that Mr. York’s unit had tested clean for mold, as had many other units in the building.

The question, according to JoAnne Kennedy, president of Coldwell Banker Hunt Kennedy, “is how to raise the issue without casting a spell on the whole project.”

Toxic-Mold Gold: Shoddy High Rises Sold With Flaws