Zeidel & Associates Counsels Investor in One of the Largest Office-to-Residential Conversions in New York

Situation

Zeidel & Associates was retained to represent an equity and debt real estate investment company with approximately $49.2 billion in assets. The company was considering funding a preferred equity investment in a high-profile acquisition of a 410,000-square-foot office building in downtown Manhattan. The building would be converted into 571 market-rate apartments, marking one of the largest office-to-residential conversions in New York.

The project’s sponsors included a highly regarded real estate investment, development, and management firm and the largest developer of office-to-residential conversions in New York City. Several other investors had already passed on the project.

Zeidel & Associates was hired for our breadth of experience and understanding of construction projects.

Upon reviewing the Letter of Intent, we realized that it did not fully address the relationships and arrangements for the construction portion of the transaction. Although the construction manager was said to be responsible for the project, it was clear to us that they were only advisors and disclaimed all responsibility for the quality of work, schedule, and costs. We were also told that the owner would be hiring all subcontractors directly, which indicated there was no general contractor for the project, which is an unusual structure for our client’s projects.

Approach

With a construction structure outside the norm, we pressed for more information about the general contractor structure and were given a two-page agreement between the proposed owner of the project and a wholly owned subsidiary. Based on an all-hands call, we identified that the sponsor intended to act as its own general contractor without any supporting documentation. Further, the sponsor confirmed that the construction manager did not bear any liability for anything other than its own acts.

We explained to our client that if the sponsor defaulted on its obligations, and as a remedy, our client assumed ownership and development of the property, they would not have a general contractor or in-house capability (or desire) to assume the role. And since, presumably, the project would be in distress at that point, our client would likely inherit disputes with subcontractors, delay issues, cost overruns, and more and would be left without the structure to get the project back on track.

Result

We guided our client through potential solutions to mitigate their risk, which we also presented to the sponsor. The sponsor agreed to provide a broad completion guarantee and address transition concerns, such as onboarding a replacement general contractor, assignment and termination of subcontracts, resolution of liens and the like.

Further, we negotiated an expansion of the scope of duties in the internal general contractor agreement to reflect those that the sponsor was providing. We also negotiated an amendment to the construction management agreement, which would be triggered only if our client was forced to take over the project. It included a more fulsome scope of responsibilities, providing more confidence that a new third-party general contractor would be willing to complete a project in progress.

The investment closed with the expectation that the building would be converted into hundreds of new apartments in Lower Manhattan amid a citywide housing shortage. Our client was pleased that this investment would highlight its ability to deliver creative financing solutions for all projects, including those going through a change of use.