|Tenants Struggle as a British Landlord Goes Bust [NYT]|
By CHRISTINE HAUGHNEY
Foreign investors were a major force in New York’s real estate boom of the last decade, with families and companies from Dubai to Australia swallowing weekend apartments and Midtown office towers. In 2007, the roster of international investors came to include a British firm, Dawnay Day, whose executives had a splashy reputation for spending millions on fine art and yachts.
It was then, after a meeting with a New York landlord at an art show in Miami, that the British firm plunked down $225 million for 47 rental buildings, most of them in East Harlem.
The plan, in a gentrifying neighborhood, was to repeat the success its executives once found in the transformation of the south London neighborhood of Brixton. Dawnay Day would ease out its mainly lower-income residents, rehabilitate the apartments and charge a new generation of younger, more affluent tenants substantially steeper rents.
The efforts, though, didn’t get far before the recession spread across the globe and Dawnay Day went bust. Now, as part of one of the United Kingdom’s largest real estate insolvencies of the recession, the firm’s yachts are up for auction, and their expensive art has been stripped from the walls of its former London headquarters.
And in the 47 buildings, anger, uncertainty and a degree of misery have set in. At tenant meetings, renters complain of gaping holes in their ceilings and walls that allow rats to freely roam. The properties face foreclosure, and it is very possible that the buildings may fall back into the hands of the landlord some tenants say neglected them long before they attracted a foreign buyer.
“They were a multinational corporation guided by greed,” Juan Haro, director of the housing rights group Movement for Justice in El Barrio, who has worked with tenants in the buildings, said of Dawnay Day. “They failed miserably. They crumbled financially and they were a victim of their own devices.”
Saying the federal government has not adequately responded to the broader real estate crisis, a group of tenants are planning a demonstration for Tuesday at the Bank of New York Mellon, which holds the mortgage on the Dawnay Day properties.
For the moment, the thousands of residents of the 1,100 apartments in East Harlem have been left partly to fend for themselves. Many of them have lived in the buildings for generations, and they are hardly unfamiliar with hardship and discord. Still, their current state of limbo — days trying to get apartments repaired and night meetings with a court-appointed receiver — has taken its toll.
For Joaquin Rufiles, a barrel-chested butcher who shares a one-bedroom apartment in one of the East Harlem buildings with his wife, Josefina Toiralua, their two children and his wife’s uncle, Dawnay Day’s collapse means living with rats in their kitchen. On Nov. 4, his family presented their complaints to the receiver handling the bankruptcy. They said the problems were not fixed.
“We pay rent. It’s not like we live for free,” said Ms. Toiralua through a translator.
The tale of this portfolio of Harlem buildings began in the 1980s, when Steven Kessner, the son of a Bronx taxi driver who studied economics at Dartmouth based on the encouragement of one of his father’s passengers, passed up Harvard Business School to return to the city and work in real estate. Mr. Kessner said he started buying and repairing East Harlem walk-ups when most banks would not lend in the neighborhood.
In what he described as 100-hour workweeks that required “blood, sweat and tears,” he repaired boilers, eliminated thousands of violations and kicked out drug dealers running the buildings. At the same time, he expanded his empire by buying properties in the East Village.
While Mr. Kessner said that he worked hard to manage the buildings, and repaired many of their problems, The Village Voice identified him as one of the 10 worst landlords in New York City in 2006. By the time Mr. Kessner sold the buildings in March 2007, the 1,111 apartments still had 2,419 violations, according to the Department of Housing Preservation and Development.
Mr. Kessner decided to sell the bulk of his portfolio in the fall of 2006. The real estate market in New York was peaking. All corners of Harlem were being transformed — integrated and gentrified and alive with new commercial investments and enterprises.
A world away, the real estate firm Dawnay Day had become something of an insatiable Goliath, buying up mainly commercial real estate in a half-dozen countries. Its purchases included well-known trophies like the Michelin-starred London restaurant the Wolseley and a hotel in the Cotswolds where Oliver Cromwell once stayed. British newspapers varied widely on their estimates of the company’s value, though they roughly put it at several billion dollars.
With company money, Dawnay Day executives also indulged their personal hobbies. Yachts were bought to entertain friends and relatives. Local British papers say they decorated their office with multimillion-dollar works of art including a Damien Hirst, and a Lucian Freud called “Benefits Supervisor Sleeping,” which was auctioned by Christies in May 2008 for $34 million.
They then set their sights on what for them was an unconventional purchase, the buildings in East Harlem.
The deal, which had been discussed for weeks, was completed during Art Basel, an annual art collectors’ gathering where Dawnay executives agreed to meet Mr. Kessner. Mr. Kessner recalls chatting with the company’s two head executives, Peter Klimt and Guy Naggar, about the final price and letting his son Michael stay and manage the buildings.
By March 2007, when Dawnay Day closed on the purchase, executives trumpeted the deal to British papers, saying that they could easily raise rents more than tenfold and then expand through the United States.
The tenants, if unfamiliar with their new international landlord, learned quickly what the change would mean for them. Mr. Haro said that Dawnay Day quickly began pressuring longtime tenants to move out, asked all tenants for Social Security numbers and began charging for basic repairs. Diego Quiñones, an organizer with Community Voices Heard who also is working with Dawnay Day tenants, said the landlords quickly grew “more strategic” in how they harassed tenants and tried to push them out. In October 2007, some tenants filed a lawsuit under consumer protection laws to challenge fees imposed over late rent, repairs and washing machines.
Meanwhile, Andre and Matthew Mauro, who run a local real estate brokerage, said they started receiving three to four calls a week from renters in the Dawnay buildings eager to leave. Gabriella Pollonini left her $1,200-a-month one-bedroom when her lease expired in May 2009 after management did not respond to her complaints about three outbreaks of bedbugs and the lack of heat and hot water, she said.
“I had four blankets, and I was sleeping with my pajamas and my jacket,” said Ms. Pollonini, 39, a researcher at the nearby Mount Sinai School of Medicine. “I was going to the gym to get my shower.”
However troubled the conditions in the Harlem buildings, the problems with the firm were apparently dire. According to British press reports and interviews with British executives familiar with the company’s unraveling, Dawnay Day found itself overexposed as the credit markets started to tighten in early 2008. By the summer, Dawnay Day’s loans and debts were being called in, and the company fell into receivership. Assets were quickly sold.
Richard Stanley, a London-based former director of the real estate firm DTZ, which handled the sale of many of Dawnay Day’s European properties, said the magnitude of Dawnay Day’s fall made it one of the largest real estate insolvencies in 2008.
Peter Bennett, director of the Swiss-based Blue Water Yachting, which has been trying to sell one of Dawnay Day’s yachts for $6 million, said its executives were too optimistic. He had met some of them when they were chartering their yacht.
“They just thought the boom was going to keep going,” he said.
Dawnay Day’s three top former executives, who are no longer associated with the Harlem buildings, did not respond to requests for interviews through New York and London real estate brokers who have worked with them in the past. Mr. Klimt, who is one of the two former heads of Dawnay Day, did not respond to phone and e-mail messages at his new London company, Klimt & Co.
Back in Harlem, where Dawnay Day had hired Michael Kessner to manage the buildings for them, there was general confusion. Mr. Kessner said he stopped receiving guidance from Dawnay Day after the company folded and had little direction to go by.
“Their office basically just shut down,” he said.
In September, the properties officially fell into foreclosure. That month, Justice Charles E. Ramos of State Supreme Court in Manhattan appointed Harvey Fishbein as receiver to manage the properties through foreclosure. At this point, Mr. Fishbein has not been given any time frame for when the properties may be sold.
And so the tenants spend their days meeting with the receiver, celebrating minor victories — their lawsuit over Dawnay Day to remove fees from their rent bills — and fearing the future.
Mr. Kessner said he would bid on the foreclosed properties “at the right price.”
The city said it is monitoring conditions in the buildings. So far, officials said, the financial distress has not translated into wholesale physical distress.
Meanwhile, tenants still carry some share of envy toward their London landlords. They talk sometimes about how they would have used the fortunes that Dawnay Day executives spent on yachts and art collections. As Mr. Rufiles cuddles his 4-year-old daughter and rats squeak faintly from his kitchen cabinet, he marvels at the habits of the rich.
“What I would do with money is buy clothes for my children,” he said.