Isaac Katan stood on the edge of the cement pier and gazed across the choppy waters of the East River at Manhattan.
The city’s skyline unfolded in a panorama in front of him. On one side was the Empire State Building prominent among the cluster of buildings in Midtown, then Lower Manhattan just across the water and finally downtown Brooklyn to the south. Periodically, the rattling of a passing subway echoed over the Williamsburg Bridge, whose sweeping span arched across the sky only a few hundred yards away.
“This is why,” Mr. Katan said, gazing out blankly at the view.
When in 2006 a broker whispered to Mr. Katan that the Domino Sugar factory would be coming to market for sale, only one question popped into his mind: how could he buy it before rivals even had a chance to bid?
“The broker told me, I had 48 hours,” Mr. Katan remembered.
In a rush of negotiations done over the span of a single weekend, Mr. Katan formed what he described as a shotgun partnership with the Community Preservation Corporation, a non-profit company that specializes in the development and financing of affordable housing. The deal propelled him to a successful bid for the Domino factory for $55 million. But now, six years later, it is CPC’s treachery and mismanagement he claims, that threatens to unravel his stake at the site and scrap his ambitious dreams of building a series of residential towers there.
Last December, Mr. Katan and CPC fell into default on their roughly $125 million mortgage for the project. The debt holder, Pacific Coast Capital Partners, LLC (PCCP), has offered a simple plan to rectify the situation. It will convert its loan into equity, canceling the debt on the site. Mr. Katan and CPC would each be left with an eight percent interest, a significant reduction from their fifty-fifty joint venture.
“We would be virtually wiped out under that deal,” Mr. Katan said.
But CPC has endorsed the plan. The company, according to Susan Pollock, a senior vice president at the firm, has scowered the market for a year and a half to find partners or lenders who could refinance the project.
“There were no offers that were on the table that would meet all the needs of the project,” Ms. Pollock told The Commercial Observer. “We vetted them seriously, we have had very lengthy negotiations with several parties and no one has been able to offer the deal that PCCP is willing to do.”
Mr. Katan though says that CPC is biased in favor of the deal because of all the lucrative consulting fees and other financial perks it would earn. He claimed that CPC, which is the managing partner of the venture, would collect about $750,000 a year for overseeing the project in its proposed restructuring with PCCP, a nearly threefold increase from what it currently earns he said.
Already CPC has reaped about $4.4 million in management fees for the project, an outsize sum Mr. Katan insists in light of the fact that no substantial construction work has been done at the site. The deal with PCCP, Mr. Katan claims, would also trigger an additional $1.1 million performance bonus for CPC.
In his conversation with The Commercial Observer, Mr. Katan complained about the roughly $125 million of debt hanging over the project, roughly half of which he says CPC accrued with seemingly little result or progress in developing the site.
“Where did all of the money go?” Mr. Katan asked. “We don’t believe our partners have run this project economically.”
At the beginning of March, Mr. Katan launched a lawsuit to prevent the recapitalization with PCCP, claiming he has been cut out of the process and that CPC has not considered partners he says he has been negotiating with who would provide superior restructuring terms to the PCCP deal. Earlier today, both Mr. Katan and CPC agreed in a hearing in court to essentially postpone the recapitalization deal for at least a month.
Mr. Katan told The Commercial Observer that by stalling or blocking the recapitalization, he hopes to arrange a transaction that will offer both him and CPC better terms.
The very public rift between the partners comes a little more than a year after CPC won hard fought approvals with the City Council and the Department of City Planning to build at least four high rise residential towers on the parcel. The company agreed to dedicate a significant portion of the units for affordable housing and also to restore and preserve the historic buildings on the site.
Ms. Pollock said that much of the money spent by the partnership was to prepare development plans and other materials for that approval process.
“To spend $125 million in preparation for a planned $1.5 billion development isn’t an unusual amount,” Ms. Pollock said, noting that the city’s Uniform Land Use Review Process, the city approval that CPC had to pass the project through, is a lengthy and rigorous undertaking that required detailed disclosures on its technical and environmental components.
Several million dollars were necessary just to be kept in reserve to pay for the interest on all of the debt.
Looking back, many of the problems that have now driven the partnership and its vision to the brink of insolvency were apparent nearly from the start.
Mr. Katan said he immediately thought of and called Michael Lappin, the former chief executive of CPC, six years ago in order to raise the money necessary to acquire the site. He drove to Mr. Lappin’s apartment on the Upper West Side on a Friday to discuss the opportunity. Mr. Lappin was immediately receptive and Mr. Katan concedes that if not for CPC’s equity and its quick response to the fleeting opportunity to buy the site before it went into an open auction, he would never have likely been able to secure the Domino factory in the first place.
To do the deal however, the company handed Mr. Katan difficult terms. It was to be the operating manager – even though Mr. Katan and CPC shared a fifty-fifty interest in the project’s equity – meaning it would have control of what was planned for the site and would supervise and get paid for its work effecting the plans it came up with. Mr. Katan admits he agreed to what now in hindsight appears in some ways like a one-sided arrangement. He agreed to other hard terms, such as having his name as the guarantor on the mortgage agreement, which means he is personally liable for repayment of portions of the debt.
“If you look at the operating agreement, we are the managing member and that was an agreement that they willingly signed,” Ms. Pollock said. “If they are unhappy then they’re unhappy with something that they agreed to.”
More recently Mr. Katan claims that CPC loaned a little over $3 million to the partnership in order to cover mounting expenses such as real estate taxes at the site. They insisted on a 20 percent interest rate on the loan and a minimum 50 percent return on the debt if the partnership repays it earlier than scheduled Mr. Katan said.
“That loan was so onerous, I should have known right then and there that they were not really my partners,” Mr. Katan said.
The partnership’s decision to take on restoring the Domino Refinery’s landmark buildings was also a lofty – and costly – challenge to take on, though it was likely also necessary to get the approvals from the city.
The site’s main buildings, a towering structure with a prominent smokestack and its boxy neighbor, a building with Domino’s signature logo stenciled in giant letters on its facade, have become landmarks on Williamsburg’s waterfront, hulking structures that typify the aesthetics of the area’s industrial past.
Though Domino Sugar ostensibly operated at the site until 2004, the company’s activities on the Brooklyn waterfront had clearly wound down from their peak long before that and the buildings today look as though they have been abandoned for decades.
The concrete pier which stretches the length of the refinery buildings, probably about the length of two football fields, was severely crumbling in places, great steel tanks, cranes and other equipment were coated with rust and windows were broken. Mr. Katan said that all of it, including the pier would have to be ripped out and replaced. He didn’t have a price tag for how much it would cost to make the refinery a habitable structure but common sense would put it in the tens of millions, if not more.
A cold wind howled, adding another dimension of hauntedness to the derelict structures as it hummed through the crevices of the buildings. As we left through the main building, a security guard sat in a heated room standing watch.
“Goodbye Mr. Katan,” he said as we passed through.