Sutton Strike: Gamma’s Jonathan Kalikow on the War Over 3 Sutton Place

Developer talks legal battle with Bauhouse Group's Joseph Beninati, opposition from local community



“I believe in completely disproportionate retaliation,” Jonathan Kalikow told Commercial Observer, “like Count of Monte Cristo, but to the 10th power. As in, now you’ve fucked with the wrong person.”

SEE ALSO: City Planning Holds First Hearing On Fate of Gamma Real Estate’s Sutton Place Development

Kalikow has reason to be angry. He’s talking about 3 Sutton Place—the subject of three years of lawsuits, bankruptcies, foreclosures, political haggling and endless 311 calls.

Kalikow, the 47-year-old married father of four girls ages 8, 10, 12 and 17, is the president of Gamma Real Estate and a man of real estate pedigree par excellence. He is the son of N. Richard Kalikow—the chairman and chief executive officer of Gamma and cousin of Peter Kalikow, the former Metropolitan Transportation Authority chairman and the founder of real estate firm H.J. Kalikow and Co. And as we sat down with him for lunch at the 101 Club, we got the sense that he doesn’t pull punches.

Between courses, he opined on some of New York City’s most buzzed-about projects: “I like the Related [Companies] guys as individuals a lot, I really do,” Kalikow said, “but I don’t really understand Hudson Yards. Anything you build that’s residential proximate…is going to be expensive. And you have a lot of traffic and logistical issues to overcome. This building [101 Park Avenue] is next to Grand Central [Terminal], whereas it could take you another 40 minutes to get over there. I’m sure it’ll be successful because there are a lot of powerful people involved who are smarter than me, but I don’t see us building new tunnels or bridges or subway lines any time soon.”

But that’s a different discussion.

“I tend to be a very under-the-radar person,” Kalikow explained. “My family is in real estate, and everyone in the real estate business likes to have the press. But we’ve been very under the radar when it comes to lending. I guess it’s hurt a little bit in terms of [business driven by] word of mouth, but because we have a 50-year history of doing this, we’re [easily vetted]. Also, our amount of repeat borrowers is huge.”

Still, Gamma Real Estate nevertheless found itself embroiled in a real estate battle and forced into the spotlight after it financed Joseph Beninati’s Bauhouse Group’s 87-story residential development at 3 Sutton Place between East 57th and East 58th Streets. When Beninati defaulted on the $147 million loan from Gamma, the lender foreclosed on the property and later acquired it in a foreclosure auction for $86 million ($98 million including air rights), outbidding Brooklyn investor Isaac Hager. Oh, and there was a bankruptcy filing in between.

Last December, Gamma filed plans for its own 844-foot, 67-story tower at 3 Sutton Place, for which construction has recently commenced.

The Kalikows aren’t exactly wet behind the ears when it comes to real estate lending. Gamma has originated billions of dollars of loans on hundreds of properties over the past half-century. (Kalikow was insistent that he does not loan to own, even if that turned out to be the case for 3 Sutton Place. “It’s a pain. If I want to buy it, I’ll buy it, but I want the borrowers to be successful at the end of the day,” he said.)

And lending is only one feather in their cap: Gamma has also owned and built over 12,000 multifamily units across the U.S.—9,000 in the southeastern U.S.—and owns 10 million square feet of office space in Manhattan alone.

But, it’s 3 Sutton Place that has been the subject of the most industry chatter (and headaches for Kalikow) over the past couple of years, and the embattled property isn’t out of the woods yet. A zoning war is now underway with Sutton Place City Council officials and the surrounding community, which is fighting to cap the proposed development’s height at 260 feet.

But before getting there, it’s worth examining the origins. After all, this started out as a beautiful dream.

“[Three Sutton Place] is in a residential neighborhood that we find unique, and it has these really strong water views,” Kalikow said about Beninati’s plan for a 950-foot tower when it first crossed his desk in 2014. “Not to mention its proximity to the FDR Drive, to Connecticut, to the airports and to the Hamptons. There are parts of this deal that made a lot of sense to us.”

Back then, the site was comprised of three low-rise apartment buildings. To build the cloud-piercing tower he envisioned, Beninati would have to buy those buildings (for $32 million), empty them of their rental tenants, demolish them and buy 267,000 square feet of air rights from other properties. And Beninati and his business partner Chris Jones had plenty of experience raising millions of dollars in financing, having overseen several large-scale development projects totaling $4 billion, according to the post-bankruptcy trial memorandum of decision dated Dec. 1, 2016.

Banco Inbursa was one of the first lenders out of the gate, entering into negotiations for the project’s financing and executing a term sheet for a $70 million loan. But, according to the post-trial memo, Inbursa backed out a week later because, the bank claimed, the value of the collateral would not be sufficient to satisfy its 45 percent LTV requirement.

“We understood [Beninati’s] shortcomings but we saw a lot of embedded value,” Kalikow said. “We made one loan then we made a second loan to complete the purchase.” Gamma provided an 18-month loan that then was refinanced with a seven-month, $147 million loan in June 2015. It comprised a $145.9 million single loan to refinance the previous loan and a $1.4 million building loan to fund the demolition of the existing properties at the site.

Under the terms of the second loan, Beninati had to either find a partner or find a buyer for the development, according to Kalikow. “But some of the ridiculous things he was asking for led us to believe that he would never find a partner,” Kalikow said, one example being a $50 million step-up in basis cashed-out to him. (Beninati, officials at Bauhouse Group and their legal counsel never returned CO’s requests for comment.)

Beninati, on the other hand, claimed that it was Gamma that made unreasonable demands around a potential sale in the company’s Chapter 11 disclosure statement; he attempted to reach a resolution with Gamma to ensure that creditors were paid, but Gamma demanded it be paid “almost $50 million more than it was owed before creditors would be paid.”

Three to four months before the second loan matured, Beninati told Kalikow he had three potential buyers lined up for 3 Sutton Place with one lead candidate.

“[Beninati] would have made $50 million after paying us off, had he done the sale,” Kalikow said. “But he met with us, and it was clear that he did not intend to make the sale.”

Kalikow said that his team explained to Beninati that in almost no other scenario would he cash out for $50 million.

“He asked, ‘What sell-out price are you using?’ and we replied, ‘$4,000 a foot.’ He said, ‘What if you use $7,000 a foot?’ We said that if you use $7,000 a foot you probably make half a billion dollars. So then one of my associates jokingly said, ‘Well, what if you use $12,000 a foot?’ Joe runs the numbers and says, ‘Oh my god. I’d make over a billion!’ ”

Kalikow added, “It was very clear that the money was not nearly as important to him as his name in lights.”

The loan maturity date of Jan. 19, 2016, arrived and Bauhouse Group hadn’t repaid any amounts under the loan agreements, according to court filings. One day later, Gamma sent Bauhouse notices of maturity defaults as well as a notice that it would conduct a foreclosure sale of the collateral the following month.

“We have it in our [loan] documents that if you do anything to fight a foreclosure you’re fully personally liable, but if you turn over the deed, you’re not personally liable,” Kalikow said. “So, to make things even easier we said [to Beninati] we’d give him back all of his cash invested in the property, and if we sold the property within a year, we’d give him 20 or 25 percent above a threshold so he could retain a portion. He agrees—but then goes radio silent.”

When Beninati resurfaced later with new legal counsel, it kick-started another (ongoing) lawsuit in the 3 Sutton Place saga, and another player entered the picture: Philip Pilevsky, the CEO of real estate owner and property management company Philips International.

“I surmise that [Pilevsky] was introduced to Joe, who told him, ‘Woe is me, I don’t want to lose my baby,’ ” Kalikow said. “Pilevsky says, ‘We know how to deal with lenders, we’ll handle this for you.’ So they try to get an injunction to stop the foreclosure.”

On Feb. 17, 2016, Bauhouse filed a suit seeking a preliminary injunction to stop the foreclosure sale. On Feb. 23 the motion was denied on the merits that the borrowers would not be irreparably harmed by the sale and that the equities favored allowing Gamma to enforce its contractual rights.

primaryphoto Sutton Strike: Gammas Jonathan Kalikow on the War Over 3 Sutton Place
3 Sutton Place. Photo: CoStar Group Photo: CoStar Group

And, then, it got even stickier: Beninati declared bankruptcy.

Gamma filed a complaint against Pilevsky, plus his sons Michael and Seth Pilevsky, for “tortious interference,” in a filing dated Sept. 16, 2016. The complaint alleges that the three of them, as “strangers to the project,” caused Beninati to breach contractual obligations following his maturity defaults and helped him file for bankruptcy “in a scheme to benefit themselves and obtain an ownership interest in [3 Sutton Place].”

“We’re suing Pilevsky for over $100 million,” Kalikow said. “Our loan, plus the interest…we’ll call it $185 million. Our bid out of bankruptcy [for 3 Sutton] was $86 million, so that’s a $100 million crystallized loss. The fact of the matter is, lawsuits cost a lot of money. So why they would want to get into a fight with us literally makes no sense. It’s like a bunch of seventh graders picking a fight with a Navy Seal platoon. You’re not winning this one.”

Gamma’s lawsuit firstly alleges that Philip Pilevsky caused Prime Alliance Group (of which he is president) to lend Beninati $50,000 to retain a law firm, LaMonica, Herbst & Maniscalco, to file a bankruptcy petition which then prevented Gamma from executing the foreclosure sale. The suit also notes that another Pilevsky, Jordan, is a partner at said law firm.

Secondly, the suit claims that the Pilevskys altered the treatment of 3 Sutton Place, as a “Single Asset Real Estate” in the bankruptcy filing by transferring three small cooperative apartments at 504 Merrick Avenue in Lynbrook, N.Y., over to Beninati. In return for the apartments, plus $150,000 in cash, the lawsuit alleges that the Pilevskys received an indirect equity interest.

“They changed the bankruptcy law for real estate in 2005 to say that if you’re a single real estate asset it’s a faster track—so, you as the developer can’t tactically declare bankruptcy and indefinitely hold up your lender,” Kalikow explained. “But [Beninati’s counsel] filed a document that said [3 Sutton Place] is not a single real estate asset. One of our lawyers called up his lawyer and said, ‘Did you guys make an error?’ They said, ‘No. We didn’t make an error.’ ”

In July 2016, Beninati brought a 26-count lawsuit against Gamma, alleging improper conduct and that Gamma breached contracts between the two parties. Bauhouse also alleged that Gamma “had a different motivation than a traditional lender” and seized greater control by refusing to fund the project in accordance with loan documents.

Half of the 26 counts were dropped before the trial, and over five days of hearings last November, the Southern District of New York’s bankruptcy court held a trial regarding the remaining claims.

The roster of those who testified included Beninati, N. Richard Kalikow, JLL’s Keith Kurland (as debt and equity adviser to Beninati, tasked with sourcing the project’s financing) and Jon Kalikow. The court concluded that Beninati had failed to establish a basis for relief on 12 of the remaining 13 counts. The only count left was criminal usury, for which the court ruled that the building loan had a rate higher than the New York statute.

“I was on the stand for seven hours,” Kalikow said. “There were so many little fights during this war. What we think—and again, we don’t know—is that Pilevsky believed that we had used leverage like everybody else does on [this type of] loan.”

Which Gamma did not, Kalikow said.

Like Beninati and Bauhouse, the Pilevskys did not respond to CO’s requests for comment.

Beninati also alleged that Gamma was not a lender but a partner and acted as equity, Kalikow said.

“One of his reasons [for believing this] was that we had attended a meeting at the architect’s office, and my father sat at the head of the table,” Kalikow recalled. “They deposed the architects who attended the meeting, who didn’t remember whether we were there or not, but said that if we were there, we said nothing. We were at the meeting doing our due diligence and checking on the project like any good lender would. Another was that my father remarked to one of the borrowers that he liked his pen, and they said that showed the closeness of the relationship—I shit you not.

“At the end of trial, one of their defenses was they never read the documents that they signed.”

Beninati had a different perspective, describing Gamma’s role as “active” in court documents, saying that the lender demanded that the developers make dozens of changes to the project design, implementation and construction.

While the war ensued in the Downtown courtroom, another battle was flaring up with 3 Sutton’s zoning approvals.

“[In 2015], Beninati goes and describes the enormity of the project, which pisses off all the neighbors, who then raise money for their councilman [Ben Kallos], who then starts a rezoning proposal,” Kalikow said.

When Bauhouse filed its plans for the 87-story tower, Sutton Place locals made a bid for a zoning change that would block super-tall skyscrapers in Sutton Place. The proposal—brought forth in January 2016—would ban commercial development between East 52nd and 59th Streets east of First Avenue and cap the height of new structures at 260 feet. While the community groups argue that the zoning law would protect the area from super-talls, Kalikow maintains it does nothing but protect the views of wealthy residents at The Sovereign, a 485-foot residential neighboring co-op.

In its suit against the Pilevskys, Gamma said that the delay allowed groups like the East River Fifties Alliance (ERFA) to organize against its development.

But the community was up in arms long before Gamma took over the property.

New York City Council District 5 representative Ben Kallos first discovered news of Bauhouse’s planned development from a local resident while attending an Easter egg hunt in April 2015.

“Somebody in the neighborhood [said to me], ‘Did you know there is going to be a tower? Somebody wants to put up 1,000 feet here,’ ” Kallos told CO. “And I’m like, ‘You mean at 432 Park?’ They said, ‘No, [East] 58th Street and Sutton [Place].’ I said, ‘There’s no way. Is this an April Fool’s Day joke?’ ”

By January 2016, the ERFA—backed by Kallos and Manhattan Borough President Gale Brewer as well as State Senator Liz Krueger and Councilman Dan Garodnick—had formed and filed its first rezoning application with the Department of City Planning, looking to cap the height of the building and also secure a section of the residential development for affordable housing units.

This April, CO reported that Gamma had spent the previous few months demolishing the three tenement buildings that had previously occupied the site. The company is now prepared to go forward with the tower’s construction, according to Kalikow. But, the surrounding community, two years into a fight against super-tall neighboring commercial buildings, is determined to halt the project.

Brewer first met with Bauhouse to discuss the site, prior to Gamma taking it over and recalled, “We met with [Bauhouse], and I’ll admit I said, ‘This is an awfully tall building. Do you know what you’re doing?’ I think I said, ‘You have to be kidding me?’ ” she said.

Kallos, Krueger, Garodnick and a representative of Brewer met with Kalikow on May 11 to discuss controversies surrounding the site, including the community’s firm opposition and how steep a climb Gamma would have to complete the project.

“[We told them] we’re not Beninati: We know what we’re doing, and we’re building for New York buyers because this is a New York enclave,” Kalikow said. “They said, ‘We don’t care, it’s too high.’ ”

Kallos said that during the meeting, he flagged the height of the building and warned Kalikow that it might be in Gamma’s best interest to scale down the project to fit the neighborhood’s context or use its air rights elsewhere.

Kalikow interpreted that as a threat and that Kallos was “going to do something with these tenants to hurt us,” he said.

The councilman said he simply brought forth community concerns.

“I offered them options such as using their air rights in other parts of the city,” Kallos added. “We also talked to them about the fact that the rezoning we were proposing would actually give them additional floor area ratio on site—that wasn’t on site and already there—in order to build affordable housing. It was not a threat; it was a specific explanation of the fact that I had hoped that we could work together.”

One of the ways Kalikow believes Kallos followed through on what he thought was a “threat” was through the community’s increased use of 311 calls this past summer, specifically around the Fourth of July weekend, which invited greater scrutiny on the site. (The city must log and address each complaint as it relates to construction safety.)

“I am proud of it,” Kallos responded cheerfully to Kalikow’s accusation that he urged residents to call 311. “Every day I get complaints from residents about construction noise. Any person who is being bothered by construction at [the Sutton Place development] or at any site in my district, I ask them to call 311; I ask them to reach out to me personally. I’m proud.” (When asked about a stop-work order issued on June 28 by the New York City Department of Buildings, Kallos said, “I wish I could take credit for that stop-work order. The DOB was doing their job. It actually took us some time to figure out what happened.”)

A spokesman for the DOB said that between May 1 and Sept. 25, 18 DOB-related 311 complaints were made regarding the property. The spokesman also said that after the stop-work order was issued, workers were allowed to “remediate” the “inefficient” underpinning of a neighboring building and make the site safe, but that no other construction work was allowed.

Kalikow said he has been told that the ERFA, which has grown to include 45 buildings and roughly 2,600 individuals living within and outside the propsed rezoning area, spent $1.3 million to $1.4 million trying to fight 3 Sutton Place’s height, speculating the bulk came from residents of The Sovereign.

ERFA President Alan Kersh responded to Kalikow’s assertion by saying, “Together, [ERFA] building owners and city residents have reached into their pockets and donated funds to support our rezoning efforts. The Sovereign has taken the laboring oar, no doubt, but there are many buildings that have contributed substantially.”

One would assume that some of the shine would come off 3 Sutton Place amid the war raging around it, but Kalikow isn’t walking away. “We’re prepared to build it. We think it’s a very unique property, and we haven’t put it on the market. Not until the grandfather issue is resolved”—one way around a zoning change would be to be grandfathered in to previous zoning laws—“I’m happy to take a profit because there is some deal fatigue. But I’d love to stay in.”

That’s not to say there haven’t been interested suitors. Kalikow has been approached a half-dozen times by potential buyers, he said. “Five of those six were trying to assess my strength and desire to hold it—to see if they can get in at a cheap price.”

For now, Kalikow’s eyes are firmly on the finish line.

“I think there’s a group of potential buyers that would find living in that area exciting,” he said. “[The] Corcoran [Group], our sales team, will say, ‘Oh, well people will go anywhere,’ and maybe they will, but my father would absolutely sell Fifth Avenue to move to Sutton [Place]. When you’re looking at this building in the skyline as you come over the 59th Street Bridge, it’s center stage. It’s a powerful image.”

And, the battle wages on.