Pine Equity’s `flipping’ draws suits; foreigners are left unprotected
May 2002, By Tom Fredrickson



Like so many others, Ofer Resles and Oren Yarushalmy came to New York looking for business success.

They realized their goal and then some. Through a company called Pine Equity NY Inc. and a sister company in Israel, they sold apartments, designed to be rented out for income, to an estimated 500 Israeli citizens looking for investments during the 1990s real estate boom.

Now they’re parlaying their success into new real estate ventures. They have ownership stakes in three buildings that offer short-term rentals for business travelers, and they’re helping to develop two more for lease to a subsidiary of Marriott International Inc.

But some of Pine Equity’s customers allege in lawsuits that Messrs. Resles and Yarushalmy built their burgeoning empire with questionable business practices. Investors allege that Pine Equity took advantage of their physical distance and sold them apartments at prices inflated to ensure big profits for Pine.

The allegations center around a real estate practice known as flipping-the purchase and rapid resale of a property for which the price was marked up. As was often the case with Pine Equity, a flipper also may merely acquire the right to buy the property, and then assign that right to a buyer for a significant profit. Though not illegal, flipping has been criticized by the federal government and others as a sales practice that is frequently abused.

Investors allege that Pine Equity was raising the prices on apartments it sold by as much as 35%, to levels that were above market value. Investors also allege that the company disguised the flipping in order to conceal from investors the fact that the apartment prices had been raised.

Three lawsuits have been filed: one in Israel and two in the United States. While the two U.S. lawsuits have been settled, the Israeli case is scheduled to go to trial in the coming weeks. Other investors say they may sue over their transactions.

”We are talking about people who have put their life savings into these apartments,” says Lior Aldad, a Manhattan real estate attorney who represents one of the investors. ”They wanted to retire comfortably and collect rent from an apartment in Manhattan.”

Mr. Resles, president of Pine Equity, says foreign investors knowingly paid more to have the company smooth their way into the New York market. Pine Equity supplied and decorated the apartments, found business travelers to rent the units and helped arrange mortgages. Investors received their rental income monthly, he says.

”We created a package that was a little more expensive compared to just coming and buying on the street from a broker, but we gave them an answer to all their needs, and they were fully aware of that,” Mr. Resles says.

Considering how many transactions Pine Equity handled-more than 500-the number of investors who complained is very small, Mr. Resles says.

Lingering allegations

While Messrs. Resles and Yarushalmy continue to own and manage apartments, they have sold the marketing side of their business to Israel-based Poalim Investments, a publicly traded holding company. But the litigation lingers, as do the allegations that lawsuits have raised about Pine Equity’s business practices.

The claims raise larger questions about the need to protect foreign investors, who own an estimated 20% of Manhattan rental apartments. A mini-industry thrives around them, with a handful of companies focusing on selling to specific nationalities.

New York state consumer protection laws are not designed to safeguard foreigners. Moreover, foreign investors are vulnerable for a variety of reasons, including language barriers and geographic distance. They’re less likely than local investors to be able to spot inflated prices, and since they often are not present at real estate closings, they have fewer opportunities to raise questions.

In the case of a building at 110 Fulton St., investors who sued Pine allege that they did not know that the company was flipping the property. They allege that Pine Equity structured the deal so that it would make a $2.45 million profit on the flip without spending any of its own money.

In 1998, according to the complaint filed in state Supreme Court in Manhattan, Pine Equity arranged to buy the 14-story building along with a group of Israeli investors, including Ilan Moses, Shlomo Greenberg, Moshe Miller, Yuval Benhar and an investor identified as Dom Investment Ltd. Pine Equity set up a partnership called Wall Street Suites, which included the investors and Pine Equity, to buy the rental building and convert it to 28 condominiums.

Under the deal that Pine Equity presented, the partnership would buy the property for $7.05 million from Headington Inc. In fact, the investors allege, Headington was owned by Pine Equity. Court records show that Headington had signed a contract to purchase the property from Hong Fung Realty Inc. for $4.6 million.

Unexpected premium

”We did not bargain to pay an absurdly high premium to Pine,” Mr. Greenberg says in a court filing.

Mr. Resles, however, says that the investors knew that Pine Equity owned Headington, which existed for tax reasons. He also says that the other parties gladly paid the extra $2.45 million to Pine Equity for bringing them the opportunity to invest in the Wall Street area building.

The dispute was recently settled out of court when Messrs. Resles and Yarushalmy agreed to buy out the other parties. Mr. Resles, on the advice of an attorney, refused to discuss the allegations in the lawsuit because of a confidentiality agreement.

In that case, a whole building was involved. But typically, Pine Equity’s transactions were for single apartments sold to individual investors. In those instances, too, Pine Equity was flipping properties and sharply raising prices, according to investors, who say they discovered the markups later.

Real estate records support the allegations that the apartments were marked up substantially. For instance, Pine Equity locked in the purchase of an apartment at 200 Rector Place for less than $180,000, an analysis of city real estate records shows. Kalman Mnuskin, an Israeli investor who bought the apartment through Pine in 1998, paid $236,000. That’s a markup of 31% for Pine Equity.

Investors say that based on Pine Equity’s sales and marketing information, they believed that Pine owned the apartments and was selling them directly. This helped convince them to invest, they say, because Pine Equity representatives told them its ownership allowed them to buy a property commission-free.

In a few cases, investors discovered that they were paying more than the properties were worth and tried to get out of the deals. Tel Aviv resident Andrew Hollander is suing Pine Equity in Israel. After he agreed in 2000 to pay $275,000 for his apartment, an independent appraisal put its value at $40,000 less. He has tried to back out, but according to his lawsuit, he has been unable to retrieve his $27,500 deposit.

Mr. Hollander’s lawsuit alleges that Pine Equity misrepresented itself as the owner of the downtown apartment and falsely assured Mr. Hollander and Hava Globin, his common-law wife, that the price they would pay was lower than the market value for such an apartment.

Tzvi Magril, an Israeli investor living in Fort Lauderdale, Fla., made a deposit to buy a Manhattan apartment last year. Pine Equity had stopped marketing apartments by itself, but the company was still involved in the business through a joint venture with Poalim Investments called the Manhattan Group. It was through the Manhattan Group that Mr. Magril arranged to purchase a condo.

An independent appraisal valued his apartment at $70,000 less than the $320,000 purchase price. He is also trying to back out of the deal, and he’s considering filing a lawsuit.

`Abusing the situation’

”I think they are abusing the situation of so many Israelis who are looking for investments,” says Mr. Magril.

Mr. Resles says that he does not know much about the specifics of Mr. Hollander’s deal. He says that at that point, he was not actively involved in the marketing side of the business. Regarding Mr. Magril, he says that neither he nor Mr. Yarushalmy was involved in the active management of the Manhattan Group. The Manhattan Group did not respond to requests for comment.

But Mr. Resles says that, in general, the contracts in Israel made it clear that Pine Equity was flipping, though he isn’t sure exactly what the contracts said. ”We had so many forms of contracts,” he says.

Mr. Resles says that all investors had a lawyer looking out for their interests at the closings, which took place in the United States. He also says that the process was open, and information was not exploited. ”When you are flipping, the only thing you can’t do is exploit information, because everyone is at the same table and knows exactly what is going to happen,” he says.

However, he acknowledges that Pine Equity recommended the two lawyers who represented most of the investors at the closings.
Examining the practice
The practice of flipping has been coming under greater scrutiny. The Department of Housing and Urban Development is considering whether flipping should be banned altogether for mortgages backed by the Federal Housing Administration, because of the danger that buyers and lenders will invest more money in properties than they are worth.

The Real Estate Board of New York, which establishes advisory ethical standards for the industry, has no formal position on flipping, but say that it is common only in the commercial market, among buyers and sellers who understand the process.

But many of Pine Equity’s clients knew little about New York real estate. Some didn’t speak English.

They were seeking places to invest outside the Middle East, and Messrs. Resles and Yarushalmy were poised to take advantage of their interest. The two men, longtime business partners who met in the Israeli air force, had run an electrical subcontracting company in Israel and a gift-importing business in New York.

Nothing really clicked, though, until they got into real estate. Mr. Yarushalmy did so well investing in distressed properties in the early to mid-1990s that he and Mr. Resles founded Pine Equity in 1995. When they first started locating apartments for Israeli investors, Israeli law allowed only corporations to invest in foreign properties. Then, in 1998, Israeli law changed, allowing individuals to purchase assets outside the country.

Pine Equity advertised and became well-known in Israel. As Pine developed a sizable inventory, the company became attractive to corporate clients looking for bigger blocks of apartments, such as ExecuStay, now a unit of Marriott International.

To meet the growing demand from ExecuStay, Messrs. Resles and Yarushalmy began adding buildings to their portfolio. They own buildings in Manhattan, Great Neck and White Plains. Along with Townhouse Management Inc., which is owned by the Maidman family, they are developing a 31-story tower on Third Avenue and East 37th Street, and they are searching for a site for another tower.

Mr. Resles says he doesn’t miss the residential sales game. He and Mr. Yarushalmy are focusing their attention on Oxford Capital, which will own the properties they are developing for Marriott. ”It is much better to be a developer,” he says.

2002, Crain Communications, Inc