July 1, 2011

Azure sees signs of life


A tragic crane collapse behind it, the UES cond-op begins turnaround, but still faces challengesh

A luxury apartment building towering 34 boxy stories above low-rise Yorkville shops, Azure has always been nondescript by design, and yet theatrically imposing in reality.

Launched in 2007, the project was aimed at Manhattan’s growing population of families. Marketing materials emphasized child-oriented neighborhood amenities and focused on the customizable, three-, four- and five-bedroom units on offer. Azure was not meant to excite comment; however, time and again, it has failed.

In May 2008, five months after Azure’s initial sales launch, a 200-foot crane collapsed at the site of the project, killing two construction workers, forcing a temporary shutdown of then-agent Nancy Packes’ marketing efforts, and sealing the building’s fate as headline fodder in the still ongoing legal saga that followed. (Crane owner James Lomma is currently awaiting trial on manslaughter charges after a judge turned down his bid to have the case dismissed.)

Then the real estate market tanked. At the time of the crane accident, Azure could boast 17 of its 128 units in contract, but two years later, that number had shrunk to just nine, suggesting that some buyers had backed out of their contracts.

Fast-forward to today. The crane accident is now a distant memory, and the building is beginning to overcome some of its challenges. During the downturn, its ground-lease ownership structure became its Achilles’ heel, turning off more than a few buyers, brokers and attorneys and making financing difficult for those buyers willing to take the risk. The lease has, however, since been renegotiated, but the new sales team is still working to shed the building’s stigma — no easy task.

“We highly dissuade anyone from buying in this building,” said attorney Adam Leitman Bailey, owner of an eponymous Manhattan-based law firm, noting the ground lease and the small fraction of units sold. “Who is going to pay for the light bulbs if the sponsor goes under?” he asked.

Sources also said that investors are now angling to purchase the property’s $145 million mortgage, currently held by HSBC and four other lenders.

However, a spokesperson for HSBC denied the rumor that it would be willing to sell, adding that the bank continues to issue mortgages to individual buyers in the building. And several additional lenders are now financing purchases in the building, thanks to the renegotiation of the ground lease, which also lowered the effective carrying costs for buyers.

Douglas MacLaury, a senior vice president at the Mattone Group, Azure’s co- developer alongside the DeMatteis Organization, said Azure is in the midst of a sales turnaround. As of last month, 25 units had closed at the building (though two of those were purchased by Douglas Mattone, one of the developers, and his wife, who plan to use the combination spread as a pied-à-terre). MacLaury said he expects 41 additional units to close by December, which would bring the building to roughly 50 percent sold.

But just when things started looking up for Azure, a court last month cleared the way for the reopening of a massive waste transfer station just two blocks away from the building.

Azure may have been able to shed the memory of the construction accident, and it may even overcome the challenges of its ground lease in the coming months. But as for fading into the background as just another nice, family building — it seems that was just never in the cards.

Ground-lease stigma

Mattone and DeMatteis are both family-run firms rooted in the outer boroughs. Mattone, a Queens-based development and construction company, operates properties like Jamaica Center, a shopping center and movie theatre. DeMatteis, with offices on Long Island and in New Jersey, is one of the city’s largest school builders.

The partners broke ground on Azure — named for the blue sky reflected by the building’s glass skin — in September 2007, and kicked off sales one month later.

The building was constructed at 333 East 91st Street atop city-owned land, using $8.4 million worth of air rights the developers were allowed to purchase in exchange for building a public middle school next door. Because the city very rarely agrees to part with its land, the developers instead inked a 75-year ground lease, meaning the building would not be a condominium but rather a cond-op — a co-op with condo bylaws.

In order to construct the Azure, the developers first had to emerge as the winner in a competitive bidding process handled by the city’s Educational Construction Fund, which trades unused air rights for classrooms in an attempt to alleviate overcrowding in schools. It was the first of what was expected to be a new wave of projects conceived by the fund, which hadn’t been active since the 1980s.

At the time, the market for new construction was hot, and if anything, buyers were more concerned about noise from the school than about the potential pitfalls of a ground lease.

Then came the crane collapse. The accident delayed construction and bestowed a stigma upon the building just as the real estate bubble was coming to an end. By the time the accident began fading from memory, the market was frozen solid. Then, as it began to thaw, the ground lease emerged as a major roadblock to sales.

Because Azure residents must pay to help cover the annual ground rent, the building’s maintenance fees are noticeably higher than at comparable new construction buildings.

Units are priced lower than other condos in order to offset the maintenance fees: Azure’s units have thus far sold at an average of $933 per square foot, according to data from StreetEasy. By comparison, Yorkville’s Georgica and Brompton condos, launched around the same time as Azure, have respectively sold for $1,270 and $1,557 per square foot, though they also have ostensibly more desirable locations.

Still, Azure’s land lease left unit owners vulnerable to skyrocketing monthly charges after 75 years, because it did not give the building the option to either renew the lease or purchase the land below. That meant the city could theoretically hike up the rent significantly at the lease’s expiration.

The developers had tried to negotiate better terms from the get-go, but at the time, the city wouldn’t budge, and it wasn’t perceived as a necessity in order to sell the building. “We knew of those issues back in 2007, 2008, but there were different market conditions [then],” MacLaury said. “Everything was selling.”

Once the recession hit, however, the land lease became a major impediment to sales.

“In a bad market, where people look for excuses to write off potential properties, that is an excuse,” said Bruce Cholst, a partner at the law firm Rosen Livingston & Cholst, who is not involved in any cases at Azure.

The building’s far-from-the-subway location — on the corner of 91st Street and First Avenue — didn’t help matters either.

“The location is tough,” said one broker who previously marketed the building. “If it [were] 30 blocks south and a condo, it would sell in three months, easily.”

(Ironically, the one thing even Azure’s detractors don’t dispute is that the building — which initially gained notoriety because of the crane collapse — is actually constructed remarkably well.)

Meanwhile, Azure’s owners have not been willing to slash prices, unlike most other buildings on the market during the downturn.

MacLaury said that asking prices, which currently begin at $805,000 for a low-floor one-bedroom, and reach $5.69 million for a four-bedroom penthouse, have not changed “materially” since the building was declared effective by the Attorney General’s office in early 2010. A source with knowledge of the building said that at one point, the developers even turned down an offer from a buyer who wanted the entire building for $700 per square foot.

With sales being handled by Prudential Douglas Elliman’s Ilan Bracha (now of Keller Williams), the building crossed over the requisite 15 percent-sold mark required for closings to begin. However, that sales uptick was partly due to a bulk deal of roughly 20 units that later fell apart, according to brokers with knowledge of the building. (MacLaury contends that this is a “misinterpretation” of what occurred.)

Gaining traction

By the spring of 2010, with Azure still languishing on the market, it became clear that something needed to change. Mattone and DeMatteis went back to the city to ask for reconsideration of the land lease, and this time, they were successful.

Last summer, the developers paid the city $500,000 for the option to purchase the land when the lease expires, and were granted an option to extend the lease for another 25 years should Azure’s board choose not to buy it. They also negotiated an additional tax benefit from the city that effectively extends the building’s 421a tax abatement to 20 years, rather than the typical 10, which brings Azure’s carrying costs closer to those at other buildings.

Costs now average around $1.60 per square foot per month, according to real estate website StreetEasy, are 45 percent tax deductible, and can be higher or lower depending on the floor. By contrast, data from appraisal firm Miller Samuel shows that carrying costs in Manhattan condos in 2010 averaged $1.44 per square foot.

The restructuring of the lease appears to have produced something of a breakthrough for mortgage lending in the building. Last month, the developers announced that JPMorgan Chase and Wells Fargo had joined HSBC in giving the building their stamps of approval, signing on to finance loans for buyers at up to 80 percent of the loan-to-value.

Craig Rojek, a mortgage broker at San Diego-based CalCon Mutual Mortgage, which also recently began lending in the building, said Azure seems to be “picking up a ton of traction” and that he’s received a number of calls within the last month from buyers looking to finance their purchases there.

Azure’s sales team has also been working to change the industry’s knee-jerk reaction to buildings on leased land, trumpeting the idea that not all ground leases are created equal.

The building is now being marketed by Ammanda Espinal, a former Bracha Group member, and Elliman’s Jacky Teplitzky team, which recently took over a handful of the building’s higher-priced listings. In May, Teplitzky lured some 85 brokers to Azure for margaritas, Mexican food and a seminar on ground leases co-hosted by attorney and ground-lease specialist Lior Aldad of Aldad & Associates, who has represented at least 10 of Azure’s buyers.

Teplitzky said many brokers have avoided bringing clients to the building because they’re spooked by the land lease. The aim of the event, she said, was to reverse that stigma by educating the community.

“A lot of the brokers were shying away from even showing [apartments at Azure],” she said. “If they cannot understand the concept [of a ground lease], they cannot sell it to their own clients.”

Also to encourage sales, the developers have picked up the tab for closing costs usually covered by buyers, Aldad said. Mac-Laury said buyers’ incentives are given on “a case-by-case basis,” though concessions are “diminishing” as the building fills up and as the Upper East Side’s supply of large, residential units dwindles.

New transfer station

Just as the building is getting back on its feet, though, it looks like there may be another dose of Azure-related drama coming down the road. The city plans to fast-track the $125.4 million plan for the waste station, so that it will be fully operational by 2014.

The new facility would handle 5,280 tons of trash per day, 24 hours a day, six days a week, and has prompted a rash of protests from Yorkville residents, who expressed concern about the health hazards of opening a garbage facility in a densely packed residential neighborhood.

In addition, residents argue that the transfer station is too close to the neighborhood’s beloved Asphalt Green athletic complex, on York Avenue between 90th and 91st streets.

Azure’s proximity to Asphalt Green has also been a major selling point for the building.

MacLaury said that while the Mattone Group has “had a dialogue” with the City Council about the project, they’re not planning to join their neighbors in signing a recent petition against the project that has amassed thousands of signatures.

The developers feel the facility’s “location is sufficiently far away” from the building so as not to have an impact on sales or property values, he said.

But a similar debate recently raged in Hudson Square, where the Sanitation Department is moving forward with a new garage and salt shed within earshot of several pricey new condos. Buyers in those buildings, including a number of celebrities, joined with neighborhood groups in protests and lawsuits but were ultimately defeated. The Urban Glass House, the condo next door to the garbage and salt shed, has suffered. The building, which launched in 2005, did not see a single resale until this year, despite several apartments sitting on the market for months with marked-down asking prices, according to data from StreetEasy.

Teplitzky isn’t worried, saying she has faith that the powerful Upper East Side community will prevail in blocking the project from moving forward.

“Seven years ago, they wanted to open a Toys ‘R’ Us at the Richmond condominium, at 201 East 80th Street,” she said. “On the Upper East Side, you have a lot of very strong people that live here. They all got together and protested and it was not opened. I just can’t imagine that [the waste transfer station] will [happen].”

For now, Azure is waiting patiently as the developers try to move the remaining units at the prices they have stuck with for years.

Mattone and DeMatteis both deny industry speculation that the building might wind up going part-rental and say they’d still be interested in doing more cond-op projects through the Educational Construction Fund in the future.

“We would definitely be interested in the next project coming out,” said John Caiazzo, the director for real estate development at DeMatteis and the former head of the ECF. “The issues we faced with this project because of the slowdown [did not] deter us.”