Robbing Peter to pay the condo bill

As developers of struggling new condos grow more desperate for cash, some may be pilfering funds from their own projects, industry insiders say.

The reserve fund — a sort of rainy day fund for capital improvements at condo conversions — is particularly vulnerable because developers have easy access to it, experts said. Former Sheffield57 developer Kent Swig and Rector Square’s Yair Levy are the most high-profile examples of sponsors who’ve been accused of depleting these funds. But attorneys and other sources say many more developers are likely misappropriating funds, using residents’ money to pay their bills and falsely inflating costs.

“The sponsors are raiding the reserve funds, wrongfully and unlawfully,” said Marc Held, the attorney for a group of owners at Rector Square. “It appears to be an epidemic in buildings in New York.”

According to New York City’s Local Law 70, enacted in 1982, any occupied building undergoing conversion to a co-op or condo must have a sponsor-financed reserve fund equal to either 3 percent of the aggregate sales price of the apartments offered to the tenants, or 3 percent of all sales over a five-year period. The idea behind the law is to ensure that “when the residents take over, there’s not an empty till,” said attorney Robert Braverman.

The reserve fund “belongs to the condo, and can only be used for capital improvements,” said Braverman, who represented owners at Sheffield57, where Swig was accused of making some 40 withdrawals from the building’s reserve fund to pay his legal fees and loan payments.

Tough economic times can drive cash-strapped sponsors to “borrow” money from the reserve fund.

“These developers are in need of cash,” said Held, noting that Levy admitted under oath to emptying the reserve fund at Rector Square, one of the first completed condos in the city to ever go into foreclosure. “This is an easy way of getting cash — to take it from these accounts.”

If a developer comes up short on operating expenses for a project, the only options are to put in more cash or raise common charges. Some feel “it’s easier to just draw down a little from the reserve,” Braverman said.

That’s especially true because many developers have unfettered access to the reserve monies. In fact, they’re often responsible for depositing money into the fund from each sale.

Debra Guzov, the co-founder of the law firm Guzov Ofsink, said low-profile developers may have an easier time getting away with improprieties. Even if residents discover these transgressions, “it’s less likely that smaller buildings are going to go to the attorney general’s office or file a lawsuit, because there’s such a high cost,” she said.

Some developers fail to set up a reserve at all, or purposefully establish a fund that’s too small, Guzov said. Other developers improperly tap the fund to do work on a building project before it’s completed, experts said. While the fund is intended for capital improvements, it’s not supposed to subsidize the sponsor’s construction costs. “We have found situations where the developers owed condos substantial sums of money,” said Mindy Eisenberg Stark, an accountant and certified fraud examiner who works with a number of condos in the city.

Development partners don’t always agree on which funds are fair game.

In December, the owner of an Italian tile company went to court alleging that Extell Development’s president Gary Barnett was improperly spending funds at a small condo conversion of four units the two were working on together at 470 Broome Street.

Sicis, the company, claimed in court documents that Barnett had hired Extell affiliates to work on the conversion, paying them inflated fees. Barnett has flatly denied the claims, calling them “nonsense.”

Finally, some developers have been known to line their coffers by falsely inflating the bills submitted to lenders from contractors, then pocketing the difference.

“They ‘cook the reqs,’” said attorney Gregory Tembeck. “They submit an inflated requisition, the bank pays it, they get the money and they do whatever they want.”