Source: http://www.nytimes.com, March 6, 2015
By: Ronda Kaysen

Construction Defects Follow a Brooklyn Building Boom

It took just three years for balconies to crack and concrete to flake from the facade of one Brooklyn condominium. Another building was prone to flooding, because the storm drainage system was never connected to the sewage system. With buildings rising at a pace not seen in years, some fear that shoddy construction could be making a comeback, too.

As developers feverishly break ground on projects to cash in on soaring property values, lawyers, architects and engineers say they are fielding more calls from residents complaining of structural defects in newly built homes. There is growing concern that some developers are repeating the mistakes of the last housing boom and delivering substandard product. As more residents settle into new buildings, the trickle of calls could soon turn into a flood.

“My phone is ringing already on projects that were just completed,” said Steven D. Sladkus, a Manhattan real estate lawyer who says his firm has dozens of active construction defect cases. “Uh-oh, here we go again.”

When the housing market collapsed in 2007 and coffers ran dry, many developers were left scrambling to complete projects. Some cut corners or abandoned developments, leaving others to finish the work. The result was a spate of poorly built developments followed by a rash of lawsuits from angry buyers. But the number of complaints dwindled when the recession took hold and new construction stalled, leaving only the most seasoned developers to continue to build.

Now, in today’s increasingly heady housing market, untested developers are eager to get in the game, and some of those who built problematic buildings in the past are breaking ground again. “It’s like the developers did not learn their lessons,” said Adam Leitman Bailey, a Manhattan real estate lawyer who has noticed an uptick since the start of the year in complaints from residents of newly built buildings reporting problems with elevators, water infiltration and inadequate insulation.

Last year, the city issued construction permits for 20,300 units of housing, according to the Real Estate Board of New York. And the state attorney general’s office received submissions for 263 offering plans for condo conversions and new construction in 2014, up from 184 in 2011. Those numbers will most likely grow in 2015, encouraged by Mayor Bill de Blasio’s push to build more housing.

With land and construction prices high, profit margins are narrower, particularly in midmarket projects. Some builders may take shortcuts, swapping higher-quality materials for less expensive alternatives. Others may hire unqualified subcontractors. While some grievances hinge on cosmetic details like parquet floors where quarter-sawn oak was promised, others are far more serious, with the health and safety of residents — and sometimes pedestrians — in jeopardy.

“It’s one thing that you don’t like the paint job or the carpet in the hallway is shabby,” said Howard L. Zimmerman, an architect whose firm has hired additional staff members in expectation of more problems to come. “But when you don’t have sprinklers and when you don’t have self-closing doors in the fire stairs, those are really life-safety issues that are almost criminal. People could die.”

At 500 Fourth Avenue, a 156-unit condo in Brooklyn that opened in 2010, trouble began in July 2013 when concrete fell from the 12-story building’s facade and balconies onto the streets below. A Department of Buildings inspection found cracks in the balconies, resulting in a partial vacate order — residents living in the 94 units with balconies could no longer step out onto them. The city ordered the building to erect scaffolding and a sidewalk shed to protect passers-by.

Reeling from the news, the fledgling condo board hired an architectural firm that determined that the top layer of concrete on the balconies and ledges had not been laid properly and that the glass railings had been improperly anchored. The price tag for repairs topped $1 million.

“This thing just went up in 2010, are you kidding me?” said Erik Kath, an architect who bought a studio in 2011 with his wife, Kalina, also an architect. The $428,000 apartment, which does not have a balcony, was the first home they had purchased.

Through a series of town-hall-style meetings, residents made their wishes clear: They wanted to return to their balconies. The sidewalk shed, which cannot be removed until the city deems the balconies safe, has darkened a shared resident terrace and several private terraces on the second floor. The board decided to repair the balconies, even though the building had not reached an agreement with its sponsor, the Park Slope Group.

“Clearly, no one buys in a luxury building and weeks in expects to do a $1 million construction project,” said Robin Riddle, the president of the condo board. “But the shock and awe was quickly replaced with ‘We need to get on with this.’ ”

The board levied a two-year assessment. The assessment on the Kaths’ studio is $185 a month, in addition to their $400 a month in common charges.

Repairs on the balconies are scheduled to be complete by fall. Fixing the problem has proved less difficult than reaching a solution with the development’s sponsor, a process Mr. Riddle described as “disappointingly slow.”

“We know what’s wrong with the balconies. Either you are going to pay for them or you’re not going to pay for them,” said Robert J. Braverman, a lawyer representing the condo association of 500 Fourth Avenue. “I have my doubts of their willingness to do a quick settlement.”

In an email response to questions about the balconies, Michael Matrisciani, a principal sponsor of 500 Fourth Avenue, pointed to the construction company’s role in the development, saying: “We hired a large and experienced construction company, Hudson Meridian. We are confident that this company will stand behind their work as well as cooperate with the sponsor and the condo board.”

The principal sponsors of the development include Itzhak Katan and four members of the Matrisciani family — Michael, Monty, Daniel and Alex Jr. According to the offering plan, 500 Fourth Avenue is the first condo development by the Matriscianis, who formerly worked in the beer and soda distribution business.

Mr. Katan, however, has developed nine other Brooklyn condos, according to the offering plan, sometimes using the name Isaac Katan. Many of the buildings rose along Fourth Avenue during the last housing boom. Two of them — the Crest and Park Slope Views — have filed lawsuits against Mr. Katan and others involved in the projects citing significant construction defects, including problems with facades and balconies. In both cases, defendants denied allegations in unsuccessful motions to have the cases dismissed. Both cases are still pending. Novo, another Katan condo on Fourth Avenue, has also had construction defects, according to a summons with notice that the condo board filed in 2011. A formal lawsuit has not been filed.

On the Crest and Novo, Mr. Katan partnered with Shaya Boymelgreen. Mr. Boymelgreen, who has been named in other construction-defect lawsuits in Brooklyn and Manhattan, is currently under investigation by state Attorney General Eric T. Schneiderman for defects at 15 Broad Street, a condo conversion in the Financial District. Last spring, a judge granted a temporary restraining order against Mr. Boymelgreen and another business partner, barring them from condo and co-op sales in the city. The restraining order is still in place, pending the outcome of the attorney general’s investigation.

“It’s a real travesty,” said Mr. Sladkus, who represents the condo boards at the Crest, Park Slope Views and Novo. “It just boggles my mind that a development could have so many documented problems.”

Holding a sponsor accountable for construction defects, of course, is not easy. Sponsors frequently use limited liability corporations that dissolve after all units sell, making it difficult — but not impossible — to hold anyone personally liable or find assets to seize. The window for litigation for condo boards is also narrow and closes relatively fast, even though some defects may take time to manifest.

Boards have different legal strategies available to them. They can sue for breach of contract or certain types of fraud, and even negligence. The statute of limitations for negligence suits is three years. For breach of contract, it is six years.

Litigation can carry a stigma. Buyers are often reluctant to bid on an apartment in a condo that has been labeled defective — and with good reason. Banks will rarely refinance a loan or lend to a buyer in a building with ongoing litigation. Legal fees and repair costs pile up. Owners, meanwhile, fear property values will plunge if word gets out that their building has defects. “There is this dark cloud that is hanging over the building,” Mr. Braverman said. “They get blacklisted.”

At 550 Grand Street, a small condo conversion in Williamsburg, Brooklyn, with persistent water problems, no units have resold since it opened in 2009. “Who wants to buy into a lawsuit?” said Naomi Azuma, the president of the condo board.

Sales have not suffered, however, at 500 Fourth Avenue. Buyers looking for new condo construction in the area do not have many units to choose from and the building has a property tax abatement, which might make the temporary assessment more palatable.

In the 20 months since the city issued a partial vacate order, 20 units have sold, according to StreetEasy.com — nearly all for a profit. When the Kaths listed their apartment last October, they said, they received about five offers in a week, selling the studio for 6 percent over asking price. The balcony issues were mentioned at the open house, and the assessment was disclosed during the contract process, yet the buyers were not dissuaded. Last month, the Kaths moved into a two-bedroom rental nearby in anticipation of the birth of their first child, who is due in April.

All new construction has inherent risks. And some lawyers, architects and developers say that, for the most part, developers deliver sound structures. Major defects are a rare exception to the rule. “I don’t think a building has been built without an issue since the pyramids,” said Stuart M. Saft, a lawyer who represents sponsors.

Regardless, buyers are left to do their own due diligence in a frenzied real estate market. Offering plans are dense, and a developer’s track record can be hard to trace. In a seller’s market, buyers have neither the time nor the leverage to slow the process.

“As consumers, we don’t know the questions to ask, because it’s not something we do every day,” said Kathy Braddock, a managing director of William Raveis New York City. “There is such a buzz about new construction, it’s like eye candy. But it can also be sour.”

Still, the Kaths doubt they would do things much differently the next time around. “New York City real estate is too cutthroat,” Ms. Kath said. “If we wanted to spend time doing our due diligence, the sellers would simply move on to the next buyer.”

For Alana Blahoski, trouble began in August 2011, just weeks after she and her partner, Georgianna Fouquet, bought a one-bedroom duplex at 550 Grand Street, the condo conversion. Ms. Blahoski was outside spraying a garden hose when Ms. Fouquet noticed water in her closet on the lower level of the apartment. From there, the water troubles worsened. The bamboo floors buckled; mold grew. Water seeped in from three sides. A year after they moved in, the wood floors and Sheetrock on the lower level had to be demolished, costing the couple $8,900.

“You would hear the horror stories of people in their homes and you never thought it would happen to you,” said Ms. Blahoski, who won a gold medal in ice hockey at the 1998 Olympics.

Eventually, the condo discovered that the storm drainage system had never been connected to the sewer system. The problems were not limited to the basement. The roof leaked, pipes burst and critical fire-stopping measures were missing, according to a lawsuit filed by the board against the sponsor, 550 Grand LLC, and other parties in 2013.

The condo had traveled a bumpy path to its 2009 opening. Midway through construction, in 2007, as the housing market took a nose dive, the original developer sold the entire building for less than $1 million. The new developers, EcoRise Development, included a husband and wife team, Cynthia and Michael Schlegel, and Timothy Phillips, an architect. At the time, the Schlegels had built only one other condo, a six-story property in Crown Heights that opened in 2007. Mr. Phillips’s website describes EcoRise as his first development company.

In many ways, the condo board’s list of complaints describes a project with loose ends. The board has claimed the following: The HVAC system was not properly installed; a new roof was never installed; the sponsor never applied for promised tax abatements; and sprinkler heads and other fire-stopping measures were missing or nonfunctional.

In a motion to dismiss the case, the Schlegels argued that the condo board had failed to properly protect, repair and maintain common elements in the building. In a separate motion to dismiss, Mr. Phillips argued that he was no longer a member of 550 Grand LLC or EcoRise Development, and had been only a minority equity holder in the companies with no control over day-to-day operations. Although all claims against EcoRise and the architect were dismissed, claims still stand against the sponsor, the contractor, Mr. Phillips and the Schlegels. Several parties in the lawsuit have indicated that they believe they are close to a settlement.

“The Schlegels and their companies have a great track record in new development,” said Steven R. Wagner, a lawyer for the Schlegels. At 550 Grand Street, “they have voluntarily made repairs and are in the process of negotiating a fair resolution for every single one of the remaining legitimate complaints.”

“When projects go wrong, when they change hands or there is a bankruptcy involved, there is often a lot of damage,” said James Garrison, the principal of Garrison Architects. He was not involved with the development of 550 Grand Street, but his company is designing a condo for EcoRise at 305 Union Avenue in Williamsburg.

EcoRise Development, with its office in the commercial space of 550 Grand Street, has continued to build. In 2010, it built 161 Roebling Street with Mr. Phillips and the same contractor that built 550 Grand Street, Ghattas Engineering. The Buildings Department has not issued any violations against 161 Roebling Street since it opened.

Mr. Phillips, who declined to comment for this article, is no longer associated with EcoRise but is still a defendant in the lawsuit.

Recently, EcoRise has been looking beyond Williamsburg: It is buying a group of warehouses in Gowanus, according to Mr. Schlegel’s LinkedIn page. And soon, the company will break ground on 305 Union Avenue, a seven-story condo a few blocks from 550 Grand Street that was designed by Garrison Architects.