New York CIty Council Member Ben Kallos

Joint Testimony to the Board of Standards and Appeals,In Opposition to Request for Exemption from Zoning Change

Download PDF of Testimony and Exhibits

Joint Testimony to the Board of Standards and Appeals

New York City Council Member Ben Kallos
New York State Senator Liz Krueger

and
New York City Council Member Keith Powers

Tuesday, April 10, 2018
RE: 2017-320-BZY, 428-432 East 58th Street, Manhattan
In Opposition to Request for Exemption from Zoning Change

 

I. Summary

Thank you to Chair Perlmutter and the members of the Board of Standards and Appeals for the opportunity to testify today.

We are here to strongly oppose Sutton 58 Holding Company LLC’s request to exempt its development at 428-432 East 58th Street from zoning text that is the result of a community-led grassroots zoning text change approved by Community Board 6, Manhattan Borough President Gale Brewer, the City Planning Commission, and the City Council. We are proud to represent the community surrounding the site that is the subject of today’s hearing.

The Sutton rezoning, which was enacted November 30, 2017, was the result of a grassroots effort led by a group called the East River Fifties Alliance (ERFA), which consists of 45 buildings, represented by co-op boards, condo boards and individual owners, and over 2,600 individual supporters living in more than 500 buildings within and beyond the rezoning area. Along with ERFA, Borough President Gale Brewer, and then-Councilmember Dan Garodnick, we both were co-applicants on the rezoning application. We are now joined in support by Council Member Keith Powers.  The rezoning was also supported by Congress Member Carolyn Maloney, Community Board 6, and numerous civic organizations including the Sutton Area Community, CIVITAS, Friends of the Upper East Side Historic Districts, and the Municipal Arts Society.

This is relevant here because the effort to rezone the narrow streets east of First Avenue between 51st and 59th Streets and the progress being made in the ULURP proceeding for that rezoning were publicly known to the developers, not only before they began laying their foundation, or before they applied for the permits, but before they even purchased the property.

As the Board is aware, the vesting provisions of the Zoning Resolution are designed to protect owners of real estate from unforeseen zoning changes which unfairly restrict development after properties are acquired. In this instance, however, the applicant acquired the property with full knowledge of the planned zoning restrictions, and thereafter, rather than slowing construction activity to avoid potential prejudice, increased it, often working beyond the hours permitted by existing permits. The applicant is seeking to turn the vesting provisions of the Zoning Resolution upside down. Section 11-331 of the Zoning Resolution, which allows construction under certain conditions, is being subverted by the applicant for the purpose of creating an unfairness. After the zoning change was adopted, the applicant continued to perform construction work on the building, proceeding at its own risk and in bad faith, even though a full stop work order had been served on December 1, 2017.

 

II. The Story of this Development

The Bauhouse Project

Sutton Area residents, led by the Sutton Area Community neighborhood association’s then-president Dieter Selig, first alerted Council Member Kallos in April 2015 to a proposed 90-story building, being planned by the Bauhouse Group at the site we are discussing today. The building quickly garnered press attention, with an article in the Our Town newspaper on April 7 of that year and an opinion editorial in opposition to the out-of-scale tower, which Council Member Kallos published in the same newspaper (See Exhibit 1). Community Board 6 passed a resolution calling for height caps in the neighborhood on May 13, 2015, which was sent to the Department of City Planning (See Exhibit 2). By August, the New York Times had covered the community’s efforts to rezone the neighborhood (See Exhibit 3).

On January 21, 2016, as covered by the Daily News, ERFA submitted its rezoning proposal to the City Planning Commission, with Borough President Brewer, Senator Krueger, and Council Members Kallos and Garodnick as co-applicants (See Exhibit 4).

In the time between January of 2016 and June of 2017, when the proposal was ultimately certified by the City Planning Commission, we worked with Department of City Planning staff through the process of preparing a final application for the Commission. At the same time, we expanded our outreach, holding countless public meetings and town halls, as well as publishing reports and op-eds on the issue.

Changes at the Bauhouse Site

During this time period, a lot changed at the development site on 58th Street as well. In February, 2016, Gamma Real Estate, which had provided the loan to the Bauhouse Group for the site, sought a foreclosure auction on its $147 million loan, as the Bauhouse Group reportedly struggled to raise the necessary construction financing (See Exhibit 5). After failing to win a restraining order, on February 26, 2016, Joseph Beninati, principal of the Bauhouse Group, filed for bankruptcy for the limited liability company that owned the site, halting the foreclosure auction.

Following a failed lawsuit, the property officially went into bankruptcy in April 2016 and was approved for sale in September 2016. Finally, near the end of 2016, a corporate entity owned by Gamma Real Estate, the firm that had initially loaned money to the Bauhouse Group, won the auction for the site, paying $86 million for the property and $12 million to secure additional air rights, according to the Real Deal. The community’s efforts were well publicized ahead of this sale, from real estate trade publications, to the New York Times, Wall Street Journal, Daily News, and Bloomberg News.

Crucially, the rezoning was referenced in court documents related to the bankruptcy sale, showing that the current developers purchased the property in full knowledge of the risks inherent to the project (See Exhibit 6).

Legally Distinct Corporate Entities

While the applicants seek to appear as individuals with controlling ownership interests in multiple companies, those companies must be treated as legally distinct entities by the Board of Standards and Appeals. The applicant should not be entitled to all the benefits of their corporate forms including their instant creation or termination without facing the reality that the companies are legally distinct. The entity before us today was a new entity that chose to purchase the property in bankruptcy, with full knowledge of the benefits and risks of the collateral, as explicated in the bankruptcy court filings.

According to the New York State Division of Corporations Entity Information, the following companies were formed and made active and inactive on the following dates (See Exhibit 7):

  • Sutton 58 Owner, LLC was formed as a Domestic Limited Liability Company in New York County on June, 13, 2014, and is currently inactive.
  • Sutton 58 Owner, LLC was registered as an Unauthorized Limited Liability Company with jurisdiction in Delaware on March 17, 2015 set to inactive with the notation “merged out” on the same date.
  • Sutton 58 Owner, LLC was registered as a Foreign Limited Liability Company in the County of New York with a jurisdiction of Delaware with service of process care of Bauhouse Group in Connecticut on March 18, 2015, and is currently active.
  • Sutton 58 Associates LLC was registered as a Foreign Limited Liability Company in the County of New York with a jurisdiction of Delaware with service of process at 101 Park Avenue (the same address as is used by Gamma Real Estate) on June 4, 2015, and is currently active.
  • Sutton 58 Holding Company LLC was registered as a Foreign Limited Liability Company in the County of New York with a jurisdiction of Delaware with service of process at 101 Park Avenue (the same address as is used by Gamma Real Estate) on December 8, 2016 and is currently active.

Each entity is separate and distinct, with its own identification number, date of registration, jurisdiction, and status. It is of note that the entity applying to the BSA today, Sutton 58 Holding Company LLC, was registered on December 8, 2016 nearly a year after the rezoning was filed with the Department of City Planning on January 21, 2016.

According to testimony before the City Council on November 20, 2017, the entity that made the loan to Sutton 58 Owner LLC was Sutton 58 Associates, while the entity that purchased the estate at Bankruptcy was Sutton 58 Holding Company LLC (Exhibit 8 at pages 279 - 283).

The rights of Sutton 58 Associates terminated with the satisfaction of the bankruptcy estate and the individuals with ownership of Sutton 58 Associates could have been made whole to fullest extent of the law through the bankruptcy process by accepting a bid from a company that they did not own. In particular, according to the same testimony, Isaac Hager’s Cornell Realty bid $81 million, but was outbid by Sutton 58 Holding Company LLC (Exhibit 8 at page 282).

Sutton 58 Holding Company LLC is a new entity registered on December 8, 2016 for the apparent purpose of purchasing the property in question at Bankruptcy. The purchase price was far below what was paid by the original developer, in part because of the pending rezoning which introduced a risk for which Sutton 58 Holding Company LLC paid a substantially lower price.

Communications with Gamma Real Estate

Our first contact with Gamma Real Estate occurred on March 21, 2017, when Jonathan and Richard Kalikow of Gamma sent a letter to the elected official co-applicants requesting a meeting. As reported in depth by the Commercial Observer, Senator Liz Krueger, Council Members Ben Kallos and Dan Garodnick, and a representative of Borough President Gale Brewer met on May 11, 2017 with Jonathan Kalikow, his lawyers Stanley Schlein and Gary Tarnoff, as well as additional representatives from Gamma Real Estate, to discuss Gamma’s plans for the site (See Exhibit 9).

Mr. Kalikow indicated that while he understood the community and elected officials’ desire for buildings in context with the neighborhood, his intention was to “make whole” on the initial loan given to Bauhouse, and that doing so was only possible with the revenue that mega-units at the top of a super-tall building could bring. Gamma Real Estate indicated that their new plan for the building would bring the height down roughly 100 feet, from 900-plus feet to 800-plus feet, mechanicals included, and that it would have a design more in context with the aesthetic of the neighborhood. We stated our intention to continue supporting ERFA and the residents of the Sutton Area in their rezoning effort to fix the zoning for the whole area.

We also discussed the lot and air-rights assemblage it had taken to allow for the possibility of building a supertall on a side street in the Sutton Area. Mr. Kalikow acknowledged that the assemblage utilized inclusionary housing air rights from another site, which could still be used at a separate site in Community Board 6 or within half a mile of the site from which the FAR had been purchased. Alternatively, the air rights could still be sold to another developer. Aware of these options and the community’s ongoing effort to bring contextual rezoning to the neighborhood, Mr. Kalikow indicated that he planned to move forward with the construction of a supertall tower.

The Public Review Process

On June 5, 2017, the City Planning Commission certified our rezoning application (N 170282 ZRM), allowing it to move forward through the formal public review process. After Community Board 6 held two public hearings, one conducted jointly with the Manhattan Borough President, the board issued a resolution on June 28 supporting the proposal. The rezoning passed the City Planning commission on November 15 and was sent to the City Council for review.

 

III. The Grandfathering Clause

When the City Planning Commission approved the ERFA application, it did so with one significant modification, the inclusion of a grandfathering clause to make the particular building being considered here today exempt from the new rezoning. Senator Krueger and all other co-applicants called for the grandfathering clause to be removed at the City Council’s hearing on the rezoning application on November 20. Ultimately, the clause was resoundingly overturned by the City Council, with a vote of 45 in favor, 0 against, and 1 abstention. While the text of the rezoning as passed by the Council and enacted is clear, Council Member Kallos highlighted this the removal of the clause in his remarks at the Council vote, stating, “We removed the grandfathering provision that the City Planning Commission has added erroneously.” It is clear that the rezoning was intended to and should apply to all properties in the zoning district.

The applicant has since argued that Council Member Kallos intended for the developer to seek recourse through the appeal process to the BSA under the vesting provisions of ZR 11-331, as they have done. The intent of this comment was only to state that it was the developer’s right to appeal to the BSA, and in no way an endorsement of the validity of such an appeal, which the Council Member wholeheartedly opposes.

 

IV. Illegal After Hours Work Variances (AHVs)

Following In Re Perrotta (107 A.D. 2d 320), the Board of Standards and Appeals must determine if any of the permits or variances were granted properly by the Department of Buildings or if they were never legally granted and thus invalid ab initio.

After Hours Work Authorization may only be granted for one of five reasons specifically enumerated under §24-223(e) of the Administrative Code: (1) Emergency Work, (2) Public Safety, (3) City Construction Projects, (4) Construction Activities with Minimal Noise Impact, and (5) Undue Hardship. On June 6, 2017 and thereafter, Council Member Kallos communicated with the Department of Buildings regarding the granting of After Hours Work authorizations in violation of the law (See Exhibit 10).

The After Hours Work Variances began on Saturday, June 3, 2017, continuing (See Exhibit 11):

Saturday, June 10 – Saturday, June 17
Saturday, June 24 – Saturday, July 1
Saturday, July 22 – Saturday, July 29
Saturday, August 5 – Saturday, August 12
Saturday, August 19 – Saturday, August 26
Saturday, September 2 – Saturday, September 9
Saturday, September 16 – Saturday, September 23
Saturday, September 30 – Saturday, October 7
Saturday, October 14 – Saturday, October 21
Saturday, October 28 – Saturday, November 4
Saturday, November 11
Saturday, November 18
Saturday, November 25 – Saturday, December 2
Saturday, January 13, 2018
Saturday, January 20
Saturday, January 27

The After Hours Variance applications cited a reason of “Public Safety” and were approved for “Other.” An example description of work from June 3 reads, “EXCAVATION, DRILLING, INSTALLATION OF SUPPORT OF EXCAVATION, REBAR PLACEMENT, CONCRETE PLACEMENT, TRUCKING, FORM WORK AND ASSOCIATED FORM WORK, SAFETY CARPENTRY, SAFETY PROTECTION AND EQUIPMENT MAINTENANCE,” none of which qualifies for “Public Safety” that could not otherwise occur during regular hours. The description of work continued to be much the same, throughout all of the After Hours Variances. In fact all of the work described as necessary for “Public Safety” also occurred during regular hours, meaning that either the same work during regular hours endangered the public safety or there was no danger to public safety at all.

The Department of Buildings has on occasion applied a strict interpretation of the Administrative Code, denying similarly situated applications in my district, but in this case continued to grant After Hours Variances in violation of the law. The Department of Buildings may grant authorizations or take other actions in violation of the law, but its doing so does not render the authorized illegal activity legal. In fact, it remains illegal, just not subject to enforcement action. The Board of Standards and Appeals, though appointed by the Executive, is a quasi-judicial body empowered by the City Charter to interpret the meaning or applicability of the Zoning Resolution, Building and Fire Codes, Multiple Dwelling Law, and Labor Law.

The Board of Standards and Appeals must make a finding of fact as to each of the After Hours Work Variances. It must determine whether such authorizations were properly based on any of the five enumerated reasons. Any work authorized for “Public Safety” reasons must not include work that is also done during regular hours without that same public safety concern. Finally, any foundation work done under an After Hours Variance in violation of the law may not be counted for the purposes of establishing a foundation. Given the facts, the Board should find that none of the After Hours Variances were properly issued, thereby disqualifying any and all of the foundation built during those illegal After Hours Variances.

 

V. A Scofflaw Foundation

Pouring without Permits

Once the rezoning application was nearing a final vote, the developers began to take last resort actions in an attempt to convince this board that their property should be exempted from the impending rules. These actions included doing work for hours after their permits expired and simply doing work with no permit at all. This was a cynical attempt to ignore the law in hopes that the City’s response would be too slow to properly enforce the new rules and that this Board would not see through this deception.

On November 11, 2017, the developers took the extreme action of closing 58th Street without a city permit in order to pour, according to the applicant’s filing, 880 cubic yards of cement, representing approximately 50% of the mat foundation. Countless constituents saw the unauthorized work and reported it to my office, 311, and the 17th Precinct. We reached out to the relevant city agencies and were ultimately informed that the applicant did not have a permit. However, in the meantime, the cement had been poured.

A week later, on November 18, it happened again. The developers continuously poured cement from 7am until 10pm, according to contemporaneous reports by neighbors sent to our offices, despite the after-hours construction permit’s expiration at 6pm. Again, they illegally disrupted traffic, closing one lane without a permit from the Department of Transportation or any other City agency. Traffic on nearby streets was also blocked by employees of the applicant, without a permit. This day resulted in a pour of 893 cubic yards, representing approximately the other half of the foundation mat pour.

Burying the Evidence

Although the BSA only considers, for the purposes of vesting, foundation poured before the adoption of a zoning change, the applicant continued to pour foundation on the day of adoption and afterwards, despite a Stop Work Order from the Department of Buildings.

At a November 20, 2017 City Council hearing, the developer stated under oath that over 100 workers would be laid off during the holiday season. However, after a stop work order was issued on November 30 at 5:21pm, work resumed the next day, on December 1. This work continued for weeks, far beyond the standard procedure of cleaning and shoring up a work site to make it safe during a stop work order. Council Member Kallos personally reached out to officials at the Department of Buildings on December 5, 2017 with evidence that, among other types of activity, rebar work was occurring on the site after the stop work order was issued.

It is hard to imagine that the foundation was supposedly at 80% completion on November 30, 2017, but necessitated another two months of work, with After Hours Variances issued through Saturday, January 27, 2018, to be completed (See Exhibit 11).

The issue of fact in this proceeding is whether the foundation is substantially complete, and the Board of Standards and Appeals has a long tradition of independently inspecting sites. However, while the developer was preparing their appeal to the Board of Standards and Appeals, and even after filing this appeal, the developer continued work on the building in question, concealing, altering and destroying the physical evidence of progress at the time of the zoning change.

In light of the concealment and alteration of the physical evidence of the building’s construction on the day of the rezoning preventing any independent evaluation and analysis, the BSA must not reward this act, and must assume that the building was not substantially complete. Should the BSA not make this assumption, it must require that the developer provide details and supporting documentation for all work done since adoption.

The foundation today that is almost at street level is not indicative of the amount of foundation that was completed at the time of adoption, and it bears no resemblance to the small portion of the foundation completed without violating the law.

Ignoring All Work Following Adoption

The Zoning Resolution is clear in considering only work completed prior to adoption. Although the applicant may seek to introduce evidence of work following adoption, it must not be counted toward substantial completion.

 

VI. Floating Air Rights

In Bankruptcy, Gamma Real Estate purchased the lot and the air rights separately.

The air rights purchased were from 11 surrounding buildings, as well as over 70,000 feet of affordable housing inclusionary certificates purchased from a development on 39th Street, within Community District 6, according to testimony at the November 20th City Council hearing (Exhibit 8 at page 277). These air rights can be used anywhere in Community District 6 or within half a mile of the 39th Street site. The developer can use the air rights on another development site they own or they can sell them to another developer. Without the floating air rights of 70,000 feet of FAR, the building would only have 60,000 feet of FAR and could more easily be built within the form required by the zoning text, while allowing the developer to earn additional revenue from the sale of the floating air rights. The BSA has no requirement to guarantee a developer the right to use FAR they purchased on a specific site that has been rezoned.

 

VII. Conclusion

This Board serves a crucial purpose, to ensure New York City’s Zoning Resolution is not so rigid that commonsense and fairness are erased by rules for rules’ sake. Specifically, the power to vest properties into the zoning code as written at the time the building’s foundation is completed is an important way of ensuring that developers are not surprised by changes to city law, finding themselves in a situation where they have just poured their savings into something they can no longer afford.

The scenario you are considering today is a distortion of the spirit of this law. The developers did not find themselves stuck with a foundation they could do nothing with. They poured their foundation illegally, partially in the final hour and partially after midnight, as a last-ditch effort to convince this Board that they were stuck with it and should thus receive special dispensation. A total of 1701 cubic yards of this foundation was poured utilizing unpermitted street closures. Of that, 180 cubic yards of cement was poured after the applicant’s permit expired. An additional 300 cubic yards was poured on the day of the zoning change’s adoption, and so it is not considered. Only 93 cubic yards of cement was poured without cutting any corners, with the permission of our city’s agencies. All the while, the developer did work utilizing illegally granted After Hours Variances.

This is not substantial completion of a foundation. This is an attempt to avoid the law. Please vote against approving this applicant’s request, in order to maintain the integrity of the zoning code and of this residential neighborhood.

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