‘Wait Until The Check Clears’: What Comes Next In Nightingale's Plan To Pay Back Investors

Investors who are collectively owed tens of millions of dollars as the result of a botched crowdfunding real estate scheme were last week given the first indication their money would be returned — but clawing back those funds is far from a done deal.

More than three months after CrowdStreet told investors in two campaigns run by New York real estate investor Nightingale Properties that its CEO, Elie Schwartz, misappropriated their money, the independent manager of the entities created for the campaigns announced she had struck a deal with Schwartz to repay investors in full.

Under the agreement, Schwartz could be forced to liquidate pieces of his firm’s real estate portfolio — which spans New York, Philadelphia, New Jersey, West Virginia and Florida — to pay back investors in quarterly installments over the next three years.

The arrangement is a major development in the ongoing scandal that has engulfed Schwartz and his company, which involved two crowdfunding campaigns for real estate deals in Atlanta and Miami Beach that never closed.

But liquidating the assets, several of which Schwartz is already battling to hold on to, in a tough market will be no easy feat, market insiders said.

“I think the investors can wait until the check clears before anyone can celebrate,” said Joshua Kons, principal at Kons Law Firm, who said he is representing a dozen investors who participated in the campaigns on CrowdStreet. “I’m hopeful investors can get paid back, but I just think it's really early, and I think there's a lot of other creditors that want a piece of Mr. Schwartz's assets.”

Baker Hostetler partner Jorian Rose, the attorney hired to represent the bankrupt entities, told Bisnow in an interview this week that how Schwartz meets those quarterly payment deadlines is up to him, as long as he is meeting the deadlines.

He may pay early if he chooses, and his personal residence, a 6K SF apartment at 1 West End Ave. that he reportedly paid $17.9M for in 2018, could also be sold were he to fall behind.

"This is a good outcome for investors," Rose said. "And they will hopefully avoid the cost and expense and delay of extended litigation."

A spokesperson for Schwartz declined to comment. Schwartz didn't respond to a request for comment.

Nightingale used CrowdStreet to raise $45M from retail investors last spring in a bid to buy the 915K SF Atlanta Financial Center complex for $182M. It raised another $8.8M in the fall to renovate 1601 Washington Ave. in Miami Beach, an office building it already owned.

More than 600 investors participated, but neither deal closed. CrowdStreet subsequently told investors it couldn't account for where the funds were located — they had gone directly into LLCs controlled by Schwartz rather than being placed in escrow — and accused Schwartz of misappropriating the money.

The entities Nightingale formed to raise the funds were put into bankruptcy by an independent fiduciary, Anna Phillips, who was appointed to investigate the evaporated cash. Phillips named B. Riley Advisory Services Managing Director Eric Lee as the entities' chief restructuring officer.

In the last three months, several new details have emerged from their investigation, including the revelation that Schwartz spent $12M of the funds meant for the real estate deals on stocks and stock options in First Republic Bank in the weeks before it failed.  

Phillips had hinted in recent weeks that a settlement was in the works, and she and Rose announced the agreement on a webinar with investors in the campaigns last week, which Bisnow first reported.

Rose said Tuesday that a bankruptcy plan will be filed with the court by the end of this week.

The settlement they negotiated is essentially playing out in two phases, Rose said. The first part is the funding generated from the sale of 1601 Washington Ave.

Nightingale agreed to sell the building late last month for a reported $82M. Once the deal closes, Rose said $8.8M of the proceeds will be placed in escrow and allocated in accordance with the bankruptcy plan.

Assuming the sale goes ahead and money is collected, Rose and Phillips will calculate what is still owed to investors, and that figure will be divided by 12 to work out exactly what quarterly payments Schwartz will be obliged to pay over the next three years. Rose indicated on the webinar last week that the total amount owed was roughly $50M. 

Those payments will go into a trust, Rose said, which will then be used to repay the CrowdStreet investors.

Schwartz has agreed to liens on his assets, giving the trust the ability to sue or enforce a sale if he misses a payment. Schwartz’s attorney didn't respond to a request for comment.

“Obviously, the settlement was just announced, but the investors have zero transparency into his personal finances,” said Kons, the attorney for the investors. “It can be a very opaque process. They just really have to hope that Mr. Schwartz is able to liquidate the assets.”

The approach Schwartz will take is something of a mystery. His public-facing ownership story doesn't paint the full picture of his portfolio.

Nightingale Properties claims on its website to own 15 properties. In reality, it has been losing grip on many of those buildings for some time.

At least five of the buildings listed on the site have been involved in some form of public foreclosure, lawsuit or default in the last year. 

Nightingale still lists in its portfolio one of its best-known properties, the Whale Building, a 500K SF office property in Sunset Park, Brooklyn. But the building was acquired by Joshua Zamir’s Capstone Equities at a foreclosure auction in August, The Real Deal reported. Zamir declined to comment.

At 20 East 46th St., another of Nightingale's Manhattan properties listed online, the company defaulted on its $30M loan earlier this year, prompting lender East West Bank to sell the debt, which was acquired by investors Namdar Group and Klosed Properties, TRD reported. Representatives for the partnership didn't respond to a request for comment.

At 300 Lafayette, foreclosure had been imminent, but it was avoided at the eleventh hour. Lender TPG Real Estate Finance pushed to take over the building after it said Nightingale had defaulted on a roughly $129M loan. But Nightingale’s partner in the building, InterVest Capital Partners, formerly Wafra, bought the $143M note on the property, PincusCo reported this summer, keeping the foreclosure at bay.

InterVest didn't respond to a request for comment. 

InterVest is also a partner at 111 Wall Street, the 1.2M SF property the pair owns. An auction was reportedly due to take place last month after Oaktree Capital Management, which holds the $100M mezzanine loan on the property, initiated a UCC sale in July, Green Street reported.

That foreclosure was adjourned, a source with knowledge of the UCC process told Bisnow. Oaktree declined to comment.

The InterVest and Nightingale partnership’s trouble spread to Philadelphia too. Their 2.2M SF office complex at 1500 Market St. was placed into receivership in April, Bisnow previously reported. That property is listed as sold on Nightingale's website.

At 1500 Spring Garden, lender TPG put the debt it had on the property up for sale and initiated foreclosure proceedings, according to a JLL sale listing. The sale listing has been removed, and the property is still on Nightingale’s website. TPG declined to comment, and JLL didn't reply to a request for comment.

Even for the buildings where Nightingale isn't facing apparent distress, there is no guarantee it will be able to sell at a price that could be used to pay back investors.

All of the firm's holdings are office buildings, which have seen their value collapse to the point where many equity holders have been wiped out. JLL reported in June that more than 15M SF of New York City office buildings have loan balances greater than their estimated valuations. 

Then there is the issue of the market's appetite to acquire assets. Investment sales have slowed significantly. There were just seven New York City office sales to close during the third quarter totaling $207.9M, a 65% drop on the trailing four-quarter average.

“We're in a market characterized by dislocations and disruptions in both equity and debt,” said Sam Chandan, the director of New York University’s Chen Institute for Global Real Estate Finance. “[With] competitively and functionally impaired assets, it will trigger discounts.”