At the height of the real estate bubble, banks looking to make profitable loans on residential multifamily properties viewed Bronx real estate operator Frank Palazzolo as an excellent investment candidate. He looked good—at least on paper.
For starters, Palazzolo’s business was thriving. He was owner, partner, investor or financier in dozens of large apartment houses. He was clearly well situated in a market with an endless supply of customers: Many of his holdings were located in the borough’s northwest section, the densest residential area outside Manhattan and a stronghold of working-class New Yorkers, many of them immigrants, all in need of the city’s rarest commodity: affordable rental housing.
On a checklist of creditworthiness, Palazzolo scored high: In 10 years, he had gone from owning a handful of properties with relatives to heading a major real estate operation with several dozen associates and partners. He had established a track record of having held earlier bank loans, including two for more than $1 million. And it didn’t hurt that he ran his business out of his own modern office complex several miles north of New York City.
In the language of bankers, Palazzolo had the requisite three Cs: capital, capacity and collateral, and enough of each to handle sizable mortgages.
A few years earlier, he would have been out of luck, along with most other Bronx real estate owners. In the 1970s and early ’80s, banks were loath to offer mortgages of any size as arson, owner abandonment and city disinvestment took a huge toll on Bronx residential neighborhoods.
But by the late 1990s, when Palazzolo first went shopping for large investment funds, the market had done an about-face. Housing values were soaring, and lenders were welcoming mortgage applications like his. Loan documents were quickly assembled and approved.
A series of huge deals
One of his biggest was in 2000, when he negotiated a $35.8 million note from Dime Savings Bank of New York for his Palazzolo Realty Corporation. The mortgage loan was spread over nearly three dozen properties containing more than 1,100 apartments. Most of the mortgage went to consolidate outstanding debt already carried on the buildings. But bank officials were impressed enough with their client to advance him an additional $9 million for unspecified needs. Two years later, he presented another lender, Washington Mutual, which had taken over Dime Savings Bank, with a different roster of 34 properties, containing more than 1,000 units. Like the earlier group, each property was owned by a different corporate entity, each one listed at Palazzolo’s Scarsdale offices. The bank agreed to lend him $32 million. Again, most of the note represented consolidated debt, and again Palazzolo picked up additional cash on his trip to the bank, in this case an added $8.5 million.
Mortgage documents for the loans were filed with the Bronx County clerk. They contained standard provisions protecting the bank’s interest in the properties: All insurance would be in place; they would be maintained in good condition; “all necessary or desirable repairs” would be made; rents would be collected in compliance with all laws; environmental rules—a reference to strict laws concerning elimination of dangerous lead paint—would be obeyed. With a series of soaring loops, Palazzolo signed his name as president of each of more than 60 separate corporations holding title to the properties, agreeing to the terms and conditions. Most of the buildings had been purchased in the late ’90s by either Palazzolo or his many associates. His role, as he later explained in courtroom testimony, was to serve as a kind of arranger—someone who located properties, lent money to the actual owners and arranged financing.
Once the paperwork was complete on Palazzolo’s loan applications, the funds were released. Among the properties in the mortgages was 3569 DeKalb Avenue, the building where Jashawn Parker died. Years later, when asked on the witness stand where that mortgage money went, Palazzolo insisted most of it had gone to pay outstanding loans, contractors, fuel oil vendors and the like. But if much of the money was spent to maintain the apartment houses, there was little to show for it.
Records show that many of the properties pledged in Palazzolo’s mortgages were already in severe distress at the time the loans were made. In 2004, just two years after Palazzolo had signed off on multimillion-dollar financing deals, officials at the Department of Housing Preservation and Development said that they’d found more than 19,000 housing code violations in some 100 properties identified as part of Palazzolo’s real estate operation.
A follow-up look late last year at many of those same properties found different owners of some buildings and a few positive indications that new landlords were trying to turn things around. But the findings were otherwise stark: Despite the millions of dollars paid out to his corporations in mortgages, many of the properties involved in those deals had only tumbled further into decay.
Palazzolo himself, along with almost all of the associates whose names were listed as building owners, had managed to escape any sanctions. Thanks in part to tough New York state laws that protect individual investors from corporate liability, no one was penalized for the disastrous shape in which they left their properties. A couple of them retired to mansions similar to Palazzolo’s in leafy glades in Westchester, just a few miles north of where they had found their fortunes.
Even some of the bankers said they later came to regret their dealings with the Bronx real estate tycoon. Michael Allison, executive vice president for strategy and growth for Washington Mutual, testified in a deposition in 2007 that his bank had decided not to make new deals with Palazzolo after he refused demands for repairs on the properties.
“We communicated our desire to Mr. Palazzolo that the violations be cured,” stated Allison, “and that this would be part of what would be required for us to continue the relationship or to pursue additional relationship [sic].” Palazzolo, he testified, declined.
“He disagreed with the requirements we expected on the property,” Allison said. “He felt comfortable that his level of maintenance was appropriate for his tenants and suggested he wasn’t going to do that.”