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New York City housing officials were just as puzzled—and frustrated—as the personal-injury lawyers about Palazzolo’s role in the properties. For the agency, it was an even bigger headache, since it had to figure out how to address Palazzolo’s sprawling and increasingly troubled real estate operation.

When Palazzolo first popped up on the radar of the Department of Housing Preservation and Development in the 1990s, he was just another small landlord, a hands-on owner trying to turn a profit with a handful of buildings. He’d had some problems with heat and hot water complaints from tenants, but he seemed cooperative and responded to orders to fix things up.

It wasn’t until late 2003, says Harold Shultz, the agency’s former top code enforcement troubleshooter, that the scope of Palazzolo’s influence in scores of ailing residential apartment houses became clearer. The first alert came from leaders of the Northwest Bronx Community and Clergy Coalition, an assembly of citizen activist groups formed in the 1970s during the years of owner abandonment and bank redlining. Organizers from the coalition kept stumbling across Palazzolo’s name as they talked to tenants trying to cope with devastating conditions in their homes. Even more startling, after they began organizing meetings in the buildings, the owner—a company named Palazzolo Holding II Corporation—filed a lawsuit accusing them of interfering with the company’s financing.

To better understand what they were up against, the organizers turned to the city housing agency, where they met with Shultz and others. An old hand at dealing with crafty landlords, Shultz says he’d never seen a real estate operation like Palazzolo’s. On the one hand, there were the ownership and management corporations, each listing different individuals as controlling officers, almost all of them based at the same headquarters in Westchester County. On the other, there were the massive mortgages for those same properties in which Palazzolo had declared himself president of the corporations that owned the buildings.

Shultz and Commissioner Jerilyn Perine took advantage of a new law that allowed them to do their own corporate veil piercing. In March 2004, they sent a lengthy subpoena to Palazzolo demanding records for 101 large residential properties in which they believed Palazzolo had an interest. The subpoena asked for information on 97 corporations and 31 individuals whose names were listed as either owners or managers, along with anything that might shed light on how things actually worked inside Palazzolo Plaza: stock and incorporation certificates, tax returns, management contracts, partnership agreements, stock pledges and any checks made out to, or endorsed by, Palazzolo or his family.

Two weeks later, an attorney for Palazzolo named Lawrence Gottlieb responded to the subpoena. They would supply records, the lawyer wrote, proving “that Mr. Palazzolo does not maintain ownership, management and/or control” of the properties and corporations. The housing agency eventually received a large box from the landlord’s attorney. Among other records, it included a thick stack of documents titled “Pledge Agreement” or “Irrevocable Proxy Agreement.”

They made for interesting reading. Obtained for this article under a Freedom of Information Law request, the pledge agreements show that in exchange for unspecified loans (the amounts were redacted by Palazzolo’s attorney as “proprietary” information) Palazzolo had the power to exercise control of all the corporations that owned the ailing buildings.

For instance, the proxy agreements gave Palazzolo voting rights that allowed him to vote all shares at meetings of the corporation. Dated December 2003, they were retroactive to whenever stockholders became owners of their shares. The proxy agreements also appointed Palazzolo “director, president and secretary” of the corporation.

In an accompanying letter, Palazzolo’s lawyer claimed that the pledges were never exercised and were later canceled. But they still indicate far-reaching influence in all the properties.

Housing officials who examined the documents were amazed. The real estate operation was organized like a McDonald’s franchise: Palazzolo was in control of major financing decisions, while corporation officers acted like local franchisees, handling management of the individual buildings.

Further detail of Palazzolo’s novel management system was provided months later when one of Palazzolo’s associates, Stephen Tobia, testified during a hearing in the lawsuit brought against the community groups.

Tobia, whose own corporations were listed as the plaintiffs in the case, acknowledged that Palazzolo helped with purchasing supplies and obtaining financing for the properties. Mortgage payments were made from a pool into which individual building owners contributed. “Who had control of that account?” Tobia was asked. “Frank Palazzolo,” he replied. Pressed as to what Palazzolo’s actual role was in the properties, Tobia hedged. “He is not a manager in the respect of the everyday workings of it,” he said. “He told the bank he would oversee, if necessary, in a managerial, you know, capacity, if needed.”

A courtroom accounting

A much clearer description of that technique was presented a few years later when Palazzolo himself took the witness stand to tell his story in a different case.

The occasion was another lawsuit alleging that a baby had suffered brain damage from flaking lead paint in yet another ailing apartment house covered under one of Palazzolo’s massive mortgages. Tenant Atara James said she had complained repeatedly to the managers of 422 East 178th Street about peeling paint, holes in the walls and leaks in her apartment. Getting no response, she withheld her rent, only to be sued by the landlord for nonpayment. In Housing Court, the matter was settled when representatives of the Loran Realty V Corp. agreed to make the needed repairs. But it was an empty promise, a court ruling indicates. Building owners ignored that order as well as another from the city’s department of health to fix things up, a judge later found. A contractor from the city was dispatched to make the repairs.

But the damage was already done. James’ daughter, Kayla, was diagnosed in November 2001 with an elevated level of lead in her blood. A lawsuit was filed in 2002 against the landlord, but James and her lawyer were quickly informed by the owner’s attorney that they too were out of luck: Loran V was uninsured and mortgaged for more than the value of the property. Even if they were able to prove liability, there was “no possibility of recovery.”

Once more the mortgage document showing where Palazzolo had listed himself as president of the Loran corporations was presented to the court as evidence of his involvement. This time, a court gave an initial green light to proceed against the wealthy real estate operator.

Palazzolo’s attorneys vigorously contested the claim, and the matter didn’t make it to a courtroom until 2009. When he finally testified at the nonjury trial in Bronx Supreme Court, Palazzolo outlined his general business practice. He explained that after several years of owning and operating buildings, he’d decided to bring friends and family into the real estate business. He said he used his own expertise to find properties that would generate income through “rehabilitation and careful management,” as the judge stated in his decision. His own profit, Palazzolo said, came via finder’s fees that he charged these friends for identifying the property, forming corporations to take title, closing on the purchase and obtaining the financing. He said his practice was to then step out of the ownership corporation “and not participate in management of the property in any way.”

He would also lend money to these owner-operators as needed, charging a hefty 12 percent interest rate. The loans were recorded as promissory notes secured by pledges of stock and proxy agreements, presumably similar to those delivered to city housing officials under subpoena. But unless someone defaulted on a loan, the pledges were never exercised, and once the notes were paid off, they were canceled. Loran and many of the other corporations were housed at his Scarsdale headquarters, he said, where they paid unspecified rent for space as well as such office needs as fax machines and copiers.

This was the way things had worked with 422 East 178th Street, Palazzolo testified, when he had helped some friends buy the building back in 1998. When property values increased a few years later, he’d “used his relationships and experience” to package it and 32 other buildings into one big loan. The proceeds of the financing, he said, had gone “in large part” to pay off existing mortgages, taxes and suppliers. He also took out any remaining finder’s fees and loans still due to him from his friends and associates.

Carmine Donadio, one of the officers of Loran V, also testified at the trial. He said he was a high school graduate who had worked as a painter and was introduced to the real estate business through another relative who had a similar deal with Palazzolo. Like many of Palazzolo’s recruits, he had no prior experience and only a hope to “make a living and profit from the deal,” as the judge stated.

Bronx Supreme Court Justice Stanley Green issued a 17-page decision at the end of the trial. He declined to express an opinion as to whether Palazzolo had actually controlled the property. But he said that even if Palazzolo had at some point been the one calling the shots, there was no proof of intentional fraud on his part. James’ attorneys brought the case to an appellate court, and last June a panel of five judges put things a little more strongly: “While plaintiffs may have demonstrated that defendant Palazzolo exercised complete domination and control over Loran V, they have also failed to show that Palazzolo’s actions were for the purpose of leaving the corporation judgment-proof or that his actions amounted to a wrong against them.”

Attorneys for James say they plan another appeal, but it’s a long shot.

The second-worst building in the city

Actually, in the abstract, Palazzolo’s real estate system wasn’t such a bad idea for running large multifamily apartment buildings. It offered an economy of scale by allowing bulk purchases, provided experience for new landlords in running properties and allowed a seasoned professional like Palazzolo to handle the bank financing. It might have worked, if only it had produced decent housing for residents. Except that it somehow resulted in the exact opposite.

The starkest example—one that even surpassed the dismal state of affairs on Boynton Avenue and East 167th Street—was another Palazzolo-linked property at 2710 Bainbridge Avenue. Located just off East 196th Street, not far from Fordham University, the six-story building has 56 apartments. By 2010 it had accumulated an astonishing 1,048 code violations. They included buckling ceilings, broken windows, leaking pipes and a vast infestation of rodents and other vermin. A survey that year by Public Advocate Bill de Blasio ranked 2710 Bainbridge as the second-worst building in the city.

It managed to achieve that status despite being one of the 32 properties financed under the $35.8 million mortgage from the Dime Savings Bank that Palazzolo obtained in 2000. At the time of the mortgage, the listed owner was Palazzolo Realty IV Corp., located at the Scarsdale headquarters. By 2004, a relative, Brian Palazzolo, was one of three listed stockholders; in 2007, the corporation’s name was changed to Semper Fi Realty IV.

Records show the city was forced to make more than 200 separate emergency repairs at the building from 2002 to 2010. The bill—still outstanding in February—came to more than $200,000. It covered everything from repairing leaking bathroom pipes to replacing apartment windows and fixing a broken furnace and—as at the other properties—extensive removal of lead paint.

A stab at intervention came in November 2008, when city housing officials placed the property in a special enforcement program aimed at the city’s worst buildings. It gave the landlord a time limit for making repairs. Palazzolo’s associates insisted they’d take care of things but then blew right past the deadline, officials said. When city repairmen were dispatched to do the work, they were refused entrance to the property. City lawyers had to obtain court orders to be allowed inside.

But even those efforts couldn’t keep up with the deterioration. On May 3, 2009, a 49-year-old tenant on the first floor named Peggy Vargas awoke at 7 a.m. in terror as she watched her bedroom ceiling collapse on her. The falling plaster broke her shoulder and damaged her spine, according to a lawsuit she later filed.

Like others brought against the Palazzolo organization, the lawsuit—still ongoing—bogged down in the search for responsible parties. But enraged tenants at 2710 Bainbridge began withholding their rent in protest against conditions there. One of the leaders of the protest was Olga Tatis, a 20-year resident, whose two sisters also lived in the building. “We were living in bad conditions with hoodlums,” she says.

In Bronx Housing Court, lawyers for the tenants argued that owners needed to be replaced by an outside administrator under the city’s 7A program, which puts troubled multifamily buildings in a kind of legal foster care. “It is rare to see conditions as severe as in this building,” said Garrett Wright, an attorney from the nonprofit Urban Justice Center, at an April 2010 press conference with tenants.

In their application, 29 of the building’s tenants detailed their day-to-day living conditions: “Rat caves, no hot water, bells/buzzer do not work,” wrote a fourth-floor resident. “Electric wiring exposed,” stated someone on the fifth floor. “Ceiling falling,” wrote a sixth-floor tenant.

The judge on the case, Jerald Klein, decided to visit the building himself before deciding. Right before his tour, tenants say, the landlord made some quick cosmetic repairs. “They came and repaired the entrance with some fresh cement,” recalls Franmylia Diaz, Tatis’ sister. She says the judge even commented that the fix-up “was made for my visit.” Tenants thought the judge seemed shocked by the conditions, at one point saying he feared floorboards in one of the apartments might give way beneath him. But the judge later ruled that the landlord deserved more time to make repairs.

That was good news to Shawn Curry, a 64-year-old carpenter and budding landlord who agreed to take over the building’s management company in April 2010, after Palazzolo’s associates decided it was time to get out. Curry says his first day as manager began with a trip to Housing Court, where he was confronted by residents angrily demanding repairs. Curry initially resisted tenant demands as well as city enforcement efforts. But he said he quickly came to understand their anger at the miserable conditions they had endured.

“They were right,” he told us in an interview last fall as he stood in the building’s now renovated basement. “They were paying rent. They deserve a service.” Asked about how things had gotten so bad, he made no excuses for the prior owners. “It’s just, basically, there was no maintenance done for years,” he said. “I mean nothing.”

Curry, who moved to New York from Ireland in the ’80s, declined to criticize Palazzolo directly and credited him with advancing him funding to get his own repairs going. But he said he had been “a bit blindsided” when he bought the property. “I am not a good paper guy,” he said. In the months after he took over, Curry began moving through the building making repairs, engaging a crew of up to 20 workers to tackle the project. He repaired the leaking roof, cracked ceilings and damaged walls, and began installing new plumbing. His work won the respect of many tenants, including Rolando Chambers, whose wife was part of the group that had asked the Housing Court for an outside administrator. “This is one of the best buildings in the neighborhood,” Chambers said with pride in December.

As of January, city records showed that the number of violations in the building had fallen to 126—far from good but a vast improvement over the worst of the Palazzolo era. Wright, the tenants’ attorney, noted that it wasn’t until the tenants took their complaints to court that things began improving. “It took that kind of threat and action of the tenants and organizing work to get them to come to the table,” he says.

Exit from the Bronx

The departure of the Palazzolo group from 2710 Bainbridge was part of what seems to have been a general exodus by the Westchester-based operator from Bronx properties in recent years. Real estate records show that the transfers began at around the same time that city officials began closely scrutinizing Palazzolo’s operation. They picked up steam after the Northwest Bronx Clergy and Community Coalition handed his lawyers a major defeat in court after they tried to bar organizers from their buildings.

Not that Palazzolo and his associates made out badly. Many properties—still in wretched condition—were sold for high prices to outside investment funds just before the market collapsed in late 2008. Like the rookies Palazzolo recruited to join him in the real estate business, those funds also had no experience in the field of managing troubled multifamily apartment houses. But they were a great deal richer. At least eight Palazzolo-connected properties were sold to something called the Ocelot Capital Group, a now defunct firm funded primarily by an obscure Israeli company. City officials suspected that the owners never even saw the decrepit buildings before they purchased them. Ocelot quickly ran into its own management problems and sold them off at a loss after the real estate bubble burst.

Although ownership remains murky, real estate records suggest that less than two dozen of the 100-plus buildings cited by the city housing agency in 2004 remain in the hands of Palazzolo or his associates.

Yet some bankers remain wary of again becoming entangled in his web of corporations. “He was like a behind-the-scenes kind of guy,” says New York Community Bank’s Giovinco. “You have to have a team of lawyers drill down as far as you could to make sure he wasn’t involved in a building,” he says. “You want to make sure he’s not in there anymore.”