The $14M Escrow Scandal That Rocked NYC Real Estate

0:05Lilah Burke: Welcome to Deconstruct, a podcast from The Real Deal. I'm Lilah Burke. Hannah Kramer is in Miami, so joining me today is Senior Editor Amanda Gladowski. Amanda, welcome. Thank you. Thank you for having me. On Deconstruct this week, we'll be talking about Manhattan office rents, how real estate players are planning for succession, and of course, the election. And for our main story, we'll be joined by our Commercial Bureau Chief, Rich Bachman, to talk about Mitch Kossoff, a convicted felon who was recently released from prison. Let's dive in.

0:39Lilah Burke: Today on Deconstruct, the story of a fraudster who has had an early release from prison. To tell us more about what he did and what we can learn from this legal saga is Commercial Bureau Chief, Rich Bachman. Rich, welcome to Deconstruct. Thanks. So did Bia. All right. So could you please tell us a little bit about Mitch Kosoff? What did he do? What is he most notable for? So Mitch was a real estate attorney since been disbarred. And he worked with a lot of rent-stabilized landlords. He worked with Steve Krohman, Terrence Lundberg, and Todd Cohen of Icon Realty Management, Larry Gluck of Stellar Management.

1:16And if you sort of notice a through line between those, they were sort of the forefront of buying out rent-stabilized tenants. And that's a lot of the work that Mitch did. He held the money that they used for buyouts in escrow. And this is sort of what got him in trouble.

1:33Lilah Burke: And tell us a little bit about that trouble. In the spring of 2021, I got a tip that Mitch, who I'd never heard of before, had disappeared and that he had allegedly stolen his client's funds. I wrote a story about it, and there was a period going on where no one could really find him. There were all these rumors that he had absconded, that he was on a Caribbean island somewhere with all this money. It turned out he had turned himself into the federal authorities. So can you tell us a little bit about his conviction and kind of how that process played out over the last few years? Sure. So like I said, he turned himself into the federal authorities, but he was eventually charged by the Manhattan District Attorney's Office with three counts of fraud and stealing more than$14 million from his clients.

2:21He pleaded guilty in late 2021, and the following year he was sentenced to four and a half to 13 and a half years in prison.

2:29Lilah Burke: And what was he taking the money for? So Mitch has a pair of wealthy parents. His mother is a philanthropist. She actually co-founded the Cystic Fibrosis Foundation. and they had a struggling manufacturing company in Queens. Mitch had taken it over and he had started to dip into his clients' escrow funds to support that business. He also, you know, along with his law firm, he had a messenger courier service that he ran, a detective's firm, which were all bleeding money. He also, sort of a side gig, he was into SoulCycle cycling and he was an instructor. He seemed to have like a very full plate.

3:08Lilah Burke: Okay, so he's taking the money from the escrow account to fund these failing family businesses and I guess his SoulCycle career. Is that right? Yeah. I spoke to some of his real estate clients and they said, you know, they would go and take his class. What were they like? What was like his playlist? I don't know his playlist, but there was something about how he liked to dance on the bike. Okay, so how long was he in prison for? He was sentenced to four and a half to 13 and a half years in prison. He did the minimum term and then he was eligible for parole, which he was released on in September.

3:44Got it. So you've recently read the transcript where he's kind of reflecting on his experience. What was that like? You know, it was eye opening. I think in cases like this, you're always wondering, like, how did this happen? Was this person determined to steal? It starts off small and these things get out of control. And that's what Mitch said. He said that, you know, he started taking from the escrow funds to support these businesses, that he thought he would grow his law firm out of it, but that things spiraled out of control. So Kosov says that he took the money to kind of rescue these three flailing businesses.

4:23Do you believe him? It sounds plausible. You know, I've covered fraud cases in the past where I've asked this question and people have decidedly come down on the side that the person I'm writing about was dishonest and intended to steal the money. I haven't heard any of that with Mitch. The parole board brought up this question of did he use the money to fund a lavish, extensive lifestyle? And he said no. He never took any of the stolen money to spend on personal expenses, but he acknowledged that money is fungible, that he had a apartment that he was paying$19 ,000 a month rent on, and he was paying for that from his salary.

5:05But like I said, he acknowledged that he should have downsized. The DA's office also pointed out that he had a$16 ,000 a month credit card bill. Right. So essentially, he was living somewhat of a lavish lifestyle, but that was from his personal money, not his stolen money. He says. He says. As Mitch tells it. Right.

5:26Lilah Burke: So Mitch has been released from prison. Where does that leave him? Can he rebuild? He's trying to rebuild what he says is his reputation. I think that he has a lot of damage, particularly with his family. He says that he's living with someone who's not his wife and that he's trying to repair his relationship with his children. He said that he had an offer to work as an administrative assistant in a private detective's office. And he was very clear that he wouldn't be doing any legal work because he has been disbarred. OK, well, that's a pretty far, you know, distance to travel down from being an attorney and doing all these deals to now you're an administrative assistant.

6:08You know, was there any sort of reflection upon that, you know, sort of fall from grace? Yeah, you know, I think that what came across in the transcript to me is that Mitch seemed to not recognize the person who had committed these crimes. He said time and again what a lapse of judgment it was and how wrong he knows that it was. And it seems that, you know, he justified it in the moment. But I think that he's crystal clear now that there were worse consequences than letting those companies fail. So we cover a lot of fraudsters or alleged fraudsters all the time. What do you think this Kosov saga has kind of said about these types of criminals and what might it signal for others who are going through this legal process right now?

6:54I think the signal is really, you know, buyer beware. Real estate is really largely an unregulated industry and you have to choose people with integrity because they have a lot of power with your money. The guardrails around escrow are really punitive. They're not protective. If someone steals your money, you can go to the authorities after, but there's not much in place beforehand.

7:18Lilah Burke: And so with the Kosov saga, is there anything we can take away about what might prevent this sort of fraud or these sorts of crimes? You know, I think a lot of it is the due diligence of the people who are working with these attorneys. We spoke to some lawyers at larger firms, and they said that when they want to take money out of escrow, it requires the sign off from two of the attorneys. Mitch was a sole proprietor. He didn't have those protections in place. And either his clients didn't ask whether he had those or they didn't care. And so there's an element of human nature here, right? He had access to this money.

7:56Lilah Burke: He wants to take it. It's very tempting. You know, is there anything that can prevent that? So, yeah, you know, around the time we had done the story on escrow, Someone that we spoke to likened it to your house and a robber. You can have the best security system in the world, all the protections you want, but if someone wants to break into your house, you can't stop them. So where do things go from here for Kosov? His law firm was put into bankruptcy, and the trustee overseeing that is still trying to get the money back for victims. Not too long ago, he filed a lawsuit against JPMorgan Chase, where some of these accounts were.

8:36He sued them for$18 million saying that they should have been aware of Mitch's misconduct and stopped it.

8:43Lilah Burke: All right. Well, we will be watching that. Rich, thank you so much for joining us. Thanks for having me on. Okay. Amanda, I'm excited to have you co-hosting with me today. Can you tell me about a story that you're obsessed with? Yes, and excited to be here. A story that I am obsessed with this week is NYU's five-week night school for real estate nepo babies. Okay, what is that? So this combines three of my fascinations, which are real estate, extreme wealth, and family dysfunction. Naturally. So essentially, for the low, low price of$850, you can go to this class and kind of succession plan or almost have like a group therapy session, it seems like.

9:36So we actually sent one of our reporters, Liz Cryan, to observe this class. And the deal that we struck was that it would be off the record, but she could kind of report on what goes on at a high level for this group. And there were just some really interesting details right off the bat. I mean, something that I really enjoyed is the class takes place at One Vanderbilt. So not quite a lecture hall per se, but then also they do order pizza and like drink soda out of plastic cups. So it's good that they're getting the college experience to some extent. And Succession School appears to be pretty legit.

10:16Simon Ziff of Ackman Ziff co-founded the class. They have pretty legit speakers. Scott Ruckler stops by, Nathan Berman, to discuss kind of family dynamics and money. So essentially, it does sound like a little bit of group therapy for the 1%. And we cover these family feuds all the time at The Real Deal, of course. The Goldman's, the Durst's, you name it. But usually by the time we get to things, things have kind of melted down a bit. The dirty laundry is hung out. And this feels like more of a preventative measure of how to avoid getting into those types of situations.

10:55Lilah Burke: And it's specifically for succession? That's what they bill it as? Yeah. It's basically for people who are born into a real estate family and how to kind of manage the complicated dynamics that come with that. Like imagine two brothers build a property empire. A couple of generations go by and now you have 30 cousins that you are grappling with who's doing what, who's getting paid. You know, is one cousin the hardworking cousin and the other cousin is collecting checks while in Tulum. I guess that can be kind of an isolating experience because not very many people that I know personally are in that boat.

11:37Lilah Burke: Yeah, I mean, I think, just thinking this over, I think, not to sound like an ad or anything, but$850. I did like the price tag. It feels like couch cushion change for this crowd, but good for them. So the advice in the class does appear to be fairly practical. Get everything in writing, establish the ground rules about who can work in the business, and kind of do some disaster planning for divorce, death, lawsuits, who is not allowed to run the company under any circumstance, who is, you know, identified as that potential leader to take things over. Okay, so get it in writing, you know, plan things out.

12:21Lilah Burke: A lot of this sounds like common sense, right? I do agree with you, and you must think that these people have other advisors telling them to do that. But it does seem like a big part of the class is also emotional support. So something that was pretty interesting that came up in reporting is that I think this was maybe a five-class module. And in three of the classes, Thanksgiving came up as a topic. One of the participants on the record shared that her grandfather, quote, drafted her to run the family business. And this woman has a career as a successful attorney. And she said, you know, I could have said no, but I would have had to find another place to spend Thanksgiving.

13:09So it seems like that's a lot of what is discussed in this class.

13:14Lilah Burke: Right. That sort of family management, how to deal with being drafted into leadership. Right. Exactly. Or, you know, perhaps there was somebody who really wanted that honor, but perhaps they weren't the most reliable in the group. My main takeaway is that no amount of money, generational wealth or power can guarantee you peace on Thanksgiving.

13:43Okay.

13:44Lilah Burke: And for our headlines, obviously, Election Day was last week. Amanda, what were the top-line headlines? So Democrats, as we know, had a banner performance. But the interesting thing is that that doesn't necessarily translate as a loss for real estate. A lot of the battles really impacting the industry are happening on a very market-specific level. So, for example, in the California governor's race, developers backed the Democratic candidate Becerra, who had pledged to cut red tape. But at the same time, you know, you have the Texas governor's race. Seems like that was kind of a loss for real estate, put a lot of money behind Abbott.

14:21Lilah Burke: You know,$281 million he spent compared to Ina Hossa's, I think it was$37 million. Data center's really big there. Exactly. Okay, and then what about New York with the governor's race there? So New York, while it wasn't necessarily surprising that Hochul won, the strength of her victory was fairly interesting. So last election, she had a somewhat wobbly performance, whereas this time around she defeated Blakeman rather soundly. And while, of course, it's not a changing of any type for the state, it does kind of change how she could enter this next term in the sense that she has a lot of political capital and this kind of proves that.

15:07So that can kind of play out in several ways. It gives her kind of the license to fully pursue her housing agenda on her terms. So previously, there has been a question of, okay, is Hochul aligned with Mamdani and therefore forced to kind of go along with the DSA? This kind of shows she doesn't have to. And that could lead to her potentially trying to reform some of the policies that have for developers been non-starters, such as 45X. She hasn't said anything overtly, but that's what this kind of result signals.

15:44Lilah Burke: And then lastly, in Florida, an issue we were covering on the podcast quite a bit is this Amendment 3, which is supposed to phase out property taxes in Florida, right? Right. So, of course, less property taxes is a relatable thing for property owners to want. But the cut is projected to take away$12 billion from the public coffers. So we know in real estate, oftentimes, you know, policies have winners and losers, of course. So the question now is where will that money come from? Will it come from the commercial part of the industry? Will it come from renters? Or will public services get cut? I know the police and fire department unions have kind of come out against this measure.

16:35So that's kind of up in the air is, you know, will someone else foot the bill or will there just be cuts? Yeah.

16:43Lilah Burke: And Amendment 3 was really interesting because before it passed, you know, real estate seemed very divided, you know, with developers on one side. You know, renters might have to pay more in taxes. Commercial properties may have to pay more. So it'll be really interesting, I think, to see how this plays out. Right. And I think we will be following the implications. So moving on, Lila, you wanted to talk about Fannie and Freddie and some new developments there. Yeah. So we have some news that comes from actually another outlet, but they're reporting that Fannie and Freddie are pulling back on lending to New York City rent-stabilized properties, Fannie Mae tightening their underwriting requirements, and Freddie Mac pausing loans to rent-stabilized properties.

17:31Lilah Burke: Rent-stabilized properties are those that are going to see a rent freeze for at least the next two years and probably more under Mayor Mamdani, who campaigned on the policy. And it's really not a great scene for these properties, for these property owners. You know, they've seen tightened revenue, rising expenses. It's been apparently really tough for them. This decision by Fannie and Freddie is going to make it even harder to get financing. I will say that Bill Pulte of the Federal Housing Administration has denied this reporting. So it's a little unclear, but it does seem that, you know, it has been in general really hard for owners of rent-stabilized properties to get financing.

18:14Lilah Burke: And there's something going on here, and we'll have to keep a watch on how that plays out. But in general, I think it sort of shows some of the unintended consequences of this rent freeze. obviously something that New York City renters really wanted, something that progressives really wanted. You know, there are going to be some consequences for real estate and for, you know, folks in rent-stabilized housing for this policy. Right.

18:42Okay.

18:42Lilah Burke: And finally, Amanda, tell me about the Manhattan office market. Yes. So Manhattan office landlords finally have, you know, a reason to have a bit of optimism. In October, the average asking price per square foot reached just above$79. So that's a level that hasn't been seen since the pandemic. And it's continuing to climb. And there's a lot of big leases, right? Yes. Driving that. So Citadel signed a 1 million square foot lease on Park Avenue. and Ramp, the fintech firm, also inked, I think, a 450 ,000 square foot lease in Midtown South as well. Yeah. So it seems like we're seeing a big resurgence, you know, rents up to pre-pandemic levels, basically, right?

19:29Lilah Burke: Right. And what does that mean for availability? So availability also is, you know, fairly competitive. The vacancy rate is about, I think a little over 12 % in October. So definitely some signs of life in the office market for New York. All right. And that's our show. Thanks for listening. This week's episode of Deconstruct was written by Lila Burke and Amanda Glodowski. Kara Eisenpress is our script supervisor. Usha Sukai is our in-studio producer and Mila Miller is our sound engineer and post producer. See you next week.

20:07Thank you.