The stage for the trial that is the subject of this decision was set by Justice Diamond before her retirement. In a decision dated September 25, 2010, she described the background as follows:

The plaintiff Warren Cole was employed by defendant Harry Macklowe from April, 1988 to April, 1999. Macklowe is the chairman of Macklowe Properties, an unincorporated real estate investment and development business. At some point during the early 1990's, Cole became Macklowe's closest employee, generally characterized as his "right-hand man." In the Fall of 1994, Macklowe orally advised Cole that he had decided to give him a 10% equity interest in all Macklowe investment projects going forward. Thereafter, Cole drafted two separate agreements, one of which is a contract dated July 22, 1996 and the other of which is an addendum dated November 20,1998, in which he was given, inter alia, a 10% equity interest in numerous designated real estate properties owned by Macklowe. Macklowe signed both documents. However, by the beginning of April, 1999, Cole and Macklowe's relationship had deteriorated and they both agreed that Cole should leave the company. That same month, Macklowe indicated to [*2]Cole that he did not consider the agreements to be binding and would not abide by their terms.

In this action, Cole seeks to enforce the two agreements. By decision and order dated May 17, 2007, the First Department found that the agreements were enforceable and remanded the matter to this court for a determination of damages. See Cole v. Macklowe, 40 AD3d 396 (1stDept 2007). Thereafter, upon the parties' respective motions regarding the proper calculation of damages, this court held that Cole's damages should be calculated by determining, inter alia, the value of Cole's interests based on market conditions which existed at the time of the breach. On appeal, the First Department affirmed this ruling. See Cole v. Macklowe, 64 AD3d 480 (1st Dept 2009).

This text appears in the decision on Mr. Macklowe's request for a pre-trial ruling permitting him to present expert testimony regarding the lack of marketability of Mr. Cole's interests. In other words, he sought to present evidence modifying fair market value—-namely, what a willing buyer would pay a willing seller, neither of whom is acting under compulsion, by "discounts reflecting the fact that Cole holds only a minority share of the designated properties and that his interests are unmarketable because of, inter alia, his lack of control over these properties." In declining to permit a minority discount to be taken from the fair market value of Cole's interests, Justice Diamond held that "it is the majority owner, Macklowe, who is essentially purchasing Cole's interests, thus consolidating or increasing his ownership and control of the properties. Under the circumstances, the use of discounts when selling to an "insider" would result in a windfall to the transferee.' East Park Limited Partnership v. Larkin, 893 A2d at 1232."

In light of these prior decisions, the assignment presented to me was to determine market values for the disputed properties or interests, the parties generally having agreed to the amount of outstanding mortgages or acquisition expenditures, although in two instance, they could not agree on these matters.

The 2009 First Department decision held that the breach occurred sometime in April 1999 and, in connection with determining the date for the accrual of interest on a discrete aspect of the dispute, found interest should run from May 1, 1999. As a result, the breach date will be treated as April 30, 1999. The appellate decision also discussed that Mr. Cole had "interests" in "items" with a discernable "market value." In application these terms raised some difficulties. My interpretation is folded into the following analysis.

When the record closed, there were interests in ten real estate properties for which values had to be fixed, of which four [*3]are commercial buildings on or near Madison Avenue between 43rd and 55th Streets. There are four residential rental properties of which two are near or on Madison Avenue, at 55th and 67th Streets; one is a large new rental at Eighth Avenue and West 50th Street; and the other is a fairly modest new rental at First Avenue and East 64th Street. The final two real estate interests were a largely unimproved parcel on lower Sixth Avenue and an almost finished and partially sold condominium development on Lexington Avenue and East 76th Street. The last valuation to be made was of limited partnership investments referred to as "Coolidge."

Real estate of the kind at issue most frequently is appraised based on the revenue it generates. Within this approach there are two methods. Historically, the most common one is a direct capitalization analysis, using one year's projected income and expenses. Over time, and particularly as computer programming made it feasible, the discounted cash flow method (sometimes "DCF"), which projects over a longer period, became prominent.^[FN1] Indeed, that is the approach used by the parties for the Macklowe Organization's acquisitions and portfolio. At first, however, through his counsel and appraiser, Macklowe challenged this method as improper. They altered their challenge when their position was impeached by the very treatise on which they otherwise relied.^[FN2] Thereafter, they targeted the manner in which Mr. Cole's appraisers applied the method. [*4]

The trial was a duel between qualified appraisers, of which the two called by Mr. Cole were from Cushman and Wakefield while Mr. Macklowe's was from Grubb and Ellis. For the commercial properties, Mr. Cole relied upon Brian Corcoran, Cushman and Wakefield's global head of valuation services. Mr. Corcoran was impressive in his breadth of relevant experience, familiarity with the New York market and its vagaries, and with the discounted cash flow methodology and its application. His explanation of the DCF method appears in the introduction to some of his appraisals,^[FN3] and refers to a computer program known as Argus in which the firm's data base is maintained for the very purpose of making the assumptions necessary to support a discounted cash flow analysis. In each of the Cushman and Wakefield reports, there also are included sales and direct capitalization analyses which were used, with the DCF conclusions, to arrive at a final value conclusion. For the residential properties, Mr. Corcoran's younger colleague,John T. Feeney, Jr., who has, since 1997, headed the multi-family valuation team for the valuation unit of the firm's New York office, was the witness. Robert Von Ancken, who frequently has testified in this court, was the highly qualified expert selected by Mr. Macklowe to challenge the opinions of Mssrs. Corcoran and Feeney, for which he presented his own sales comparison and direct capitalization analyses. Because he has not been as directly involved with the acquisition side of real estate valuation as the Cushman and Wakefield men, his opinions relied heavily on published surveys of data relevant to markets broader than the narrow Midtown Manhattan market at issue. The testimony of the Cushman and Wakefield witnesses, especially that from Mr. Corcoran, was more persuasive due to their extensive hands-on experience in the world of value-oriented investors who acquire, develop, and often times, sell and/or finance major properties, commercial or residential, in Manhattan. In other words, Cushman and Wakefield had a better appreciation of "market conditions which existed at the time of the breach", the phrase used by Justice Diamond in the decision which was affirmed.

A point of contention—to which the appraisers' opinions were not relevant—but on which the parties differed concerned whether the valuations should reflect costs of sale. For the properties valued here, which remained in Mr. Macklowe's hand when the lawsuit began, no costs of sale are calculated because they are not a component of market value.

One other preliminary matter is worth noting. As was commented upon initially by Mr. Macklowe's counsel, contrary to [*5]the judicial role in condemnation—where the court is charged with providing for proper compensation to a claimant, this was a traditional trial where Mr. Cole had the burden of proof in establishing his claims to interests in various properties and the values, although it also was clear that, just as a jury may fix an award within the proof, so could the court here.

The Commercial Properties

1. 342 Madison Ave

Mr. Macklowe attacked two threshold assumptions made by Cushman and Wakefield. The first concerned the air rights lease from the church abutting the building at the lower floors to the south, which had allowed a portion of the building to be built out over and above the church. Mr. Corcoran was persuasive that the duration of the lease (it ran to 2037) was sufficiently beyond his DCF period that it had no effect on his calculations. In other words, for the purpose of determining market value as of the date of breach, the air rights lease does not reduce the property's value. Similarly, while Mr. Macklowe did not have title in his name at the date of the breach, he held all the economic indicia of ownership and control for the purpose of valuing his interest so that 10% could be attributed to Mr. Cole. Accordingly, I adopt the value of $105 million, a minor reduction to the Cushman and Wakefield concluded value, and close to the amount Mr. Macklowe adopted for his own financial statement in June 1999.

2. 400 Madison Avenue

As with 342 Madison, Mr. Macklowe acquired this under-managed Class B building for the purpose of upgrading it, as Mr. Corcoran testified was an appropriate investment strategy for the time in Manhattan. Mr. Corcoran's DCF analysis accounted for the more modest "repositioning effort" made by Mr. Macklowe from his acquisition in July 1998 to the date of the breach, recognizing that Mr. Macklowe subsequently made much greater improvements. I discount the Grubb and Ellis appraisal ($25 million) which is less than a 1998 Cushman and Wakefield appraisal ($35 million) which precedes Mr. Macklowe's improvement program. Accordingly, I adopt the Cushman and Wakefield DCF value of $43.8 million.3. 16-18 East 53rd Street

These were two small connected buildings on a side street with one large retail store, Hunting World, at street level. Mr. Corcoran appraised it as if it were to be acquired for repositioning and upgrading by an investor lacking Mr. Macklowe's vision.^[FN4] As a result, the fact of the vacancy in the Hunting [*6]World retail space after the appraisal date was not significant. I adopt the Cushman and Wakefield DCF value of $24.7 million.

4. 540 Madison Avenue

This once ordinary Class A building was dramatically reconfigured and renovated by Mr. Macklowe between 1996 and 1998, including by moving the entrance around the corner to East 55th Street, providing a full retail facade on Madison Avenue. His expansion of the building included the use of air rights he separately acquired from nearby properties. Mr. Macklowe's interest was pursuant to a long term ground lease, expiring in 2067, for which the rent reset in 2004. The application of this circumstance, as explained by Mr. Corcoran, illustrated the benefits of DCF analysis. The parties disputed not only the consequence of the rent reset but, separately, disputed the amount of the mortgage encumbering Mr. Macklowe's interest. I agree with Mr. Cole's analysis of each: Mr. Corcoran appropriately applied the reset amounts for the years after 2004 in his DCF analysis; and Mr. Cole was persuasive about the amount of the mortgage which, at the time he left the Macklowe Organization, was renegotiated to include an additional $8 million. Accordingly, the mortgage is fixed at $60,213,000, and the Cushman and Wakefield DCF value of $94.7 million is the value of the building.

The Residential Properties

5. 305 West 50 Street

Mr. Macklowe had completed the construction of this large market rate mixed use development, with ground floor retail, in 1997. Mr. Feeney was aggressively cross examined about his assumptions and calculations and largely held his own. Because I was not at all persuaded by Mr. Von Ancken's analysis, I conclude that this property should be valued at the lower of the Cushman and Wakefield values to minimize the enthusiasm of some of Mr. Feeney's assumptions. I adopt the concluded direct capitalization value of $82 million, an amount quite close to that presented by Mr. Macklowe in a June 1999 financial statement.

6. 40 West 55 Street

This is another instance of Mr. Macklowe's upgrading of a tired building, one which had "good bones." It is a mixed use building with street floor retail and residential market rate units above. Mr. Feeney persuasively explained the adjustments he made to the anomalous amounts of some monthly rents which [*7]appeared in material provided by the Macklowe Organization, and justified his analysis. I adopt his DCF value of $17.6 million.

7. 345 East 64 Street

This fairly ordinary East Side residential rental building with retail on the ground floor was constructed by Mr. Macklowe in 1996 at the northwest corner of First Avenue. I adopt Mr. Feeney's DCF value of $14 million.

8. 800 Madison Avenue

At the time of the breach, this mixed use building at East 67th Street, which Mr. Macklowe renovated in 1998, had valuable Madison Avenue retail space and a significant number of rent regulated tenants. I found Mr. Feeney's explanation for the growth of market rate units and their positive impact on value during the DCF period persuasive. I adopt his DCF value of $23.1 million.

The Remaining Property

It is worth recalling that the damages to which Mr. Cole is entitled is, as the First Department determined, measured by distributions available, or by a market value at the time of the breach which occurred in April of 1999 (Cole v. Macklowe, 64 AD3d 480 [1st Dept 2009]).

9. 777 Sixth Avenue

In March 1999, for $11.5 million, Mr. Macklowe acquired ownership of the entities which owned this property, then a parking lot with a small commercial building, together with other real estate. As his only interest was in this parcel, on which he planned to build, Mr. Macklowe "flipped" the other assets. Mr. Feeney issued a retrospective investment value appraisal of a building Mr. Macklowe "planned to be constructed between 1999 and 2001"^[FN5], which was to be a companion to the huge building at 305 West 50th Street, supra. The provided explanation included that Mr. Macklowe at the time had financing lined up, half a year later acquired air rights that permitted his vision to be built, and the project when built benefitted from a 421a tax abatement. None of this was persuasively relevant to the market value in situ of what Mr. Macklowe owned in April 1999 when there was not even a shovel in the ground. Rather, it is a speculative future investment analysis. Notably, by way of illustrating the flaw, Mr. Von Ancken presented a simple sales comparison analysis for the property with a value of $10 million. Mr. Cole failed to carry his burden of proving a credible market value, and his claim to any recovery is denied.

10. 145 East 76 Street

As with 777 Sixth Avenue, Mr. Feeney did not perform a [*8]proper market value analysis. Understandably, it was a difficult analysis to make. It is not likely that there would be a bulk sale of condominium units and storage spaces not yet sold in an incomplete building in its mid-stream state in April 1999, nor any realistic market for such a transaction. Nevertheless, the assignment before us was to assume a market. Instead, Mr. Feeney again provided an investment analysis for the selling out of all the units over time. Most significantly here, he failed to consider that an investor acquiring them in bulk would discount an offer in order to secure a profit.^[FN6] In Mr. Von Ancken's opinion, an entrepreneurial discount would be 25%. Accordingly, Mr. Cole here too failed to establish a value or a method which the court can use to fix a value, and his claim to any recovery is denied.

Coolidge Investments

This dispute is over Mr. Cole's entitlement to proceeds of investments in portfolios of distressed real estate assets that were obtained through the investment firm Houlihan Parnes. A chart was admitted into evidence (Plaintiff's Exhibit 7) through the deposition testimony of Kevin Neuner, who served as the Macklowe Organization's chief financial officer from 1995 until 2004. Exhibit 7 is offered to show the value of Mr. Cole's interest in the Coolidge Investments at the time of the breach. Two numbers from the chart are relevant, and form the basis for Mr. Cole's contention that he is entitled to $851,829.

First, Mr. Cole argues that the value of the investments allocated to his interest was $725,117, based upon Nuener's estimates and calculations made at Mr. Cole's request. Second, interest already realized and due to Mr. Cole from the investments as of the date of the breach was $126,712. Together, these numbers equal the total amount sought.

Mr. Macklowe properly objects to consideration of the valuation of the investments allocated to Mr. Cole. The data from which this valuation was derived in not in evidence, and Nuener's testimony indicates that these numbers were adjusted for the purpose of answering Mr. Cole's inquiry regarding the value of his interest. Mr. Cole has not met his burden to prove this aspect of his claim with reasonable certainty (see City of New York v State, 27 AD3d 1, 9 [1st Dept 2005]). However, the court accepts Nuener's testimony that the value of actual realized income from these investments as of the breach date is $126,712, and Mr. Cole established his claim to that amount. [*9]

Other Matters

During the trial, motions were decided on the record, which fixed the properties to be valued here. The motions for which decisions were reserved are decided in the three paragraphs immediately above.

Interest

The damages here are for breach of contract. It is black letter law that interest on such a claim runs from the date of the breach. This is so even when, as here, only the method of measurement but not the exact amount can be known on that date. Accordingly, the court is constrained to direct that interest shall be calculated at the statutory rate from May 1, 1999.

CONCLUSION

The foregoing, together with the decisions made on the record during trial concerning 1018 Lexington Avenue, 20 East 53rd Street, 300 Madison Avenue, 150 Fifth Avenue, and the stipulations of the parties fixing certain values, constitute the decision after trial upon which the parties are directed to settle a judgment.

Dated: November 21, 2011

ENTER:

______________________

J.S.C