In a blow to the long-troubled Anthony Costello estate, an anticipated $71.5 million sale of the Clinton Crossings medical complex has fallen through.
As the Rochester Beacon previously reported, the Brighton medical office complex, which houses UR Medicine’s largest concentration of outpatient facilities, was set to be acquired by Blue Sky Real Estate Services & Development, a New York City-based firm specializing in management of medical campuses.
Had it closed as anticipated, the Clinton Crossings sale would have marked the third major commercial development in the Costello estate’s real estate portfolio to sell this year.
The estate sold the Reserve, an upscale but neglected and deteriorating Brighton residential development, for $7.2 million in June. A month later, it closed a $17.5 million deal to sell CityGate, a high-end plaza anchored by the region’s only Costco that for several years had suffered vacancies in retail spaces and was facing an attempt by the city of Rochester to claw back a six-figure tax break.
The Reserve’s and CityGate’s delicate condition and heavy debt borne by both projects had posed serious challenges for the estate’s co-executors, Costello’s son Brett Costello and Bonadio Group CEO Thomas Bonadio, the elder Costello’s longtime accountant and business adviser.
Early on, disagreements between the co-executors and Anthony Costello’s other heirs led to contentious and protracted Surrogate’s Court litigation. Lenders with liens on the estate’s properties were pressing foreclosure actions in other courts, further complicating the estate’s settlement.
In addition to serving as co-executor, Brett Costello, who along with his father had long been involved in the management of the Costello family businesses for three decades, has run the estate’s enterprises since Anthony Costello’s death in 2016.
While most probated estates are settled in half the time or less, after six years the Costello estate’s tangled affairs are still unresolved.
A deal’s collapse
Coming in rapid succession after years of non-action, the sales of the Reserve and CityGate, topped by an apparently imminent sale of Clinton Crossings, seemed to promise at least a significant step toward a final settlement.
But an Oct. 13 Monroe County Surrogate’s Court order authorizing payment for fees sought by a special master—appointed four years earlier by the court to help sell Costello-estate properties—reveals that the Blue Sky deal has collapsed.
“The receiver secured an offer to purchase (Clinton Crossings) from an entity known as Blue Sky and the court approved the sale by order dated July 21, 2022. The deal did not close … but all the work necessary to close had been completed,” Surrogate’s Court Judge Christopher Ciaccio wrote in the Oct. 13 order authorizing payment of the $250,000 fee that the special master, Richard Beers, sought for the work he did on the failed Clinton Crossings deal.
The order notes that prices fetched for the Reserve and CityGate did not cover amounts lenders with liens on the properties were owed, but that banks holding loans on the properties agreed to pay fees to Beers for work he did to close the two deals.
Though the lenders with liens on Clinton Crossings properties, M&T and Wells Fargo banks, were not similarly willing, Ciaccio ordered Beers’ fee to be paid, stating that even though the deal had not closed, the special master’s fee could be considered a closing cost.
Ciaccio cited unspecified problems with financing as the cause of the Blue Sky deal’s undoing. As the sale was set to close, mortgage and commercial-loan interest rates had begun a precipitous rise after years of hovering in the low single digits.
Beers had been appointed in 2018 by Ciaccio’s predecessor on the Surrogate’s Court bench, John Owens, to help arrange sales of the Costello estate’s real estate portfolio after the disagreements among Costello’s heirs and the estate’s co-executors stalled probate of Costello’s will.
Ciaccio noted that naming of a special master to arrange sales of an estate’s assets “stretches” provisions under which courts are allowed to appoint such officials. Nonetheless, he reasoned, the appointment was justified because litigation to settle disputes among Costello’s heirs and the estate’s co-executors, which already had taken up much of the Surrogate’s Court’s time, would have been too costly and disruptive to pursue.
In some four years spent arranging sales of the Costello developments, “(Beers) had a difficult task trying to sell properties that were all groaning under the weight of a mountain of debt,” the judge observed.
With payment in hand for his work on sales of the Reserve, CityGate and Clinton Crossings, Beers would resign, ending his involvement with the Costello estate, Ciaccio’s order states.
The judge also states in the order that at the time of Costello’s death, the developer’s real estate portfolio was saddled with loans totaling $108 million. Where that debt stands after the Reserve and CityGate sales is not clear.
Like USAirports, Costello’s first major venture into real estate development, Clinton Crossings was a success. Along with personal guarantees, Costello used Clinton Crossings buildings as collateral to finance the Reserve and CityGate.
When Costello died unexpectedly in 2016, the Reserve and CityGate were in early stages of development and facing stiff headwinds.
Facing fierce neighborhood opposition, Costello had dropped plans to make the Reserve a gated community but still promoted it as an exclusive, high-end development. Homeowners would enjoy perks like membership in a clubhouse featuring lavish amenities including private wine lockers, a theater, a swimming pool and workout facilities, and private meeting rooms.
At the time of Costello’s death, less than half of the development’s projected 300 units were sold and after his death, sales stalled. As debts piled up, the clubhouse closed and maintenance fell off. When the estate sold the Reserve this year, much of the development’s acreage was overtaken with weeds, the clubhouse remained shuttered and the project’s homeowners had begun legal action.
Even before CityGate was completed, Costello became involved in a long and costly legal dispute with Costco over his and two partners’ opening of a liquor store in the plaza.
Costco, which planned to have an affiliate open a liquor store adjacent to its main store, saw the move as an unconscionable betrayal. The chain would never agree to settle with Costello, an attorney representing Costco said at the time.
By the time the parties agreed to drop the suit, Costello’s liquor store had gone out of business and Costco had been able to install its affiliate as it originally planned to do.
When the plaza sold this year, the Costello liquor store’s square footage along with retail spaces vacated by several other CityGate tenants had stood unoccupied for several years. A hotel that Costello had announced as part of his plan for the upscale plaza was never built.
In a 30-page will drafted some 13 years before his death, Costello left detailed instructions spelling out how his estate’s assets were to be parceled out among his widow, his children and grandchildren.
In an arrangement meant to avoid estate taxes, the will calls for the establishment of three trusts.
Two trusts were to consist of assets subject to the estate tax’s marital deduction, a provision that allows for an estate’s assets to continue to build wealth tax-free by having an unlimited amount of assets be held in trust for a surviving spouse. Estate tax is deferred until the surviving spouse’s death. Assets not subject the marital deduction were to go into a third trust.
As much of the net income generated by the estate’s assets as would be needed were to go toward payments to Costello’s widow, Elaine Costello, so as “to provide adequately for her comfortable support and maintenance in accordance with the standard of living we enjoyed my lifetime,” the will states.
As co-executors and co-trustees, Brett Costello and Bonadio would collectively have sole discretion to say how the trusts’ proceeds were to be managed and distributed while adhering to the will’s prime directive, seeing first that Elaine Costello’s needs would be attended to.
The will voluminously states how assets might be distributed under a variety of circumstances among Costello’s widow and his four children—Brett Costello, Lynette Ward, Alicia Smith and Andrea DiLiberto—and to their children. It names Brett Costello as his father’s successor in running the family enterprise and spells out powers he might exercise in that capacity under a plethora of circumstances and contingencies.
A long probate
Some 13 years after Costello signed the carefully crafted will, however, the budding real estate empire he’d been building stood on increasingly shaky ground. That set the stage for what turned out to be a long and contentious probate.
While operating under the general banner of Anthony J. Costello & Son Development, the Costello family enterprise’s holdings are legally split into a welter of nominally independent sub-corporations. Meant to limit liability, such arrangements are virtually ubiquitously employed by real estate developers,
Each Costello & Son sub-corporation is distinguished by the addition of the name of one of Costello’s grandchildren.
CityGate loans, for example, were taken out by Anthony Costello & Son (Landon) LLC. The Reserve’s loans are owed by Anthony Costello & Son Development (Joseph) LLC. Individual Clinton Crossings buildings are similarly incorporated, making the medical complex as a whole indebted to several different banks.
Anthony Costello was a 60 percent owner of each of the Anthony Costello & Son sub-corporations, which makes the estate a 60 percent owner of those assets. Remaining shares are equally divided among each of his children, making each a 10 percent owner of each LLC.
Only a few months after Anthony Costello’s passing, Brett Costello and Bonadio clashed over whether to continue operating or sell the estate’s major properties.
Citing the Reserve’s and CityGate’s heavy debt load, the entangled debt obligations among the Costello enterprises’ properties and the Reserve’s and CityGate’s apparently diminishing prospects, Bonadio wanted to sell off the estate’s major real estate holdings and use the proceeds to fund the estate’s trusts.
Brett Costello wanted to obtain new financing and keep running the developments.
The co-executors’ disagreement was only temporarily allayed after they signed a written agreement crafted by both parties’ lawyers in 2016. The pact spelled out each co-executor’s duties and prescribed a process for them to resolve disputes. Their basic disagreement over the estate’s best path forward continued to simmer, however.
In an affidavit submitted to Surrogate’s Court midway through 2021, Bonadio summarized the clashes between himself, Brett Costello and Anthony Costello’s daughters that had played out over the previous three and half years. The disputes drew in Elaine Costello as well.
An early flashpoint between Bonadio and Brett Costello erupted when the working agreement was only months old in December 2016 when Brett Costello fired Costello & Son’s longtime executive vice president, Tim Reidy, whose continued employment was a term of the working agreement.
“It is clear to me that terminating Reidy places the continued success and viability of the businesses in jeopardy,” Bonadio wrote in a December 2017 letter to Brett Costello. The loss of “Reidy’s solid and respected relationships with the estate’s bankers jeopardizes both existing and future financing,” Bonadio warned.
If Reidy sued for wrongful termination, Bonadio predicted, the “already cash strapped” Costello estate would “face costly litigation and a potentially significant damages award.”
Reidy did sue and in 2019 collected a $215,263 award.
In 2017, Bonadio, arguing that sales of Clinton Crossings and other properties were needed to salvage the estate’s sagging finances, asked the court to consider giving him control of the estate’s businesses.
Initially, Brett Costello’s sisters sided with Bonadio. Later, alliances shifted.
In a 2017 petition backing Bonadio, Andrea DiLiberto complained that her brother had reduced the role her father’s will assigned to Bonadio to “window dressing.” Under Brett Costello’s management, the Reserve was losing more than $1 million a year and was “not the only business that is bleeding the estate,” DiLiberto contended.
Lynette Ward also submitted papers backing Bonadio’s bid to wrest control from her brother. Brett Costello’s dual duties as co-executor and manager of the estate’s businesses created a conflict of interest, she maintained, echoing a claim leveled by her sister. Ward also questioned her brother’s managerial judgment.
“I understand the debt on (the Reserve) is significant and as structured is an impediment to profitability in the near term,” Ward wrote. “Northwest Bank has filed a claim in this court in November 2016 for $14.24 million. My father’s federal estate-tax return shows a receivable of $8.4 million from the entity owning the reserve. To date the beneficiaries have not received a plan that would show for $X investment they could expect Y% as a rate of return. The hole is simply too deep and no amount of additional investment will result in profitability. It is past time to limit the loss.”
In papers answering Bonadio’s bid for control, Brett Costello accused Bonadio of breaching the 2016 working agreement. The sales of estate properties Bonadio proposed would be counter to the terms of his father’s will, which specifically called for there to not be a liquidation of the estate’s assets, Brett Costello argued.
Elaine Costello agreed, pleading to the court to keep her son in charge.
“Anthony and I spoke often about the businesses throughout our marriage,” she stated in a 2017 deposition. “Anthony shared with me his wish and desire that the businesses keep operating even after his death. Our son Brett worked alongside Anthony for 30 years until Anthony’s death. Anthony often shared with me his interest and intent that Brett manage and control the businesses after his death.”
Papers submitted in 2017 by Brett Costello’s attorneys argued that granting Bonadio’s bid to wrest control from Brett would violate the terms of Anthony Costello’s will.
The filing cites figures purporting to show that the Costello & Son enterprise’s prospects were improving. Debt service costs were down 11 percent while cash flow showed a 40 percent increase. A recently signed lease on the 17,000-square-foot Clinton Crossings Building D would bring in $22 million over its 15-year term, the brief states. Sales of Clinton Crossings and other properties would hurt the estate financially, Brett Costello’s lawyers contended.
In 2018, Ward backed away from Bonadio, submitting a petition again asking to have her brother removed but this time adding a demand to have Bonadio’s co-executorship terminated.
Brett Costello had not adequately reported the Costello & Son enterprises’ finances to her and “failed to answer questions and provide additional financial statements and information (that would help her) understand and clarify the statements provided,” Ward complained.
Bonadio, she asserted, had “wasted assets of the estate” and “willfully refused (or) without good cause neglected lawful directions contained in provisions of the tax law (and) made disbursements from the estate without prior approval of the court or authorization from the will.”
Last year, Alicia Smith joined Ward in calling for both Brett Costello and Bonadio to be ousted.
Both had “neglected their responsibilities as trustees and executors of my father’s estate … and have negligently and willfully mismanaged the assets owned by my father at the time of his death and as a result virtually all those asset values have been seriously diminished,” Smith contended.
In June 2018, Bonadio and the heirs signed a consent decree agreeing to Beers’ appointment as a special master empowered to sell the estate’s properties.
In his 2021 affidavit, Bonadio describes a contentious series of meetings among the Costello heirs and himself through the first half of 2018 that led to the consent decree’s signing. In one meeting, Bonadio noted, 16 lawyers representing various parties crowded the room.
Bonadio had submitted an analysis compiled by his own accounting firm backing his contention that sales of its properties would buoy the troubled estate’s prospects. Brett Costello hired Mengel, Metzger & Barr & Co. to do a competing analysis that concluded the opposite.
Mengel, Metzger & Barr partner James Schnell summarized both positions in a 2019 affidavit.
In any event, the dispute over whether to sell or continue operating the estate’s major properties became moot after the sisters refused to authorize the estate to take out new loans that would have been needed for Costello & Son to salvage the Reserve and CityGate, Bonadio states in the 2021 affidavit.
Citing health reasons, Bonadio asked the court for permission to resign as co-executor in November 2021. Ciaccio granted the request in December.
Still at odds
This year’s sales of the Reserve and CityGate do not appear to have entirely quelled dissension in the ranks of Anthony Costello’s heirs.
In a June 30 letter to Ciaccio, Alecia Smith complains that her brother’s “confusing and incomplete accounting” has failed to adequately explain the apparent evaporation of much of her father’s estate’s value.
“My father directed very clearly in his probated will that all his assets were to be transferred into various trusts and managed accordingly for the benefit of his wife and heirs. That was never done. Instead … (Brett) Costello has used the businesses as a haven for which he doesn’t have to account,” Smith wrote.
In a deposition filed two months later, Brett Costello calls his sister’s objections “premature.” The estate has sold the Reserve and CityGate and is in the process of selling Clinton Crossings and “following completion of these sales, the estate will need to update its accounting and ultimately file a final accounting.”
After the collapse of the Blue Sky deal, however, it is not clear how soon or whether Clinton Crossings might sell. Also unclear is the outlook for the Costello family businesses; Brett Costello did not respond to a request for comment on future plans.
Before the court approved the Blue Sky purchase of Clinton Crossings, other medical real estate investment trusts had expressed interest in the Brighton complex.
In July, as the court was approving the Blue Sky sale, one of those REITs, American Medical REIT Inc., submitted a deposition objecting to the deal, claiming that under interest-rate pressure, Blue Sky had reduced its offering price.
AMRE was prepared to offer $67 million, a price higher than Blue Sky’s allegedly reduced offer, AMRE president David Young asserted in the filing. But though his firm had submitted a letter of intent to the receiver managing Clinton Crossings, William Colucci had for reasons not clear to him tabled the offer and submitted the Blue Sky offer instead, Young complained.
AMRE is a wholly owned subsidiary of AMRE Asset Management, which in turn is a subsidiary of Liquid Value Asset Management, which in turn traces to Singapore-based Singapore eDevelopment Ltd.
In 2020, Rochester-based Document Security Systems Inc. announced that it had entered into a material agreement with LVAM and its subsidiaries to establish AMRE as a U.S. medical REIT. DSS is one of two U.S publicly traded firms partnered with LVAM and its subsidiaries. Whether AMRE has yet acquired any U.S. properties is not clear.
In the meantime, Anthony Costello’s estate remains unsettled. Costello’s heirs may continue to be at odds. Still, they might well share the lament Alicia Smith expressed in her June letter to Ciaccio:
“It is extremely sad and painful,” she wrote, “to experience what has happened since my father’s death.”