Not too long ago, many of the office buildings in lower Manhattan were part of one of the world's biggest real estate empires. Now, that empire, Olympia & York Developments Ltd. (OYDL), based in Toronto, has crumbled. And in a large, gray stone building, just a short walk from some of O&Y's most valuable properties, a bitter battle is now under way--in U.S. Bankruptcy Court. At issue: Who will control and extract any value from the company's U.S. subsidiary, which holds most of the last significant remnants of the O&Y colossus?

On one side is John E. Zuccotti, president of Olympia & York Cos. (USA), which is the American subsidiary of OYDL. Against all odds, he has managed to keep O&Y USA functioning and out of bankruptcy. He is trying to maintain control of O&Y USA. That effort has won the support of most of O&Y USA's creditors, the U.S. and foreign banks that have $5.3 billion in outstanding loans to O&Y USA--and that are eager to protect their interests.

On the other side is Robert E. Lowe, a partner at Coopers & Lybrand's Canadian operation and the Canadian-court-appointed administrator of the bankrupt parent company's assets. He would also like to control O&Y USA. He is eager to protect the parent company's 80% equity interest in O&Y USA's real estate properties.

HIGH-WIRE ACT. James L. Garrity, the federal bankruptcy judge, is trying to get the two sides to work things out. If they don't, the properties could well be seized by the banks, which might dump some of them on the market. That, in turn, could sharply decrease their value and further depress New York's already beleaguered commercial real estate market.

So far, Zuccotti has performed an impressive high-wire act in separating the U.S. subsidiary from the calamities of its parent. To preserve cash and win the trust of creditors, he ceased sending part of O&Y USA's revenue to prop up its ailing parent--despite protests by Paul Reichmann, then OYDL's chief executive. Zuccotti also refused suggestions from the parent company that O&Y USA stop paying city real estate taxes. But Zuccotti, a former First Deputy Mayor of New York, arranged to pay the taxes in more manageable monthly installments, rather than in semiannual chunks.

Creditors are impatient for the gridlock to end, but they are leery of foreclosing. While all 12 of the New York properties--a total of about 20 million square feet--are in technical default, as of May 26 no creditors had moved to seize any properties. In a May 21 hearing, a lawyer representing Sanwa Bank Ltd., a major creditor, testified about its reluctance. The lawyer said that any foreclosure will be "disruptive of the real estate market in the City of New York, that it will tend to destroy value on all the buildings."

FRESH SNAGS. The heated cross-border fracas has attracted some of New York City's most prominent attorneys. On May 14, attorneys for Citibank, which made a $250 million loan to an OYDL unit, filed a motion with the U.S. Bankruptcy Court to have Zuccotti appointed "interim responsible officer" of O&Y USA's properties. But the Canadian administrator opposed the motion, saying it could not give Zuccotti that authority. Both sides are maneuvering to control a new board of directors for O&Y USA, which would be empowered to approve major operating decisions. On May 24, Judge Garrity said he would appoint an examiner to mediate between the parties. He set a June 10 date for a status hearing. If there is no progress, he could appoint a trustee to supersede both parties.

Other remnants of the O&Y empire are also running into snags. The $6.5 billion Canary Wharf project in London, which is now owned by a consortium of banks, is embroiled in a new dispute with senior British government officials over funding for the vital underground-rail link to the project. Meanwhile, Paul Reichmann is on the prowl for distressed real estate as an investment adviser for the $600 million Quantum Realty Fund, launched by financier George Soros. Reichmann is said to be scouting around in Mexico. But Zuccotti just might be able to point out some good real estate opportunities in New York

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