For some of the partners in Staten Island’s New York Wheel project, the wheels are starting to fall off.

Eric Kaufman, a minority shareholder in the ambitious observation wheel project, claims that the project has no coherent business plan, ineffective management and is experiencing unexplained cost overruns, according to allegations contained in an email to fellow investors Andrew Ratner and Jay Anderson of the Feil Organization.

Kaufman, who made the claims in response to a 2014 capital call by the wheel’s board of directors, told Ratner and Anderson he would not pony up additional funds “without evidence of a viable business plan,” court papers show.

The allegations are just the latest in an escalating legal battle between Kaufman and Meir Laufer — the original developers of the wheel — and a consortium of larger investors who control the project’s board of directors.

New York Wheel board president Richard Marin called allegations of a lack of a viable business plan “silly.”

“If there was no coherent business plan, do you believe major financial institutions like the Highbridge Strategies hedge fund would have put $195 million of senior debt in?,” he told The Real Deal. “How on earth did we close on $476 million in funding without a coherent business plan? We’ve gotten all the major authorities to give us the thumbs up. To me, that speaks for itself.”

The large investors, which include the Feil Organization, BLDG Management’s Lloyd Goldman and jeans mogul Joseph Nakash, operating under the entity Wheel Estate LLC, filed suit against Kaufman and Laufer last July, seeking a judgment in reducing their respective stakes in the project because Kaufman and Laufer hadn’t met capital requirements.

Laufer, who chairs the wheel’s board of directors, countered in November, saying that he’d been sidelined from his own project and discriminated against by the other investors, who allegedly say his Hasidic image is bad for business.

Now, Kaufman is fighting back, too.

In papers filed last week in New York State Supreme Court in response to the suit, he alleges that the board concocted a false need for $17 million in additional capital from its board members in a bid to oust him and Laufer from the project. The board, knowing that he and Laufer would be unable to raise the money to meet the capital requirements, saw the calls as a means to dilute the equity stakes owned by the two small-time investors and to increase their own by making up the shortfall, Kaufman claims.

While strong-arming fellow investors is not illegal, the means by which the large investors called for additional capital did break the terms of the project’s operating agreement, which stated that the board must identify an immediate need for funding and make a “good faith” effort to raise it from outside before turning to the board for additional capital, Kaufman claims. He alleges that, with outside funding readily available and no immediate budget shortfall, it’s clear the board did not make those “good faith” efforts.

At the time of the capital calls, the wheel already had a $150 million commitment in the form of EB-5 funding, a $120 million senior loan from Deutsche Bank, a $10 million equity commitment from the Angelides Group, a $5 million loan from the New York City Investment Fund and was in talks with various other prospective investors, Kaufman said. Goldman Sachs, which financed the nearby Empire Outlets, had also expressed interest in investing in the project, he claims.

At that time, the wheel’s board had also obtained an early-stage commitment from New York Life insurance company to be the sponsor of the wheel for 22 years. That deal has since fallen through, New York Wheel president Rich Marin told The Real Deal.

 “This litigation represents an all-too-common effort by a latecomer Goliath investor seeking to eliminate the initial entrepreneurs who came up with the plans and ideas,” Kaufman alleged in court papers. “The board is not free on a whim, or even on hasty consideration, to demand $17 million in capital contributions from members.”

The larger investors want to dilute Kaufman’s stake in the project to 1.077 percent from 4 percent and raise their own from 51 percent to 78.84 percent, Kaufman claims. He has already been forced to relinquish his position as CFO on the board as a result of the missed payment deadlines.

“Wheel Estate has engaged in an egregious scheme, in breach of its contractual obligations, to deprive the originators of the groundbreaking New York Wheel attraction of their rightful ownership interest in the project,” Kaufman’s attorney, Marc Kasowitz, told The Real Deal.  “We are confident that this litigation will finally put an end to Wheel Estate’s abusive pattern of withholding critical financial information and attempting to improperly increase its own financial interest at the expense of the originators.”

Marin, who is neither a plaintiff nor a defendant in the suit, said Kaufman and Laufer’s claims were little more than sour grapes from investors who simply didn’t have the cash reserves to keep up with fellow board members.

“There are many very sophisticated investors involved in this project and then there are these two fellows who have gripes,” he said. “It’s more than coincidental that they were not able to put the money forward and now they have a gripe. I don’t believe they can do anything to impede the progress of the wheel.”

The wheel’s developers are projecting first-year pre-tax revenues of a whopping $127.85 million in 2017, as The Real Deal reported last month. Those projections, if met, would make the wheel more lucrative than the Empire State Building’s famed observatory deck, which took in $111.5 million in revenue last year.

Source: Early New York Wheel investor claims project has no coherent business plan, ineffective management