The Real Deal New York

SMK hits Madison Realty Capital with $150M lawsuit over alleged “predatory lending”

Problems began with 7 defaulted mortgage notes backed by Greenpoint properties

January 21, 2016 09:31AM

S and Joshua (credit: LinkedIn)

From left: Sylvestor Smolarczyk and Joshua Zegen (credit: LinkedIn)

SMK Property Management has filed a $150 million lawsuit against Madison Realty Capital, alleging that the real estate investment firm is a predatory lender that was out to grab its properties or rake in massive default interest.

Jozef and Sylvester Smolarczyk, the father and son development team that runs SMK Property Management, has accused Joshua Zegen’s Madison Realty Capital of 15 counts of fraud. The lawsuit stems from seven defaulted mortgage notes that Madison Realty Capital bought from New York Community Bank in 2011, the Commercial Observer reported. The notes were backed by seven Greenpoint properties owned by SMK, and the Smolarczyks allege that Madison Realty bought the mortgage notes at a discount by bribing the bank.

The developers allege that they were pressured into forbearance agreements at the threat of foreclosure, and then were bombarded by default interest and per diem. The Smolarczyks decided to take out more loans in 2013 to pay off the real estate investment firm. What the father and son didn’t realize, however, was that the lender of the loan was actually Madison Realty Capital. So, they were essentially trying to pay Madison Realty Capital back by borrowing more from the real estate investment firm.

The developers allege that they believed CLS Investments to be the lender up until the term sheet was executed, and then Jozef Smolarczyks felt too pressed for time to pull out. After closing on the loan, SMK tried to sell four properties and sought another permanent loan to refinance its debt with Madison Realty Capital, according to the lawsuit. But they ran into unforeseen obstacles: Closing documents revealed terms that guaranteed large sums of money if any properties were sold, and Madison Realty blocked attempts at refinancing, according to the lawsuit. Zegan’s attorneys have filed a motion to dismiss the lawsuit, and the case has been adjourned until March.

According to Zegen, SMK owes Madison Realty $15 million.

Zegen is a major lender to a number of prominent investors, including controversial East Village landlord Raphael Toledano, who received a $116 million loan from Madison Realty Capital to fund the acquisition of a 16-building portfolio and future renovations. The Real Deal in Feb. 2015 profiled Zegen and his firm. [NYO]Kathryn Brenzel 

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