The Real Deal New York

Investors sue Capstone Business Credit over failed deals

Hedge funders say they were assured money would not be used on real estate

July 13, 2012 02:00PM
By David Jones

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From left: the site at 158 Madison Avenue and the Sloane Mansion

Investors are accusing the Manhattan-based investment firm Capstone Business Credit, LLC of spending more than $150 million on failed Manhattan real estate deals. The lawsuit alleges that Capstone told investors at several major hedge funds that their money would not be used for real estate.

Capstone, led by managing members Joseph Ingrassia and John Rice III, lost a proposed 38-story condominium-hotel site at 158 Madison Avenue to lenders after defaulting on $34 million in loans. The site was sold earlier this year to J.D. Carlisle Development, according to the complaint filed in New York State Supreme Court. 

In the second failed deal, Capstone defaulted on $28 million in loans at the Sloane mansion at 18 East 68th Street, which was then auctioned off to Ukranian billionaire Alexander Rovt.

“The real estate transactions entered into by the Capstone operating entities related to bridge loans to finance the acquisition or construction of buildings or the conversion of existing buildings, which required management and financial and other expertise and skills different from those [that] Rice and Ingrassia claimed to have,” lawyers for the investors wrote in the July 6 complaint.

The investors, which include Eden Rock Finance Fund and the Globefin U.S. Advisors’ Cannonball Stability Fund, said they were assured repeatedly that the funds would not be invested in commercial real estate deals.

As The Real Deal previously reported, Rice and Ingrassia acquired four parcels near 158 Madison Avenue to complete a condo–hotel project at the site, home for years to Andy Warhol‘s famed Factory.

The site was originally planned as the Sundari Lofts & Towers by Buttonwood Real Estate and Thor Equities. The proposed condo­–hotel was configured in an unusual T shape, which required the developers to purchase the additional buildings in a market where construction loans for condo-hotels were already difficult to find.

According to the suit, Rice was the managing member of 158 Madison LLC and Capstone made a $39.3 million loan to help finance the project, but the loan was subordinate to a $34 million senior loan at the site. North Hill Funding of New York, the senior lender at the site, filed to foreclose on the loan, and Rice and Ingrassia personally guaranteed repayment of the loan.

According to the suit, Capstone made a loan of $19.7 million to acquire the Sloan mansion in 2007, and then used the property as collateral for the senior loan at 158 Madison Avenue. Rice and Ingrassia made waves by putting the mansion up for sale for a record $64 million in 2008. But when the market crashed, they were forced to slash prices drastically at the mansion and lost the house to foreclosure.

The suit alleges that Capstone hid the nature of those deals from investors and hid other investments, including a $35 million loan at 151–161 Maiden Lane, a waterfront site near South Street Seaport, which also defaulted. That site had been proposed as a 250,000-square-foot condo-hotel. Massey Knakal Realty Services later put the loan up for sale.

In addition to this suit, Capstone is facing a $1.1 million suit filed on June 5, from Dean Mills, a broker at Knickerbocker Village N.Y., and Shiri Shiriqui, a sales executive at Knickerbocker, alleging they negotiated the sale of 158 Madison Avenue to J.D. Carlisle, but were not paid their commission.

Lawyers for the plaintiffs declined comment. Capstone officials were not immediately available.

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