The Real Deal New York

A fallen star

Lender iStar struggles with troubled loans at a bevy of high-profile New York projects

June 01, 2010
By David Jones


Jay Sugarman
Jay Sugarman is swimming in a sea of red ink. After turning his company into one of the nation’s largest commercial real estate lenders, the chairman and chief executive of Manhattan-based iStar Financial has accumulated a virtual who’s who of troubled assets in the New York market, where it has more than $1 billion in outstanding loans. Non-performing loans comprise about 43 percent of its portfolio companywide.

From troubled condos like One Madison Park, 20 Bayard, the William Beaver House and 34 Leonard to defaulted development projects like Harry Macklowe’s former Drake Hotel site, iStar has become synonymous with some of city’s biggest flops of the boom.

In 2009, the company reported an adjusted loss of $689 million and Sugarman, in the company’s fourth-quarter conference call, admitted that iStar got burned.

“Last year, I hoped 2009 would be a transition year, setting us back on course,” Sugarman told analysts during the call. “That did not happen, as some borrowers, who we believed would work aggressively to recover value and protect their positions instead threw in the towel, walked away from their investments, or, worse, actively blocked or impeded our value to recover proceeds due to iStar. It will now be up to us, in many cases, to extract value from these assets.”

Things are improving somewhat as the credit markets begin loosening up. By the first quarter of this year, iStar narrowed its quarterly losses to $24.2 million, compared with a $62.8 million net loss in the year-ago quarter.

The lender is also taking steps to sell whatever valuable assets remain in its portfolio and maximize the value of its more problem-ridden assets.

The company’s most troubled property is probably One Madison Park, the 69-unit condo that is the subject of dozens of lawsuits and at least one criminal investigation, which has been placed into receivership by a state Supreme Court judge.

According to documents filed in the foreclosure suit, the developer, Slazer Enterprises, led by Ira Shapiro and Marc Jacobs (not the designer), owes iStar $213 million in defaulted loans, plus interest and legal fees on the project, located at 23 East 22nd Street.

Jacobs has also alleged in court documents that Shapiro forged his name on the promissory notes connected to those loans.

“The lender has discovered, since the filing of this lawsuit, that [the] borrower and its principals have engaged in gross misconduct that has greatly jeopardized the value of the One Madison Park condominium project and impaired lenders’ collateral,” said Matthew Parrott, attorney for iStar, in a document filed last month.

However, lawyers for the developer argue that iStar has engaged in a “mudslinging campaign” against Shapiro and is trying to do everything it can to take back the project even though there are a number of buyers who want to purchase condos there. They argue the lender is using hardball tactics to show the industry that it’s more than willing to foreclose on a property, even if it has cash-generating potential.

“I think that iStar and Jay Sugarman are fearful of developing a reputation for working with developers and being soft on borrowers,” said Stephen Meister, who represents Slazer Enterprises in the One Madison case.

Another high-profile setback for iStar is the William Beaver House, where it sued last month to foreclose on the unsold shares because the developers — the Sapir Organization and SDS Investments — owe $189 million on the original loan. The iStar suit came on the heels of a prior suit at the building. A fund controlled by the Blackstone Group sued investor Tamir Sapir, claiming he defaulted on another $130-million loan at the project.

Meanwhile, according to PropertyShark, the foreclosed iStar luxury condo project at 34 Leonard Street in Tribeca was scheduled for auction early last month. It remains unclear who acquired the property and what price was paid for it. IStar sued developer R Squared in May 2009 after the firm defaulted on a $37.5-million mortgage loan.

IStar is widely considered one of the most hard-nosed negotiators in the city, and is more than willing to battle it out with a developer if it can rope in a valuable asset and either manage the property or prepare it for sale to outside investors.

“They’re not your typical lender,” said Ben Thypin, senior market analyst at Real Capital Analytics, a Manhattan-based market-research firm. “They have a lot of real estate [management] experience.”

But investors say iStar’s goal right now is simply to work out enough deals to raise capital and keep its lenders and bondholders satisfied until the market begins to thaw out.

“They’re purely in defensive mode right now,” said an investment source familiar with the company who asked not to be identified. “They’re trying to preserve book value at this point.”

That book value has been accumulating for roughly 17 years.

The company (which was originally called Starwood Mezzanine Investors) launched in 1993 and operated as a unit of Barry Sternlicht’s Starwood Capital until 1998.

After the company spun off, now under the new name Starwood Financial Trust, it issued an IPO. Sugarman immediately began spearheading a series of key acquisitions, including the purchase of Phoenix Realty Services and TriNet Corporate Realty Trust for $1.5 billion in stock, making the combined firm one of the largest publicly traded real estate financial companies in the country.

In 2005, iStar bought Falcon Financial Investment Trust, a Stamford, Conn.-based firm that provided financial services to car dealers, for $120 million.

Then, in May 2007, Sugarman rolled the dice and entered into an all-cash deal to buy subprime poster child Fremont General Corp.’s commercial assets for $1.9 billion. Through the purchase, iStar inherited hundreds of millions of dollars in troubled condo loans and other assets.

At the time, iStar officials argued that it would turn the firm into one of the biggest commercial loan originators in the country and provide entrée into a number of new geographic markets. However, others predicted that the acquisition would saddle the company with too many highly leveraged real estate loans and drag it into a long-term cycle of debt.

In 2008, iStar was hit with a federal class-action law suit by two shareholders, Citiline Holdings and Plumbers Union Local No. 12, which alleged that it misled investors about the financial condition of its portfolio, particularly the performance of the Fremont loans. More recently, in April of this year, shareholder derivative suits were filed against iStar, also alleging the lender misled investors on the Fremont portfolio. The suit pointed out that iStar’s stock price fell 82 percent since February 2008 to less than $5 a share. (Late last month the stock price was at $5.44.) The lender says the allegations are without merit and that it will vigorously defend itself.

Indeed, the lender has felt the sting of a large number of underperforming loans in the Fremont portfolio, including 20 Bayard in Williamsburg. In 2009, that project went into bankruptcy a year after the borrower refinanced the iStar loan through bridge loan specialist W Financial.

In addition, iStar found itself in trouble at 201 West 92nd Street, a tenement complex that developer Kent Swig tried to convert into condos. The lender sued to foreclose on that deal in 2008 after Swig defaulted on the mortgage loan. Swig then sold the property to the Mendlowits family after the suit was filed, and iStar later filed to foreclose against the Mendlowits family, leading the court to appoint a receiver at iStar’s request.

IStar also found itself with other troubled loans outside of the Fremont portfolio.

In 2009, the lender actively marketed the loan backed by Trump Soho, a 391-unit condo hotel at 246 Spring Street. However, it failed to reach a deal, and the condo offering plan has since been declared effective by the attorney general, thus enabling buyers to start closing.

Andy Backman, vice president of investor relations at iStar, said the Trump Soho loan is current and the bank has not formally marketed the loan for sale.

And iStar has seen some recent improvement.

During a first-quarter conference call, Sugarman said iStar is beginning to see a “small glimpse of blue sky” in a market that’s expected to remain tough for the next year or two, as the firm has a number of loans coming due.

“We will continue to use all available sources of liquidity to meet our obligations, which include loan repayments, credit lines and asset sales,” Backman told The Real Deal. He noted that in the first quarter, the lender generated $1 billion in principal proceeds, mainly through loan repayments and asset sales.

Meanwhile, iStar also reached a deal last month to sell a portfolio of 33 triple-net-leased properties to the Denver-based REIT Dividend Capital Total Realty Trust for $1.4 billion. The properties are secured by $948 million in non-recourse debt that matures in April 2011.

IStar said in its quarterly earnings report that it had $640 million in unrestricted cash as of March 31, but it is exploring various alternatives to meet its 2011 debt obligations and has retained an outside firm to help it deal with the “long-term structure of its assets and liabilities.”

However, Thypin said iStar will likely be willing to work out deals or hold on to these troubled assets as foreclosure properties because of its experience managing assets. “It’s unlikely they’re going to have any fire sales on buildings or loans unless they’re going to get paid off substantially,” he said.

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