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Banks and builders battle

Caton on the Park

Caton on the Park was once a promising new condo development. Now, it's a half-finished, eight-story skeleton that looms over the quiet Brooklyn neighborhood of Kensington. And it's likely to remain that way for the foreseeable future.

Caton's developer, Moshe Feller, is locked in a bitter standoff with Chicago-based Corus Bank. The dispute is one of the many squabbles between developers and lenders that have begun to manifest themselves in the form of litigation. As the cases linger in court, the physical evidence of the disputes can be seen in the growing number of unfinished condos and the dormant construction sites dotting New York City's landscape.

This month, The Real Deal looks at three lender-developer battles: the standoff between Feller and Corus, in which neither is willing to put in the money to finish the job; a lawsuit between real estate mogul Sheldon Solow and Citibank over the developer's much-vaunted East River project, and the dispute between Brooklyn developer Alexander Gurevich and Chinatrust Bank, which allegedly stopped footing the bill for his seven-story Borough Park residential project when it was 90 percent finished. (Gurevich managed to finish the development without the bank.)

The three cases are all textbook examples of disputes that never would have gone to court if the market was still chugging along. In the face of the credit crunch, however, banks are hoarding money and scrutinizing their borrowers' obligations much more carefully than they have in the past. And as banks search for reasons to stop funding new developments, tension is building between lenders and developer.

"Capital is very precious these days, and banks are trying to figure out what to do with it," said real estate attorney Andrew Jagoda, a partner at law firm Katten Muchin Rosenman. "A borrower may have done what normally would be sufficient, but the banks are saying, 'That's not good enough.'"


Caton on the Park

In the Windsor Terrace/Kensington section of Brooklyn, Caton on the Park is only one of several developments stymied by the credit crisis.

In 2005, Feller paid $6.25 million for 23 Caton Place, a parcel that included one of the two buildings used by Kensington Stables, a popular center for horseback riding in Prospect Park.

Feller planned to replace one of the stable buildings with an eight-story, 107-unit condo development.

"No one was terribly happy about it because it resulted in the local stables losing half their space," said Warren Shaw, a resident of 81 Ocean Parkway, a six-story prewar co-op across the street from Caton on the Park.

Amid headlines that 13 horses would be evicted from the century-old stables, neighbors worried about the cache of high-density condo developments popping up in their neighborhood of one- to three-family homes, thanks to a "fluke" in the existing zoning regulations, Shaw said.

Caton on the Park appeared to be a particularly promising development for sales, especially since the prolific and high-profile architect Karl Fischer signed on to design it. Units there would range in price from $299,000 for a 575-square-foot studio to $895,985 for a 1,357-square-foot three-bedroom, according to court documents.

But last spring, neighbors began to suspect trouble at the site when they noticed workers there after-hours, often a sign that the developer is trying to finish a project quickly due to financial distress.

"We were aware that they were working early and late," Shaw said. "We heard rumors of unsafe building practices, like workmen working without appropriate safety rigging."

After several complaints about the safety of the site, the Department of Buildings last April issued a stop-work order along with a letter of intent to revoke the project's construction permit. The project was about 40 percent complete at the time, the DOB said.

As far as anyone can tell, construction never started again.

Corus Bank has since filed to foreclose on the property, and the mezzanine lender, Connecticut-based hedge fund Sagecrest II, has filed for bankruptcy. Caton on the Park is now what Shaw calls an "empty hulk of a building," with construction there, and at a 68-unit condo at 22 Caton Place, indefinitely suspended.

The site is now being overseen by a receiver appointed by the State Supreme Court in Brooklyn, where the foreclosure case was filed.

Shaw added that residents didn't realize that "the only thing worse than a new building that nobody likes is a half-finished building that nobody likes."

Dwight Frankfather, a senior vice president at Corus Bank, said the problems at the site began when cost overruns coincided with the market downturn, which made Feller unable to convince either of his cash-strapped lenders to put more money into the project. "It was going to cost more than Moshe thought," Frankfather told The Real Deal.

At the time, the nationwide credit crunch wasn't yet a presence in most of New York City, but the crisis was all too real for Feller's lenders.

Sagecrest, which provided Feller's $6.2 million mezzanine loan, had begun hemorrhaging money from investments in collateralized debt obligations long before Lehman Brothers folded. By the spring of 2007, right around the time a flurry of liens began to be filed by various subcontractors and vendors at Caton on the Park, Sagecrest's attempt to go public had failed and investors were requesting withdrawals.

In March 2008, Feller filed a motion to stop Sagecrest from selling off its interest in Caton on the Park, according to court documents. Feller hoped to convince Sagecrest to hold the debt until an agreement could be reached with Corus for the remainder of the loan.

But Corus, by this time racked with its own financial problems, wanted no part of it. With troubled commercial real estate loans in areas like Miami, Los Angeles and Las Vegas, the company reported a net loss of $128 million for the third quarter of last year. That was down from a net profit of $35.5 million in the quarter a year before, according to the company's SEC filings.

As Frankfather explains it, with the market declining, Corus was loathe to put more money into the project.

It had become clear that the building would likely have to be sold as a rental, not as a condo as originally envisioned. Feller, too, was reluctant to put more money into the deal, since his chances of turning a profit appeared slim. He is not personally responsible for the loan, as is the case in most commercial real estate deals.

"Either he didn't have it or he decided he wouldn't put any more money in," Frankfather said.

In June 2008, with Feller unable to come up with the funding to finish the job, Corus filed to foreclose on its $28.967 million construction loan and $3.833 million "soft cost" loan at Caton on the Park. The lender claimed that Feller and his general contractor, Springline Builders, had violated the loan terms because they failed to "complete the construction project within the approved budget," and "allowed numerous violations to exist at the mortgage premises."

While these violations technically constitute a default, many lenders would have overlooked them in a better market environment.

Banks are "looking for a way to reduce their losses," said Jagoda of Katten Muchin Rosenman. "Many borrowers are not accustomed to matching every little requirement. Now the banks are saying, 'We're going to do it exactly how the loan documents require.' They're not funding unless they can meet all of them."

Sagecrest, meanwhile, filed for Chapter 11 in Connecticut bankruptcy court in August.

Neither Feller nor his attorneys could be reached for comment.

Because of the complexity of New York State's foreclosure laws and Sagecrest's bankruptcy, the process will likely take around two years to sort out, Frankfather said. In the meantime, Caton on the Park will likely stay a skinless jumble of beams.

"If the market was still strong, Moshe would have found someone to put the money in," Frankfather said. "If we were in a world in which condos were still hot, we wouldn't be dealing with this."


Solow enterprise

The onetime pride and joy of Sheldon Solow's real estate empire is now a nine-acre swath of empty land studded with gaping holes, due in part to a legal dispute between Solow and his lender.

News reports about the 80-year-old billionaire seldom fail to describe him as "litigious," but in the case of the East River site, it was the bank that filed suit against Solow.

In 2004, Citibank extended lines of credit — one for $490 million and one for $13 million — to Solow to finance his $4 billion development along the East River waterfront. In March 2008 he won approval from the city to build six residential glass towers with some 4,000 apartments, an office tower and more than 500 public parking spaces just south of the United Nations.

For collateral, Solow used securities and other assets that were held in custodial accounts by Citibank, which has been rocked by the credit crunch and saw nearly $4.5 billion in losses in the fourth quarter of 2008.

The loan required Solow to maintain cash, securities or bonds in the accounts with a market value of at least $463 million, along with some $50 million in unencumbered liquid assets, according to the suit. In May 2008, however, Solow submitted a statement to Citibank saying that he only had about $12 million in liquid assets.

On September 24, with tensions running high in the aftermath of Lehman Brothers' collapse, Citi executed a "margin call," demanding that Solow deposit at least $11.3 million in collateral to the bank within two days.

"In normal times, the bank probably would have worked something out," said one source familiar with the case who asked not to be named. "But if you look at the moment where Citibank was, they needed to bring in as much cash as possible. The reason we have this liquidity crisis is because banks are looking to hoard their capital."

While it's uncommon for borrowers to pledge securities as collateral, as Solow did, loan documents often mandate borrowers maintain a certain amount of cash and assets on hand. But in better economic times, banks didn't always hold developers to the letter of the law, experts said.

Now, because of the credit crisis, "lenders are paying very close attention to every kind of obligation the borrower has," said Marc Shapiro, a partner in the real estate group at law firm Orrick, Herrington & Sutcliffe.

A spokesperson for the developer said only that Solow and his attorneys "are working to resolve the matter." Experts say Solow technically did violate the terms of his loan, since the value of the bonds he'd pledged as collateral likely plummeted in the stock market crash of early September. That type of stock market loss would have been unlikely a few years ago.

In a fundamental shift from how business was done in recent years, Citi may have been more focused on its need for cash than the fate of the loan, said an attorney familiar with the case who asked to remain anonymous.

"This is a lending institution that maybe made a decision based on its capital requirements as opposed to its concerns about the loan," the attorney said. "The difficulties that existed before were based on the project and the economics of the developer. Now it's the project, the economics of the developer and the economics of the lender."

Indeed, two days after it made its margin call on Solow, Citibank warned Solow that it would begin to sell off his collateral if he did not pay the overdue amount. Between October 7 and November 3, it did just that, for a total of just over $415 million. Then the bank took $4.25 million in cash from Solow's accounts at Citibank and applied them to his outstanding obligations, according to court documents.

It then demanded repayment of the balance of the loan — $67 million — plus late fees, and said Solow needed to immediately deposit $18.58 million into his account.

In his answer to the complaint, Solow claims that he attempted to cure the default, but that Citi rejected his offer.

"Rather than accepting defendant's offer of additional pledged collateral," the answer states, "Citibank sold the collateral notwithstanding the distressed conditions prevailing in the market for municipal securities at that time, obtaining millions of dollars less than the fair market value."

A source close to the negotiations explained that Solow feels Citi, perhaps in its haste for quick access to cash, "didn't act in good faith."

Attorneys for Citibank did not respond to calls for comment.


Alexander Court

Today, the seven-story residential building at 4102 13th Avenue in Borough Park, Brooklyn, is complete, with several sales contracts already out. But only a few months ago, it didn't look like it would ever get there.

In early February, developer Alexander Gurevich filed suit in state Supreme Court in Manhattan against his lender, California-based Chinatrust Bank, after it allegedly failed to complete payments to him on the project.

Soviet-born Gurevich has been a developer in New York for 10 years and has completed four previous projects with Chinatrust. So he was "astonished," he said, when Chinatrust informed him in September, when the project was roughly 90 percent finished, that it would terminate funding of the building loan.

"It didn't make any sense," Gurevich told The Real Deal. "You would want to keep a borrower as strong as possible if you're a bank, not cut off their legs."

However, Chinatrust's parent company, Taiwan-based Chinatrust Financial Holding, is under fire at home due to former vice chairman Jeffrey Koo Jr.'s alleged insider trading and his possible role in a high-profile money-laundering scandal.

Gurevich, who says he was in compliance with the loan, traces the dispute back to a request for an extension of a loan at another of his projects. But he suspects that the company's legal problems are ultimately responsible for the halt in his funding.

"I think they are under substantial financial pressure," he said.

In the suit, Gurevich claimed that delays caused by the lack of funding caused "substantial economic harm and distress."

The suit went on to charge Chinatrust with "malicious conduct and intent to cause plaintiffs financial harm," even saying that the defendant "had become increasingly belligerent and antagonistic to the plaintiffs as the financial banking crisis of 2008 worsened."

In its answer to the complaint, Chinatrust denied the charges, saying that it "acted in good faith and in accordance with the reasonable commercial standards of its business." It claimed that Gurevich violated the terms of his $10.4 million building loan by failing to repay the outstanding balance when the bank requested it in November.

The law firm representing Chinatrust in the case declined to comment.

Gurevich said when negotiations with Chinatrust stalled after several months of delays, he decided to turn to other funding sources, obtaining a high-interest, $1 million mezzanine loan to complete the project, which he named Alexander Court.

"We still have our reputation to preserve as a builder and developer in this community," said Gurevich, who is also developing projects at 802 Avenue U in Sheepshead Bay and at 313-317 East 46th Street and 250 East 49th Street in Manhattan.

Though he has had to reduce the prices, he said, Alexander Court went to market last month and has received "a substantial response from the area," with at least one contract signed and several others out.

Now that the project has been completed, he said, Chinatrust has indicated that it may want to work out the dispute. "It seems like they want to resolve it," he said.

Still, Gurevich said his is one of many cases that will involve litigation.

"[Banks] are looking for every excuse not to fund [projects]," he said. "This would never happen in a normal banking environment."