Lender alleges Swig defaulted on 25 Broad loan, inflated Sheffield stake

Jan.January 05, 2009 03:13 PM

A Manhattan-based private equity firm filed suit against developer Kent Swig in late December alleging he defaulted on more than $39 million in loans and inflated his stake in the Sheffield57 condominium.

In a suit filed in New York State Supreme Court, Square Mile Capital Management claimed that in March 2007 it loaned $18.4 million to 25 Broad Mezz Preferred, a Swig Equities subsidiary that invested in Swig’s failed conversion of 25 Broad Street, a luxury rental building in the Financial District. Square Mile claimed that the 25 Broad Street conversion began to run into financial difficulties in the summer of 2007, and that both loans were restructured at Swig’s request.
Swig personally guaranteed the loan, and agreed that instead of paying the loan back in cash, the loan would be converted into an equity stake in 25 Broad Street, according to the suit. The 25 Broad loan was converted into a $21.35 million stake in the project, with a 21 percent preferred rate of return.

In July 2007 Square Mile alleged, the company made a separate, personal loan to Swig for $21.15 million, which could be converted into an equity stake in the conversion of Sheffield57, a luxury tower at 322 West 57th Street. The loan has been amended four times and restructured twice since then and has a current balance of $28.38 million, including interest and penalties.

Square Mile claimed that under the restructured deal, Swig agreed to repay the 25 Broad Street loan with future proceeds from the Sheffield or his Upper West Side tenement project at 201 West 92nd Street, which was sold in July 2008 after Istar Financial filed suit to foreclose on the building.

Swig, according to the allegations, told Square Mile that he owned 99.98 percent of a firm called SE West 57 Capital, which owned 29.99 percent of the Sheffield.

However, Square Mile charged in the suit that Swig owned just 30 percent of SE West 37 Capital, meaning he controlled just 9 percent of the Sheffield. Square Mile alleged that a firm called Shefa 57, a firm unaffiliated with Swig, controlled 70 percent of SE West 57 Capital. State records list Shefa 57 LLC at the law firm of Fishbach Hertan, but officials at Sefa were not immediately available.

“Upon information and belief, Swig knowingly concealed Shefa 57 LLC’s interest from [Square Mile] because he knew if SM were aware of the truth, it would not agree to the equity conversion and to release Swig from his personal guarantee,” Square Mile wrote in the complaint.

Swig Equities denies the charges, alleging that Square Mile is trying to force a resolution through the courts.

“In the wake of unprecedented economic dislocation in the capital and credit markets, Square Mile Capital has taken unwarranted legal actions in a misguided attempt to improve its position vis-a-vis the owners and developers of these properties, and to pressure a resolution of this complicated legal and financial situation,” a Swig Equities spokesman, who asked not to be identified, said. “We will be answering the claims brought by Square Mile Capital in their complaints. We also are evaluating our defenses to these claims as well as our counterclaims. We are confident that our positions will prevail with the court.” 

The allegations mark the latest in a series of difficulties surrounding the Swig condo projects.

In 2005, Swig and Colonnade Properties teamed up to buy 25 Broad-The Exchange from Miami-based Crescent Heights for $260 million. As The Real Deal previously reported, the conversion ran into numerous construction delays and by June 2008, Swig entered discussions to prevent the collapse of the entire conversion. Lehman Brothers, the senior lender on the project, filed for bankruptcy protection in September 2008, and Swig shut down his sales office. More than 30 mechanics liens have been filed against Swig for non-payment.

In 2005, Swig, one of the city’s biggest commercial real estate developers, teamed up with investors Yair Levy and Serge Hoyda, to acquire the 845-unit Sheffield from Rose Associates for $418 million.

After combining several hundred apartments, Swig sold more than 240 of the building’s estimated 583 apartments, and recently won an appeal allowing him to evict more than 23 market-rate tenants. However, Standard & Poor’s put Sheffield57 on a watch list in August amid concerns about Swig’s ability to refinance a $104.7 million loan, plus six mezzanine loans worth $240 million. In October he got an extension.

In July 2008, Swig was forced to Sell His West 92nd Street tenement buildings for $61 million to the Mendlowits family, which owns Adorama Camera. However, New York Department of Finance records from September 2008 show that Swig paid an additional $7.2 million back to Istar.

Square Mile named two of Swig’s partners in the 92nd Street project — Levy and investor Charles Dayan — since they allegedly received proceeds from the sale. Dayan said he had not been notified of any lawsuit, but said that Swig released him from liability prior to the sale. Levy was not immediately available.

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