In the current economic downturn, even the building loan contract — the fundamental guarantee that the bank will make construction payments to the developer — continues to be weakened.
Developer Alexander Gurevich sued the California-based Chinatrust Bank (U.S.A) after it allegedly failed to complete payments to him on his seven-story residential construction project at 4102 13th Avenue in Borough Park, Brooklyn.
In a lawsuit filed last week in Manhattan State Supreme Court, Gurevich is seeking a total of $10 million in compensatory damage and $100 million in punitive damages for breach of contract and maliciously inflicting economic harm from the lender who has funded several of his projects over 10 years.
In a building loan, the bank generally pays the developer in monthly installments, and the developer then pays contractors.
But his case is just one among a growing number of incidents in which banks are threatening to freeze construction funding, an action that was virtually unheard of in recent years, real estate experts said.
At least a half-dozen projects in New York City have been threatened by banks who are demanding that the developers slash construction spending, said Louis Coletti, president and CEO of the Building Trades Employers’ Association, which represents union contractors. He began hearing such stories since the beginning of the year from developers and contractors, but was not familiar with the Brooklyn lawsuit.
Lenders are telling the developers: “If you don’t reduce construction costs by 25 percent we are going to withdraw the loan even though we pre-approved it,” he said.
Real estate attorney Andrew Jagoda, a partner at law firm Katten Muchin Rosenman, who had no knowledge of the Gurevich case, said in economic downturns banks comb through the loan documents for reasons to halt funding.
“Lenders try and pull back. It is a natural reaction because they are worried the projects will be a disaster,” he said.
In the Gurevich lawsuit, the developer alleged the bank stopped funding the $10.4 million loan at his condominium project at 4102 13th Avenue in Borough Park in September, causing delays which reduced the project’s value. The building was mostly completed after about $8.9 million of the loan had been paid, he said.
Deborah Meng, senior vice president with Chinatrust, said it has not seen the lawsuit, “But when it is served it will respond accordingly through the legal process.” She had no further comment.
Gurevich attributed the halt in payments to a dispute over a request for an extension of a loan made by Chinatrust at his Sheepshead Bay project which was completed in August 2008.
“Their behavior is completely irrational,” he said.
To cover the lost payments, Gurevich obtained a high-interest, $1 million mezzanine loan, and so far there are no mechanic’s liens filed on the property, indicating he is paying his contractors on time.
He also claims in the lawsuit that in December the bank cut off letters of credit and a line of credit, despite Gurevich being fully secured with cash collateral, out of malice.