Developer Kent Swig is racing to complete a deal to sell the senior mezzanine debt at the Sheffield57 condominium to a team led by Fortress Investment Group, amid a blockbuster derivative lawsuit by his fellow investors that could affect a final agreement.
Under the proposed deal, Guggenheim Structured Real Estate would sell its debt in the building, which includes a senior mezzanine loan of $76 million, and a junior mortgage loan of about $2 million, sources said.
The sources added that Swig and Guggenheim were looking to sell the debt at 90 cents on the dollar, while most offers were coming in at 60 to 70 cents.
The buyers would then foreclose on the note, take over the property, and pour millions of dollars into the building to complete construction and cover delinquent payments owed to numerous contractors.
“The note’s in default,” said an executive familiar with the negotiations, “but Guggenheim doesn’t have the [additional] money to put into the deal that the property needs.”
Sources say that Fortress had been in discussions with Area Property Partners, formerly known as Apollo Real Estate Advisors, to become a member of the investment group. The sources added that Area officials, however, had concerns about the complicated legal and financial entanglements at Sheffield57. The building’s former owner, Rose Associates, has emerged in recent days as a potential manager and investor in the deal.
“We do not comment on our investments or potential investments,” said Lilly Donohue, a managing director at Fortress.
At least two other firms were left at the altar during the bidding process, including Angelo, Gordon & Co., and Westbrook Partners. Officials at both firms declined to comment. Officials from Area and Fortress also declined to comment.
Swig has been in negotiations to recapitalize the luxury tower for weeks amid intense scrutiny of state regulators and litigation from contractors and condo unit owners over the pace of construction and millions in unpaid bills.
As The Real Deal previously reported, Attorney General Andrew Cuomo ordered Swig to suspend sales at Sheffield57, located at 322 West 57th Street, after the sponsor failed to update his condo offering plan with the necessary financial disclosures.
In a May lawsuit, a group of owners at Sheffield57 alleged that Swig failed to pay $5.5 million in common charges, and also filed a complaint with Cuomo’s office that Swig improperly withdrew funds from the building’s reserve fund for legal fees and other expenses.
Yesterday, companies controlled by Swig’s two major investment partners at Sheffield57, Yair Levy and Serge Hoyda, filed a derivative lawsuit in New York state Supreme Court against Swig and all of the major lenders on the project, including Guggenheim, Wells Fargo, the trustee of the Sheffield57 mortgage-backed loan and Keycorp Real Estate.
Among the allegations, Levy and Hoyda allege that Swig used $50 million in building loan proceeds for personal and other uses, paid his own construction firm for work that was never performed and signed off on major decisions without the knowledge or consent of Levy and Hoyda.
“Wells Fargo, Keycorp and Guggenheim knowingly allowed Swig to siphon off building funds for improper, non-project related purposes because they knew it would only accelerate the inevitable — a borrower default — and enable them to declare loan defaults and then sell their loans as “loan to own,” the suit alleges.
Stephen Meister, attorney for Levy and Hoyda, is asking for more than $84 million in damages, a judgment of $50 million against Swig, an injunction against Swig to block his role as manager of Sheffield57 and the appointment of a receiver to oversee the building.
Swig did not respond to repeated requests for comment.
According to documents obtained by The Real Deal, Swig has $262 million in mezzanine debt as of April, including the $76.1 million Guggenheim loan; $65.9 million from JP Morgan Chase; $19 million from Petra Fund; $36 million from Gramercy Capital; $29.5 million from New York Life and $35 million from MMA Realty Capital.
Moody’s Investors Service last month downgraded a collateralized debt obligation from Credit Suisse First Boston, citing the weak financial condition at Sheffield57. The report noted that the Sheffield57 mortgage, which has a remaining balance of $30 million, was transferred into special servicing, after Swig chose not to cover a $52 million construction shortfall.
The report noted that Swig owed $14.2 million in unpaid construction costs, and that he accumulated $6 million in mechanic’s liens that basically blocked the ability of individual condo owners to purchase title insurance.
The report also noted that the building’s reserve fund had a balance of only $154, but Swig posted a $9 million letter of credit that expires July 9, 2009. Moody’s said that Swig failed to make a May interest payment, but noted that there were enough funds from the building’s rental income to pay interest on the senior loan.
Robert Braverman, attorney for the Sheffield57 owners’ group, alleged that Swig told his clients in an April meeting that it would cost about $35 million to complete construction of the building. However, sources familiar with the negotiations agree with the Moody’s estimate that the building would require more than $50 million in additional funding.
Sources familiar with the owners say there are other investors that are willing to buy the debt and assume control over the building, but they have significant reservations about any deal that leaves Swig involved.
Sheffield57 unit owners are scheduled to have another meeting at the AG’s office late next week.