Swig: I was the fall guy

Dec.December 01, 2010 12:29 AM
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Kent Swig

Kent Swig says his critics have got his story all wrong. Since the downturn began, few New York developers have taken as big a media shellacking as Swig. A rising star during the boom years, the 48-year-old developer is now routinely described as “embattled” and near-bankrupt.

But in an interview with The Real Deal last month, Swig tried to dispel the widespread belief that his empire has “crumbled,” as many news reports have noted, and insisted that his companies, including Swig Equities, are doing fine.

“I’m in New York, I’ve been in New York, I continue to be in New York,” said Swig, who has been largely silent in recent months, but agreed to an interview request from The Real Deal. “I get up early, I’m working. I’m still doing what I used to be doing. Our portfolio is no different. Our real estate is no different.”

It’s a claim that many in the real estate industry will find hard to believe.

Swig has been sued by more than 12 creditors, squabbling over a reported $50 million in personal debt. (All it takes is three who are disgruntled with the way his income is being divided to force an involuntary bankruptcy).

His former Sheffield57 project is widely considered one of the biggest condo conversion fiascoes in New York City history — Fortress Investment Group purchased the debt on the property in 2009 for less than 40 cents on the dollar and won the right to foreclose. Just months after losing the property, a court ordered Swig to fork over $32 million in cash to Square Mile Structured Debt, which helped finance the failed conversion — prompting Swig to file an affidavit threatening to declare bankruptcy.

Meanwhile, in January, his real estate services firm, Helmsley-Spear, largely shuttered its third-party commercial brokerage operations, and laid off most of its employees. In July, Swig sold 140 William Street for $11.5 million — a 53 percent loss (though he claims it was not due to financial hardship, but because his plans for the property were contingent on his ability to snap up all the lots around it, and someone else purchased a key parcel). And in October, he surrendered his equity and transferred the deed for yet another property — 5 Hanover Square — to the Manhattan-based real estate firm Savanna, which purchased the delinquent mortgage at a foreclosure auction.

The golden-haired Californian acknowledges it’s been a    tough time — in addition to his money problems, his 22-year marriage to Elizabeth Macklowe is headed for divorce, and he had a major surgery last December.

“It’s not pleasant,” he said. “Being separated, going through financial issues, and going through shoulder surgery. I would say it was a fairly complicated year. I don’t wish it on anybody.”

But Swig offered an aggressively optimistic spin on his  two years of business travails, and tried to make a clear distinction between   his personal finances and those of the companies he owns. He predicted he would pay off his personal debt “100 percent, plus  interest” within the next 24 months or so. Income from his properties and his interest in real estate services firm Terra Holdings — which has continued to expand — will help him dig out of the hole, he said. According to court documents, all of his profits from Terra as well as income from most, if not all, of his other entities are being placed in escrow accounts under the control of New York City marshals, to be distributed to Swig’s creditors.

No poster child

In what is sure to cause head-scratching in some quarters of the real estate industry and loud guffaws in others, Swig said that far from being “the poster child for a failed deal,” Sheffield57 was actually “the best, most successful deal I have ever done in my life.”

He said he and his former partners — Yair Levy and Serge Hoyda –still stand to share in the profits from both that building and Hanover Square, thanks to little-noted agreements he worked out with  each of the property’s new owners.

Swig couldn’t talk publicly about the arrangement with  Fortress at the time of the foreclosure because the deal   was too sensitive, he claimed. But last month he told The Real Deal that the negative headlines detailing the Sheffield foreclosure buried a key fact. He claims he recruited Fortress and asked them to buy the debt on the property and foreclose — then agreed to voluntarily hand over the condo plan, which allowed Fortress to avoid having to file a new one, a process that could take up to 15 months.

In addition, Swig said, he also agreed to serve as “the fall guy” in the press. Fortress declined to comment for this story.

In exchange for his cooperation, he said, Fortress granted him and his partners a share of any future profits, one that he characterizes as “enormous” and “a very significant stake.” Swig declined to elaborate. But it’s a story he’s been selling to at least some of his creditors and their attorneys, one of whom, when contacted by The Real Deal, suggested that Swig was being overly optimistic with his Sheffield projections. He chuckled skeptically, and said dryly, “I hope it works out for him. Good luck with that.”

A confidential copy of the cooperation agreement between Fortress and Swig was entered into the evidence in one of the many lawsuits filed against Swig. The agreement, which The Real Deal obtained last month, grants Swig and his partners a share of the profits, but only after Fortress and its investors receive a 25 percent internal rate of return, and at a minimum, an equity multiple of 1.75 times their aggregate capital contributions. After that, Swig and his partners receive $7 million. Then they get a share of the subsequent profits that starts at 12 percent and rises to 49 percent, depending on how much money the Sheffield produces. In other words, Fortress and its investors will need to close to double their investments before Swig and his partners see a penny. But after that, the profit sharing kicks in, and Swig and his partners stand to see a growing share as subsequent condos sell.

The Real Deal provided a copy of the agreement to Joshua Stein, a leading commercial real estate lawyer not involved in the deal, to review. He said it’s impossible to assess how much the former owners will receive without knowing how much money Fortress will actually invest in the project, and how the Sheffield performs. But he has seen similarly structured agreements before. The good news for Swig is that Fortress will have to make back substantially less before profits kick in because it purchased the debt at a steep discount. But the share they are entitled to before Swig and his partners see an upside “represents a huge bite of the profits,” Stein noted.

“If the investment turns into a grand-slam home run — and it’s entirely possible — then at some point the former owners could receive significant proceeds. But it’s very far from money in the bank.

The Sheffield left, and 5 Hanover Square, right, two of Swig’s former projects.

“A lot of good stuff has to happen for him to get money out of this — if I had to guess, I would be surprised if the $7 million bucket gets filled up,” Stein said. Within the joint-venture entity, he added, “you have to ask yourself, ‘How much of this is Swig and how much do his former partners get?’ Not every dollar coming out of this agreement will go to Swig.”

Though some news reports have referenced an agreement, Swig maintains its importance has been ignored, and said he’s speaking publicly about it for the first time to correct the “misconception” that the deal was a failure. “I’m choosing to speak out now, because there still appear to be misconceptions in the marketplace about what happened,” he said.

He said he hammered out the arrangement to “protect myself and my partners” after learning that investment firm Guggenheim Partners planned to sell the most senior position of the mezzanine debt on the property — the key piece of the capital stack that can be used to force a foreclosure in the event of a default. That would have been an attractive option to a number of real estate players, he claimed, because most of the units he sold were on the lower floors, so the property was still poised to throw off hundreds of millions of dollars in profits with the sale of the building’s remaining apartments, which were more expensive.

“Whoever bought that position, in my opinion, was going to be adversarial to both the rest of the mezzanine debt stack and to me,” he said. “I could not protect the rest of the mezzanine debt stack. [Their demise was] going to be a fait accompli. But I had a choice — I could join in or be a victim.

“Not only was I an active participant, I organized this to protect my partnership and myself,” Swig said.

Swig said that in today’s changed market, one no longer needs to own a property to share in its profits. “I think [the Sheffield] was one of the most creative and complicated deals ever implemented in the real estate world,” he added.

Certainly, Swig has plenty of reason to exaggerate any potential profits and create an impression that he controlled the situation.

“The industry loves winners, and when you’re a winner you tend to keep winning,” noted Stein. “Once you have been painted as a loser you tend to be targeted as a loser and perceived as a loser. People are less likely to invest in your deals and they are more likely to think that they can somehow take advantage of you because you are a desperate seller or you are desperate for money and you don’t have any other options.”

Engineering deals

Neither of Swig’s partners on the deal –Levy and Hoyda — responded to calls seeking comment. But they were disgruntled enough with Swig to attempt to derail the deal while it was going down. In 2009, Hoyda and Levy sued Swig, along with Guggenheim and other lenders on the project. They accused Swig of siphoning off money from the project for “personal or unrelated purposes,” and depleting the reserve fund. The project’s lenders, they claimed, “knowingly allowed Swig to siphon off the building loan 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 loans to own.”

The case was dismissed, and Swig declined to directly address the state of his current relationship with his partners.

But he apparently has little contact with at least one of them. In a now famous move, on May 22, 2009, Levy pled guilty to harassment in the second degree, for “intentionally subjecting Kent Swig to physical contact with an ice bucket,” according to court documents.

As part of the plea, he consented to two days of community service and agreed to abide by a two-year order of protection to “stay completely away from Kent Swig.”

In the end, the true value of Swig’s deal with Fortress will be determined by how many units the Sheffield sells. It is true that sales at the Sheffield, which is now managed by Rose Properties, appear to be picking up.

Jacqueline Urgo, president of the Marketing Directors, which now handles sales for the Sheffield, said 271 of the building’s 597 units sold under Swig. Since April, Marketing Directors has sold 68 more apartments — 14 in October alone, she said. (Some of the units — which range in price from $700,000 to $7.5 million — have seen their prices reduced by 25 percent since Swig was involved in the project.)

Swig claims that he engineered a similar loan-to-own gambit at 5 Hanover Square. He said he approached Savanna, a real estate investment and development firm, after learning that Capital One — which owned the senior slice of the mezzanine debt — planned to sell it. In return, said Swig, he will receive some of the profits.

When contacted by The Real Deal, Nicholas Bienstock, a managing partner of Savanna, emphasized that Swig has no ownership stake in the building. But as Crain’s reported, Swig will continue to manage the property and handle the leasing of existing tenants (Cushman & Wakefield will handle the leasing of new tenants). As part of that deal, Swig “effectively gets a bonus for performance,” Bienstock said.

There is “upside if the deal does very well,” he said. “Beyond that, I won’t comment.”

Responsive, not reactive

140 William Street, which Swig sold for a 53 percent loss in July.

Not many real estate figures have fallen as far and as fast as Swig.

Back in the spring of 2008, Swig controlled more than 4 million square feet of office space and 1,200 luxury apartments. He and his wife Elizabeth Macklowe were considered real estate royalty. Swig had ambitious plans to enter the hotel markets — teaming with actor Robert DeNiro and partners to open a 128-room, five-star Nobu Hotel and restaurant in a 62-story Downtown tower.

But then came the credit crisis, the lawsuits and the media assault.

Swig said he received lots of advice that helped him navigate the challenges he’s faced. The most important, he said, is to “be calm and think clearly.”

“One needs to not be reactive, but to be responsive; there’s a big difference,” he said. “A reaction is an instant reaction. When something happens, take an hour to think it through, take 24 hours to think — whatever it is — you think, and then you respond thoughtfully. It’s critical.”

But despite reports to the contrary, Swig maintains that his financial situation is now largely under control. In today’s market, he argued, “debt and equity is now porous. One can change sides — you can go from ownership to debt and back to ownership.”

“In many cases,” he said, “it no longer matters whether you are an owner of the property or a participant in the profits.”

Dan Fasulo, managing director at Real Capital Analytics, noted that a growing number of loan-to-own deals include sweeteners for the owners losing the title. But, he said, equity stakes like the ones Swig is describing were an unusual inducement.

“There’s been a lot of pragmatic mezzanine debt holders looking to work out with owners rather than head down the traditional foreclosure path, which is full of landmines,” Fasulo said, pointing to the recent deal between the Macklowes and Boston Properties at 510 Madison. “If you have a really aggressive owner, you could be in court a year or two.”

So will Swig be able to hold onto his ownership stake in other properties? When asked, he insisted it doesn’t matter. When a reporter rephrased the question and asked if he would “have to” engineer similar gambits to ensure profits at any of his other properties in the future, Swig did not rule it out.

“It’s not ‘have to,'” he said. “It’s opportunity. If the opportunity arises — whether it’s my property or other people’s property — to be involved, and it makes sense. ‘Yes.'”

“It’s part of the new paradigm of the real estate business,” he continued. “And if one isn’t savvy to those new capital market nuances, I would argue you are playing with a half a deck of cards,” he said.


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