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.”