May 7, 2009 - Developer Kent Swig, New York NY

Kent Swig Taking Hits as High End Condo Market Falls

Kent Swig at his 25 Broad Street condo building in New York - Above

Kent Swig, the scion of one of San Francisco's most prominent real-estate families, is no stranger to conflict.

Two years ago, he hired a marching band that drowned out the noise of a protest mounted by tenants he was trying to evict. Last fall, one of his partners allegedly hurled an ice bucket at Mr. Swig during an argument at a business meeting, an incident that led to the filing of assault charges.

But nothing likely could have prepared Mr. Swig for the wars on numerous fronts that he has faced as the Manhattan condominium market has unraveled. He has faced a range of financial problems on his four condo projects, including the 597-unit Sheffield57, one of the largest condo projects in the city.

Mr. Swig's battles are a sample of what is happening nationwide in the condo-development sector as thousands of new units keep being delivered into a market in which demand has evaporated. In Manhattan alone, where vacant inventory stands at record levels, some 4,500 new condo units in 44 buildings are expected to come online this year, according to Reis Inc., a real-estate research firm.

Many condo projects throughout the country are going bust as developers default on construction loans. The losses are among the causes of the commercial real-estate woes that are dragging down banks and other lenders. Delinquencies on condo construction loans jumped to 32% in the first quarter, up from 25% in the previous quarter, while defaults on nonresidential construction loans rose to 8.9% in the first quarter, from 6.6% in the previous period, according to Foresight Analytics LLC.

Last summer, Mr. Swig sold a condo-conversion project on the Upper West Side after its lender, iStar Financial Inc., launched a foreclosure action. More recently, Lehman Brothers Holdings Inc. filed to foreclose on Mr. Swig's 25 Broad Street, a luxury condo steps from the New York Stock Exchange, and an adjacent condo-hotel that Mr. Swig was developing. An iStar spokesman said the sale resolved the lender's issues with Mr. Swig. Lehman declined to comment.

Closings of sales at Sheffield57 have stopped, according to sales records. Contractors have slapped liens on the building for unpaid bills, court records show. And an appellate court in March said that the building's remaining market-rate tenants could challenge a court ruling that had paved the way for their eviction. Since March 2008, the $32 million senior mortgage has been on loan servicer KeyCorp's watch list for potential default, according to Trepp, a firm that tracks the commercial-property finance market.

The fate of the building now rests largely on the six mezzanine lenders, who hold some $255 million in debt, according to Realpoint, a Horsham, Pa., ratings firm that tracks commercial mortgage-backed securities. The mezzanine lenders, which include Gramercy Capital Corp. and Square Mile Capital Management LLC, didn't respond to calls seeking comment. Mezzanine debt fills the gap between the borrower's equity and the first mortgage.

A Sheffield57 spokesman acknowledged that the sales market has been "a challenge," but said the building has more than $59 million of contracts waiting to close and has seen "increased new sales activity."

In Manhattan's high-priced market, which resisted the downdraft of the housing collapse until recently, the struggles of Mr. Swig and others are being watched. "Everybody's sort of looking over their shoulder" to see who will be the first to fail, said Jonathan Miller, a New York appraiser.

Kent Swig's troubled Sheffield57 building on 57th Street in New York. The fate of the condo building now rests largely with its lenders.

Mr. Swig is the grandson of Benjamin Swig, a real-estate magnate who became one of San Francisco's leading philanthropists and businessmen. The family's holdings at one point included the Fairmont Hotels chain. The younger Mr. Swig moved to Manhattan in the mid-1980s, going into business for his father-in-law, New York real-estate mogul Harry Macklowe. After going out on his own, Mr. Swig became best known for his joint ownership of two residential brokerage firms, Halstead Property and Brown Harris Stevens.

Mr. Swig's foray into Manhattan residential development follows his unsuccessful bid in the late 1990s to build luxury condos in downtown San Francisco.

In Manhattan, Mr. Swig got into condo development in 2005 as the market neared its peak. One of his first deals was 25 Broad Street, a 346-unit rental-apartment building that he bought in 2005 with plans to convert into condos. But sales were slow, according to brokers familiar with the project. After 25 Broad's lead lender, Lehman Brothers, sought bankruptcy protection in September, it filed a foreclosure action against the project, alleging that it was in default on three mortgages, including a senior loan valued at $231.7 million.

Lehman filed separately in January to foreclose on the adjacent 45 Broad, claiming that the project had defaulted on two loans valued at $49 million, according to New York state Supreme Court records.

A group led by Mr. Swig paid $418 million for the Sheffield building in 2005, a record for an apartment building at that time. Now, it is slightly less than 50% sold and there have been no closings since mid-February, according to sales records.

Mr. Swig's partner on the project, Yair Levy, faces a hearing later this month for two misdemeanor assault charges stemming from the ice-bucket incident. A spokesman for Mr. Levy said the incident "was completely made up by Mr. Swig."

Original Story - Wall Street Journal

Update - June 9, 2009

Assault Accusations, a Lawsuit and a Notorious Condo Deal

Yair Levy, a once high-flying real estate mogul, pleaded guilty last month to harassing his partner with an ice bucket during a rather intense business meeting. But Mr. Levy is not done with that partner yet.

On Tuesday, he filed a lawsuit in State Supreme Court in Manhattan claiming that the partner, Kent M. Swig, “siphoned off” $50 million in construction funds for “personal or unrelated purposes” instead of putting it into work at their property: the Sheffield, a 50-story residential building on West 57th Street.

The Sheffield57, as it is now known, is already well on its way to being one of the most disastrous condominium conversions in city history. After almost two years of marketing, only 40 percent of 597 apartments have been sold. Condominium owners are suing the partners, as are the market-rate tenants and the rent-regulated tenants. Unpaid contractors have placed liens against the units. And last month, the state attorney general halted sales altogether.

According to the suit, the partners — who include Serge Hoyda, who joined Mr. Levy in bringing the lawsuit — are also in default on at least $100 million in loans. Although Mr. Levy and Mr. Hoyda own a 70 percent stake in the Sheffield, they claim that Mr. Swig, who was responsible for day-to-day operations, secretly conspired with two of the lenders to sell the building out from under them.

“Yair Levy and Serge Hoyda, investors in the Sheffield Sponsor, have been victimized by Kent Swig, who took millions in loan advances from the senior lenders, Wells Fargo and Guggenheim, when those lenders knew Swig was vastly over budget and knew or should have known that Swig was using the loan proceeds for personal purposes,” said Stephen B. Meister, a lawyer for Mr. Levy and Mr. Hoyda. “They are now attempting to sell their loans to investors who intend on foreclosing.”

Mr. Swig, the scion of a San Francisco real estate family, could not be reached for comment. An executive at his office said he was unaware of the suit.

The problems at Sheffield57 and the tensions between the partners are neither new nor unique at a time when real estate values have fallen sharply and owners are falling into foreclosure. But the suit does provide a glimpse into one of New York’s favorite blood sports, real estate.

In September, Mr. Swig told the police that Mr. Levy had hit him in the right shoulder and right hand with a metal ice bucket during a meeting at Mr. Swig’s lawyer’s office. On May 22, Mr. Levy pleaded guilty to harassment and was sentenced to two days of community service.

The partnership began in 2005 with visions of a gold mine. The partners bought the Sheffield for $418 million, a record, at a time when there seemed to be an insatiable demand for housing at almost any price. They planned to convert the 853 one-bedroom and studio apartments into roughly 600 larger units, selling for $1,300 a square foot.

Mr. Levy and Mr. Hoyda together put in $17 million, while Mr. Swig contributed $7.5 million, and together they borrowed more than $500 million.

Since Mr. Swig was an experienced developer, he took over daily operations and budgeted $38 million for building renovations. A year later, Mr. Swig said they needed another $59 million to complete the renovations.

According to the suit, Mr. Swig then paid his own construction company $6 million in “unearned fees” and hired another company, Pinnacle, to do the work. “Despite having requisitioned and drawn the roughly $50 million invoiced by Pinnacle,” the suit says, “Swig shorted Pinnacle $14 million, keeping these funds in his own company, Falcon.”

The suit also contends that Mr. Swig improperly paid another of his companies, Swig Equities, millions in commissions.

In addition to the partners’ suit, rent-regulated and market-rent tenants are suing, claiming improper evictions and failure to properly maintain the building. Separately, a complaint to the state attorney general, Andrew M. Cuomo, in April on behalf of about 100 condo owners said that the building’s three owners had failed to pay $5.4 million in common charges over 20 months for the hundreds of units they control, improperly withdrawn tens of thousands of dollars from the Sheffield’s reserve funds and failed to provide a certified audit.

Update Story - New York Times

Update June 29, 2009

More trouble for Swig’s real estate empire

Sources say lender Fortress Investment Group plans to foreclose on Kent Swig’s lawsuit-laden Sheffield57 condo conversion.

Real estate developer Kent Swig’s residential quagmire is getting deeper and murkier.

Fortress Investment Group is set to take over Sheffield57, a deeply troubled condo conversion that Mr. Swig owns with partners, through a foreclosure proceeding next month, sources said.

However, published reports said Mr. Swig previously approached Fortress about forming a partnership to purchase some of the debt that would be key to any foreclosure next month. A spokesman for Mr. Swig declined to comment, and Fortress didn’t return calls seeking comment.

Meanwhile, the attorney for Mr. Swig’s two partners in the Sheffield57 building said they plan to fight the foreclosure in court. Earlier this month, Yair Levy and Serge Hoyda filed a suit against Mr. Swig and the building’s lenders, alleging that Mr. Swig pocketed money from building loans for his own use, paid a construction company he controlled for work that was never done, and made major decisions without them.

“My clients were iced out,” said Stephen Meister, attorney for the two men. He said his clients own 70% of the building.

The trio paid $418 million in 2005 for the 845-unit building on West 57th Street, with Mr. Swig controlling daily operations. Various loans were taken out on the building since then to finance construction and conversion.

Sources said Fortress bought roughly $100 million in debt held by Guggenheim Structured Real Estate Partners and is now using its position to foreclose on the property. The foreclosure proceeding, first reported by Bloomberg News, is set for Aug. 6.

In the years since the 2005 purchase, the project has been plagued by problems and lawsuits. There are at least three tenant suits that allege shoddy and unsafe construction practices. In 2007, Rep. Jerrold Nadler, D-Manhattan, accused Mr. Swig of filing false documents, engaging in illegal behavior and endangering the lives of residents.

Earlier this year, Mr. Swig told Crain’s that 59% of the building’s units had been sold. Not long after, The Real Deal reported that New York Attorney General Andrew Cuomo had ordered Mr. Swig to suspend sales at the condo because its sales plan filed with the state hadn’t been updated with the necessary financial information.

This isn’t the only bedeviled project for Mr. Swig, a scion of prominent San Francisco-based real estate family who is married to New York developer Harry Macklowe’s daughter and owns several office towers downtown.

Earlier this year, Lehman Brothers started foreclosure proceedings against Mr. Swig over 45 Broad St., a luxury hotel and condo project he planned with the actor Robert De Niro. Mr. Swig’s condo project at 25 Broad St. is also stalled, with one of his lenders suing and alleging that he defaulted on two loans.