Developer Takes Hit in Condos

Developer Takes Hit in Condos SAN FRANCISCO, CA - 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.

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."

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