The Delaware Valley Real Estate Investment Fund, the lead plaintiff, claims that 10 Rittenhouse Square was designed to be one of downtown Philadelphia’s most prestigious addresses: a 33-story tower with 134 high-end condos, nearly 24,000 square feet of commercial space and 163 parking spaces.
The pension fund began investing in the project in February 2006, and within a year had extended loans of more than $30 million, all secured on an ownership stake in the project.
The funds goals were twofold, according to its 43-page complaint: To put money into a project that promised considerable financial returns on investment, and to support construction that would provide jobs for the region’s construction workers.
But now, the plaintiffs say, their primary goal is to save the city’s “premier residential condominium development from the depredations of a troubled hedge fund and rogue lender.”
The turning point came in 2007, when Philadelphia Rittenhouse Developer LP, the developers, entered into a series of written agreements with New York-based iStar Financial Inc. for $216.5 million in construction financing. iStar Financial and iStar Tara LLC are the lead defendants in the case.
iStar held itself out as a financial sound institution, but it was not what it claimed to be, according to the complaint. Even as it entered into the Rittenhouse loan agreement, iStar was hiding the fact it had recently suffered significant financial losses, including $60 million on held-to-maturity investments, the complaint states.
The bad luck continued when the Rittenhouse project was significantly delayed, first by community preservationists, and later by the crash of the real estate market and the resulting global recession.
In 2009, the complaint states, iStar and its assignee, iSTAR Tara LLC, hatched a scheme to defraud the pension fund and the developer out of their interests in the project.
The plaintiffs claim that iStar tried to “prevent, delay and otherwise impede sales of condominiums in the residential tower.”
Without the money to make payments on the iStar loans, the developers would have no choice but to turn the project over to the lender – but the developers had one way out, according to the complaint.
Notified by iStar and iStar Tara that the payments were “out of balance,” the developer proposed selling the commercial portion of the project, and the first three floors of the residential tower, and to turn the proceeds over to iStar, along with the $10 million nonrefundable deposit it had received on the sale of a penthouse, the complaint states.
iSTAR rejected the proposal, insisting the developer borrow an additional $24 million from it, while raising the interest rate on both the original and the new loan by 33.3 percent, the complaint states.
As word of the transactions became public, the developers had even harder time selling the properties, with prospective tenants questioning whether the developers had enough funding to maintain common areas of the building and provide the promised amenities, according to the complaint.
The final straw for both the developer and the pension fund came when it became clear that iStar was not going to extend the terms of the outstanding loan from 1 to 2 years, but was poised to declare the loan in default as it came due. If this came to pass, the complaint states, the pension fund and its beneficiaries would be wiped out.
The fund seeks declaratory and injunctive relief, extension of the loan through Sept. 1, 2011, and damages for negligent misrepresentation and concealment, breach of contract, tortious interference, promissory estoppel, and breach of an intercreditor agreement.
The plaintiffs are the Regional Real estate Investment Corp., Rittenhouse Pension Investors LLC, on its own behalf and as successor in interest to Phila Ritt Dev/GP LC t/a Philadelphia Rittenhouse Developer LP of Philadelphia.
The defendants are iSTAR Financial Inc., iSTAR Tara LLC, Robert Ambrosi, Marc Perel, Heeler Brothers Partners LLC, William Wheeler, Hal Wheeler, Wheeler Brothers LLC, Mitchell Russell, RittSQ Partners LP, and Phila Ritt Dev Arc Employee GP.
(On Monday, Standard & Poor’s Ratings Service downgraded its junk ratings on iStar Financial to highly speculative territory, minutes before the market closed, citing the finance company’s limited funding flexibility and the severe deterioration in the credit quality of its loan portfolio.)
The plaintiffs are represented by Paul Rosen and David Picker with Spector, Gadon & Rosen.
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