Pension fund takes control of Philadelphia's 10 Rittenhouse Square condo building

"A pension fund representing thousands of workers, mostly in the construction trades, has taken control of the luxury 10 Rittenhouse Square project in a dispute over the fund's $57 million stake in the building.

The 33-story Robert A.M. Stern signature building at 130 S. 18th St. - with 135 condominiums priced from $600,000 to $15 million, plus retail and restaurant space - opened in November, more than two years behind schedule, because of litigation over preservation and zoning issues.

That delay, coupled with a deepening recession, resulted in sales below what are considered necessary to begin repaying more than $300 million in debt owed to the project's senior lender, Istar Financial Group of New York, and the pension fund, the Delaware Valley Real Estate Investment Fund, which manages the retirement nest eggs of 47,200 workers in the region.

According to data from city Board of Revision of Taxes and other sources, only about three dozen units have sold or gone to settlement.

Because of those low numbers and concerns about Istar's intentions for the building, the pension fund filed suit Friday in Common Pleas Court, seeking "to save Center City's premier residential condominium development from the depredations of a troubled hedge fund and rogue lender."

In 2006, the pension fund provided 10 Rittenhouse's developer, ARCWheeler L.L.C., with two loans to launch the project - the first for $25 million, the second for $5 million. With late charges and accrued interest, the pension fund is now owed $57 million.

In 2007, Istar lent $216.5 million to ARCWheeler to build the high-rise.

With its pair of loans, the pension fund provided "mezzanine" financing, similar to a second mortgage in residential real estate, with the debt secured by the borrowers' equity in the property.

In such arrangements, the senior lender, in this case Istar, typically is paid first, with the pension fund paid next. But a provision in the mezzanine agreement allows the pension fund to assume ownership if it believes its investment is in jeopardy.

With the exercise of that provision, Rittenhouse Pension Investors L.L.C., a wholly owned subsidiary of the pension fund, has assumed management of the luxury high-rise, said managing partner John M. Decker, of Dequity Investment Group.

In its lawsuit, the pension fund accuses Istar of "hatching a scheme" to defraud it and 10 Rittenhouse's developer by letting the project go into default and assuming control, with the result that "only Istar would obtain repayment."

At the same time the developer was behind in its loan payments to Istar, the lawsuit says - Istar describes ARCWheeler as "out of balance" to the tune of $35 million - Istar continued to allow the developer to draw money from the loan for construction and did not specifically suggest it was in default.

According to the suit, ARCWheeler offered to raise the $35 million by giving up its rights to the building's commercial properties and using condo deposits it had received. Instead of accepting the cash payment, Istar "insisted" ARCWheeler take out another $35 million loan, for a total of about $251 million.

The pension fund stepped in, according to the suit, to keep the union members it represents from being "completely wiped out."

When contacted Monday, Istar senior vice president Andrew Bachman said: "We are aware of the action being filed. However, we have not yet been served, nor have we reviewed the filing, so we do not have any comment."

Decker said the suit was delivered to Istar by Federal Express on Friday.

Until a "seamless transition of management" is made, Decker said, ARCWheeler will stay on at 10 Rittenhouse. He sought to reassure current owners and buyers that their interests were protected. "We are satisfied with every aspect of what ARCWheeler has done," he said.

Robert Ambrosi, a joint-venture partner in ARCWheeler with the late Harold B. Wheeler, had no comment Monday about the turn of events, except to say: "My goal is to make sure that 10 Rittenhouse is the best residential building and community of people in Philadelphia."

Ambrosi, chairman and chief executive of ARC Properties of Parsippany, N.J., and Wheeler, who died Jan. 25 of a heart attack at 54, began planning 10 Rittenhouse in the mid-1990s.

Construction, expected to take 27 months, was to have begun in spring 2005, just as the Center City condo boom was revving up. Instead, work did not begin until 2007, at the conclusion of two years of legal wrangling over a variety of issues, including preservation of buildings on the site.

Meanwhile, the region's real estate market peaked in the third quarter of 2007, followed by the start of the recession. Opening more than two years late put 10 Rittenhouse at a distinct disadvantage, especially since its price range requires well-heeled buyers.

"Under $500,000 is selling briskly, but $1 million-plus is very slow, unless discounts of 20 percent to 40 percent are being offered," said Center City Realtor and developer Allan Domb. "If you have to sell a house in the suburbs first or if you need a jumbo loan to buy, it's a big problem."

In November, when the building opened, Ambrosi said there were agreements on 50 percent of the units at 10 Rittenhouse.

Although sales have been slower than anticipated, Decker said the last 60 days have seen increased traffic and contracts, and "a better price per square foot," implying a reduced level of discounting.

Many buyers who signed contracts at the beginning either renegotiated their agreements or accepted a portion of their deposits back, Decker said. "Only a handful of lawsuits" by disappointed buyers remain."