Judge dismisses Chapter 11 petition of 10 Rittenhouse developer

By Alan J. Heavens

"A federal bankruptcy judge has dismissed the Chapter 11 petition filed by the developer of 10 Rittenhouse Square, the luxury condominium building at 130 S. 18th St.

The petition by Philadelphia Rittenhouse Developer L.P. came Jan. 5, just seven minutes before Common Pleas Court Judge Albert W. Sheppard Jr. was to have appointed a receiver. On Dec. 30, Sheppard had approved efforts by the project's senior lender, Istar Financial of New York, to foreclose on the property.

In his late Wednesday decision, Chief Bankruptcy Judge Stephen Raslavich called the Chapter 11 filing "a transparent litigation tactic in a battle between Istar" and Delaware Valley Real Estate Investment Fund, which, as mezzanine lender, has a total claim of $62 million.

In July, after months of lackluster sales at 10 Rittenhouse, Delaware Valley Real Estate Investment Fund - which manages the pensions of 47,200 workers in the region, mostly in the building trades - sued Istar and took control of the property.

Dismissal of the Chapter 11 petition could pave the way for Common Pleas Court to appoint the receiver Istar requested. Bankruptcy Court documents show Istar is owed about $205 million in loans to the 143-unit, 33-story project.

Albert A. Ciardi, attorney for Philadelphia Rittenhouse Developer, said Thursday, "We are disappointed with the decision and are evaluating our options." He said the developer would try to keep things going and reassure homeowners and buyers.

When asked whether he thought Istar would now proceed with the appointment of a receiver, Ciardi said Istar was likely looking at all its options, too.

Efforts Thursday to reach Istar were unsuccessful.

Since 10 Rittenhouse opened in November 2009, just 38 condos - originally priced from $600,000 to $15 million - have sold, according to the city Office of Property Assessment website. Data from the city Recorder of Deeds Office show that a majority of condos sold in Center City since the end of 2008 have been priced less than $500,000.

Developed by Robert Ambrosi and the late Hal Wheeler as ARC Wheeler L.L.C., 10 Rittenhouse opened two years later than planned because of legal battles over preservation and zoning, effectively missing the real estate boom, which ended here in the third quarter of 2007.

On assuming control of the building last summer, Delaware Valley Real Estate Investment Fund created a wholly owned subsidiary to manage it, putting John M. Decker of Dequity Investment Group L.L.C. in charge.

In its July lawsuit in Common Pleas Court, the investment fund accused Istar of "hatching a scheme" to defraud it and the developer by letting the project go into default and assuming control, with the result that "only Istar would obtain repayment." That suit is pending as the state court considers whether monetary damages should be awarded to the investment fund.

In September, in response to the investment fund's suit, Istar filed for foreclosure in Common Pleas Court and requested that a receiver be appointed.

Under a reorganization plan filed in Bankruptcy Court in March, the remaining units at 10 Rittenhouse would have been sold in three to four years and Istar repaid the $200 million-plus it was owed, even though some of the money realized from those sales, as well as rental of commercial space, would be used for completing the building and for operational costs.

In his 59-page decision, however, Raslavich said that "the only credible valuation evidence," given in February by Istar appraiser Joseph D. Pasquarella, put the value of the building at just $140.2 million, which Philadelphia Rittenhouse Developer L.P. accepted.

Instead of repaying Istar, therefore, the loan would be deficient by about $65 million, Raslavich said.

"The plan doesn't protect the secured creditors' debt," he said, but requires Istar "to suffer the diversion of some unquantified portion of those proceeds over to the debtor to use, as it sees fit, for an array of project-related costs and expenses."

In addition, Raslavich said, precedent requires such a plan to be "tested," typically by putting some units on the auction block to determine real market price.

Istar sought such a test. The developer rejected it.

The three largest unsecured creditors - Dale Corp., Turner Construction, and PZS Architects - are owed $4.92 million of a total $5.7 million in that category. Raslavich said they could not understand why the developer had filed for bankruptcy, nor would they approve the reorganization plan.

"Whether the court evaluates this case based on an overfly of the forest or a walk through the thicket of trees, its impression remains the same," the judge said. "The debtor [Philadelphia Rittenhouse Developer L.P.] bore the burden of providing subjective good-faith intentions and the negating of the objective futility of its [reorganization] plan, and did neither."