By JOHN R. EMSHWILLER
LOS ANGELES—Unlike many real-estate deals across the U.S., developer Sonny Astani's downtown condominium-construction project here wasn't killed by the property market's collapse. The death of the project's lender, however, has left a big mess.
Last September's failure of Corus Bank, a Chicago-based unit of Corus Bankshares Inc., put the $163 million construction loan used to finance Mr. Astani's project in the hands of the Federal Deposit Insurance Corp. The loan now is controlled by a partnership of the FDIC and an investor group led by Starwood Capital Group, part of an unusual public-private push to increase returns on loans and real estate inherited by the FDIC.
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The 56-year-old Mr. Astani says his efforts to finish the project, called Concerto, have been impeded by the FDIC and Starwood, which eventually could result in them seizing the property Concerto could be "a treasure chest for these guys," he says, contending the project, which includes a 30-story condo tower, retail space and a one-acre park, is worth more than the amount of the construction loan.
Corus Construction said Thursday that a tentative agreement has been reached with Mr. Astani that would allow the project to continue and the real-estate developer to retain ownership. Mr. Astani says negotiations have begun and are making progress but that no agreement has been reached.
Clashes between real-estate developers and lenders are common, especially during tough times. But the dispute over Concerto is an example of the litigation and other snarls facing the FDIC as it tries to work through tens of billions of dollars in loans, foreclosed real estate and other assets from failed financial institutions.
Some subcontractors have griped that Corus Construction Venture LLC, the entity formed to manage Corus's loans, has hindered their efforts to get paid. City officials say the delay has cost Los Angeles construction jobs at a time when the struggling local economy needs them.
A spokesman for Corus Construction says the Concerto loan is in default, which Mr. Astani disputes. In court filings, Corus Construction contends that the project is worth less than the amount Mr. Astani owes, accusing him of trying to "play fast and loose" with the loan terms by selling part of the project to raise cash. Corus Construction denies blocking money to subcontractors and has begun paying some of their claims.
More than 230 banks and savings institutions have failed since the start of 2008. Acquirers of seized banks usually take most of their assets, except when the loan portfolio is horribly battered. Of the $7 billion in assets that Corus had when it was taken over by the Office of the Comptroller of the Currency, the FDIC got about $4 billion.
Developer Sonny Astani, outside his Concerto condo project in Los Angeles last month, is fighting the FDIC to maintain control of the project.
Hoping to avoid selling loans at fire-sale prices, the FDIC in 2008 launched a plan to bring in private investors. Such investors put in some of their own money, oversee asset dispositions and share proceeds with the FDIC.
The idea is to "capture the expertise and efficiency of the private sector, as well as improvements in market conditions," says James Wigand, an FDIC deputy director. So far, the agency has entered into 13 joint ventures involving more than $15 billion in assets. FDIC officials plan additional partnerships with investment firms.
Corus is the biggest public-private loan-workout alliance yet. Mr. Astani's loan was part of a package of assets with a face value of $4.45 billion. The Starwood-led investor group owns 40% of the venture, while the FDIC owns 60%.
Mr. Astani says he has pumped $55 million of his own money into Concerto. In 2007, he got a $190 million loan from Corus to finance construction of the 30-story tower and a seven-story loft building.
By early 2009, though, Corus's financial condition was deteriorating, and the bank faced mounting pressure from regulators. Mr. Astani says he encountered resistance in winning approval to keep the project moving. Last August, he sold the 77 loft units in a one-day auction that raised nearly $29 million. But because of the lousy real-estate market, the sales prices fell far short of the minimum specified in his 2007 loan agreement.
Completion of the loft sales required approval by Corus. But the bank was seized before Mr. Astani got the clearance he needed. Six days after the bank's failure, Mr. Astani put the Concerto project into bankruptcy proceedings in Los Angeles, hoping a judge would sign off on the loft sales and let him use some of the cash to finish the tower.
In an interview, Mr. Astani says he believed the FDIC "would be very happy" with his plan.
The FDIC objected to the move, accusing the developer in an October court filing of trying to "play fast and loose" with the collateral for the loan. The FDIC added that Mr. Astani's financial projections ignored the "grave market and economic conditions" in the downtown Los Angeles real-estate market.
In October, Mr. Astani won permission from a U.S. Bankruptcy Court judge to complete the loft sales and use some of the proceeds to finish the condo tower. To protect the loan, though, the judge ordered the Concerto project to pay $1 million a month to Corus Construction, which also would have to sign off on further spending.
Since then, the FDIC-Starwood partnership has dragged its feet on approving a budget and construction payments, Mr. Astani says. The Corus Construction spokesman says that Mr. Astani provided insufficient information needed for the budget and has "routinely submitted incomplete or improper loan-draw requests."
The FDIC-Starwood venture is offering unpaid subcontractors 95 cents on the dollar for their claims. The offer is an "end run" to undermine support for Mr. Astani among the creditors' committee in the bankruptcy case, contends Ronald Hudson, who claims his wall-installation company is owed $1.6 million for work on Concerto. He says he hasn't been offered a payment.
The Corus Construction spokesman says the offer "simply acknowledges" that subcontractors "deserve to be paid" and isn't aimed at influencing the bankruptcy proceeding. "Several" have accepted the offer, the spokesman adds.
Write to John R. Emshwiller at john.emshwiller@wsj.com
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