It was a small-time landlord in the city’s forgotten borough who slung the first stone.
Allen Pilevsky, the owner of a Staten Island strip mall, had spent the bulk of six months working to extend the property’s $14 million mortgage. Under terms set by Signature Bank, the process should have been as complicated as overnighting written notice — no approval necessary.
But he wasn’t dealing with Signature anymore. He was dealing with Rialto Capital Advisors. And the so-called bogeyman of commercial real estate was not playing nice.
Pilevsky claimed in a complaint he notified a stand-in servicer of the extension after Signature failed. But when Rialto stepped in, it ignored the correspondence, instead piling on late fees and default interest.
It demanded a pre-negotiation agreement that would have had Pilevsky waive any claims against it and declare himself in default, the suit alleges.
The landlord was nearly under Rialto’s thumb. And he wasn’t the only one.
Citywide, property owners and court records claim Rialto is waging war against Signature borrowers, manufacturing defaults on deals in good standing by ignoring borrowers’ notices to exercise loan extensions and then suing to foreclose.
Rialto contends that it is following the rules and has only enforced its rights and remedies in “rare instances” in which sponsors defaulted and refused to communicate. It said it remains committed to borrowers and finding the “best resolutions possible.”
The servicer, one-third of the venture managing Signature’s $17 billion commercial loan book, has lodged at least 88 such actions since March 2024, a few months after the Federal Deposit Insurance Corporation closed the sale of the debt, according to an analysis of court records.
Nearly half of those pre-foreclosures have been filed this year alone. Insiders familiar with Rialto’s strategy say dozens of other owners are also feeling the heat.
“It’s $1.2 billion of loans heavily concentrated in New York,” said an attorney representing Signature borrowers. “How many of those are in default? Nobody knows.”
Some, such as Pilevsky, have the means to lawyer up and fight back. But many are even smaller-time players: a retail operator on Long Island, a multifamily landlord in Brooklyn and the owner of a two-story office building are among the borrowers who spoke with The Real Deal.
“The rapacious behavior by special servicers is one of the most blatant regulatory gaps that exists in the financial industry.”
The bulk said they lacked the resources and the know-how to fend off a multi-billion-dollar servicing empire.
“I don’t know how to stop them,” the manager of the retail space said. “I don’t know what happens next.”
Legal protections for and regulatory oversight of CRE borrowers is nearly nonexistent — they’re assumed to be savvy and self-sufficient. Or, as Rialto put it: “We expect these sophisticated, commercial borrowers to honor the commitments they made.”
The FDIC, by design, has been largely hands-off since the sale closed. It declined to comment.
In essence: “There is no one looking out for you,” said Michael Hanin, a commercial litigator at Pallas Partners.
But as more borrowers push back, the counteract has raised a crucial question for the industry: Should there be a guardian angel for commercial borrowers, and if so, who can fill the role?
Rialto at the ready
It’s no surprise that Rialto, a behemoth of special servicing, is allegedly going scorched earth on unwitting borrowers. That’s kind of its thing.
When sponsors default on securitized debt, Rialto’s job is workout talks. It negotiates on the CMBS bondholders’ behalf and its playbook has earned it a bad rap among borrowers who claim it drags out negotiations to rake in as much in fees and default interest as possible.
Signature sponsors claim Rialto copied and pasted the strategy when it took over their loans.
Pilevsky, who did not return a request for comment, alleged Rialto “acquired the position of servicer” to obtain “default interest and management and servicing fees on these loans.”
Joseph Cayre’s Midtown Equities, which lobbed a class action at Rialto this year, claimed it prolonged talks to “unlawfully manufacture” defaults and “coerce” borrowers into paying “crippling default interest and fees.” The lawsuit was dismissed with prejudice in March. The court filing states there was no formal declaration of default or demand for default interest.
Still, there’s a key distinction between CMBS borrowers and Signature’s clients.
The former are typically institutional groups with the deep pockets and legal armies to fight back. Signature, by contrast, was a major lender to the city’s mom-and-pop landlords. A midsize bank with a community feel, it prioritized relationships and tailored, flexible terms.
Take the loan at the heart of Pilevsky’s and a number of other disputes: a five-year term with a five-year extension that required notice, an income and expense statement and a current rent roll to tap, according to court records.
It’s a borrower-friendly product and servicing structure that Signature clients had relaxed into. When Rialto allegedly stopped honoring it, the whiplash was searing.
Not in the business
Rialto has replicated the alleged attack plan it first deployed against Pilevsky so many times that it earned a nickname from Midtown Equities’ attorneys in the February class action.
Brothers Terrence and Darren Oved dubbed it “Rialto’s Sinister Pocket Veto Scheme” in a nod to how Rialto ignores borrowers to force defaults.
The other common ground, borrowers claim: Their properties are not distressed. Some are market-rate apartments that benefitted from rising rents, others are small suburban office buildings that retained essential services tenants — bank branches, for example — through Covid.
Their owners thought an extension would be a given.
“It’s in pristine condition; it’s the pride of my portfolio,” said the landlord behind the two-story office building. “And then, all of a sudden, I get foreclosed upon.”
Apart from frustration, the biggest response among borrowers has been confusion.
It’s understood that lenders and loan servicers don’t want to own property. “Not in the business” was a phrase echoed by industry players during interviews. But that’s what foreclosure often achieves.
“So I don’t know why they’re beating their chest,” the office owner said.
Follow the profits
The end game for Rialto, and its joint venture partners — Blackstone and the Canada Pension Plan Investment Board — likely isn’t to own assets. It’s to maximize profits.
The group scored its stake in the loans at a discount to their book value, according to FDIC documents, creating a sizable window to flip the deals for more.
A month after the sale, Bloomberg reported the group was working to sell nearly $2 billion in loans. Since, it’s offloaded $700 million to Morgan Stanley and $247 million to Maverick Real Estate Partners. Last month, it started shopping another $400 million.
Foreclosure is another path to profits, particularly for performing deals. Take the asset back, sell it for more than what you paid for the mortgage and boom: money in hand. (One caveat to the Signature CRE sale is the leverage the FDIC offered — the Rialto venture has to pay that back first.)
It also works as a negotiating tactic: Corner the borrower into refinancing or selling so it doesn’t need to see through New York’s expensive, time-intensive judicial foreclosure process.
Rialto did not weigh in on any grander strategy. Blackstone, a partner in the venture, declined to comment. The Canada Pension Plan Investment Board, the third group in the JV, did not comment.
But a handful of attorneys speculated about the same end game.
“It’s a way to maximize pressure on the borrowers to come to a resolution,” one lawyer representing Signature borrowers said.
All-seeing FDIC
When Signature failed and the industry laid blame on its exposure to rent-regulated distress, nonprofits and the city started ringing the FDIC: They did not want a foreclosure tsunami threatening tenant stability.
The agency announced it was on board a few months before the sale, underscoring its “statutory obligation” to preserve the affordability and availability of housing for low- and moderate-income folks.
It put its money where its mouth was by holding onto 95 percent of the venture with the debt and selling the remaining 5-percent stake to two non-profits and Related, a seasoned operator of rent-stabilized housing.
“I don’t know how to stop them. I don’t know what happens next.”
The city was pleased, and so far the venture has foreclosed on a handful of deals tied to just two borrowers — a one-time “worst landlord,” and Maverick Real Estate, which took over assets owned by Raphael Toledano, a notorious rent-regulated landlord serving out a ban from New York City real estate.
For the CRE debt, the FDIC wasn’t focused on tenants but two other mandates: minimize losses to the Deposit Insurance Fund and maximize returns on failed assets.
To achieve both, it went with an 80-20 split. By holding onto the bulk of the debt, the FDIC avoided immediate losses and ensured it could capture any upside. By selling 20 percent of it to Rialto and friends, it guaranteed the venture had skin in the game and an incentive to maximize recoveries.
The foreclosure strategy, albeit brutal for borrowers, does achieve this. Pressure forces payoffs and auctions allow it to sell properties.
The FDIC declined to comment.
Gray area
A prevailing question among landlords is whether Rialto’s tactics are legal.
Several suits have grazed the allegation. One, filed on investor Israel Weinberger’s behalf over a botched loan extension on a Family Dollar, characterized Rialto’s moves as “possibly illegal.”
But moreso, attorneys say the question is around permissibility. Does Rialto’s behavior run afoul of rules or regulations?
There is at least one argument for that.
The joint venture structure is governed by a 151-page operating agreement that specifies the group must adhere to the original terms and conditions of the loans inherited from Signature.
This would appear to include honoring the extension terms landlords claim Signature baked into their loans: no formal approval necessary or pre-negotiation agreement required, just send notice and you’re good to go.
But for a judge to find Rialto’s behavior unlawful, there would need to be a law, regulation or legal precedent in place to check it. And for commercial real estate borrowers, the guardrails were never installed.
Naked and afraid
On the heels of the Great Recession, residential borrowers won a slew of new protections against the predatory lending and servicing that ran rampant during the period.
Notably, the Dodd-Frank Act requires servicers to communicate clearly and promptly with borrowers, particularly if their assets are at risk of distress or foreclosure. It also bans servicers from initiating foreclosure proceedings if a modification is underway.
“There were a lot of consumer loans — residential mortgages — foreclosed upon where you had servicers making false or inaccurate statements to judges,” a former bank examiner with the FDIC recalled of the financial crisis.
The agency, when it started selling those mortgages to private investors, also required buyers to follow “appropriate foreclosure practices,” the examiner said.
In contrast, commercial borrowers are on their own. And though the big boys of real estate may be shrewd enough to handle themselves against servicers, some smaller operators are as ill-equipped as residential borrowers: they don’t have the money or knowledge to take on Rialto.
“The rapacious behavior by special servicers is one of the most blatant regulatory gaps that exists in the financial industry,” Hanin said.
If anyone was looking into Rialto’s handling of Signature’s loans, it would be the New York Attorney General, a regulator, such as the New York Department of Financial Services, or electeds.
Rialto is not on Attorney General Letitia James’ radar, according to a spokesperson for her office. The representative said it has not received any whistleblower complaints about the venture’s servicing of Signature’s loans.
DFS has yet to fulfill a Freedom of Information Law request about any borrower complaints or investigations into the Rialto venture. TRD has been unable to independently verify if any electeds have been tipped off.
It’s unlikely anyone cares.
Bad rap
For Signature borrowers in Rialto’s crosshairs, their sole defense may be the courts.
The servicer has agreed to settle three cases lodged by Signature borrowers against the servicer, court records show and sources corroborate.
In one, it agreed to a discounted payoff of the loan, according to public records.
The terms of the two other settlements are unclear.
Those familiar with the suits say the servicer may be sensitive to the public attention such cases draw. The FDIC would also have reason to be.
“It’s a government agency so it cares about its reputation with the public; it’s as simple as that,” the bank examiner said. “The FDIC prefers not to have that publicity.”
Still, neither countersuing nor pushing back is a sure defense.
An attorney representing multiple Signature sponsors said the firm has dug in its heels, in one example refusing to work something out on a deal valued at less than $1 million.
On the Fulton Street loan, the venture filed to foreclose after the sponsor sued, alleging the “possibly illegal attempt” to manufacture a default.
It is possible that a borrower’s winning case could establish some precedent. That is: offer protection in the courts.
But this would require a sponsor to take one for the team and slog through the expense and time of a lawsuit that would likely dwarf the benefits to the borrower, one attorney said.
So the question remains: Will a David emerge to face off against Rialto’s Goliath?
UPDATED: The original story form The Real Deal’s April issue omits that Midtown’s lawsuit against Rialto was dismissed with prejudice in March, 2025. The court filing also stated there was no formal declaration of default or demand for default interest.