Warner Center apartments head for foreclosure.

The Warner Center Apartments project, the second-largest residential complex ever built in the City of Los Angeles, is going into foreclosure, amid charges that the property manager's fees were unreasonable and construction costs too high.

A partnership that owns the 29-acre complex failed to make an interest payment on June 15, prompting the effective lender on the project, Los Angeles-based Coast Federal Bank, to begin foreclosure proceedings.

Coast alleged in June in Los Angeles Superior Court that Mayer Management, a property management company controlled by Beverly Hills-based developer Alan Casden, which managed the property, might collect rent from the Warner Center project for its "own use and benefit." Coast further alleged the Casden-controlled company "charged ... commercially unreasonable (5 percent of rents) fees..." to manage the 1,279-unit property.

Coast made the charges in asking the court to appoint a receiver for the big apartment complex, a request Superior Court Judge Stephen O'Neil approved.

Santa Monica-based Sovereign/Ring Management now manages the Warner Center Apartments, and collects the $985,000 in monthly rents and other revenues the property yields.

Casden, a seasoned real estate developer well-regarded for his business acumen, declined to comment last week.

His lawyer, Edward Rosenfeld of the Beverly Hills-based law firm Rudin, Appel & Rosenfeld, vigorously rebutted Coast's allegations.

"Coast's attack on the 5 percent fee is a sham," he said in a prepared statement. Rosenfeld stated the fee level is "an industry standard," and further pointed out that when Coast was a partner with Casden in managing the apartments, and received "sole economic benefit" from the fees, the thrift had no problem with the fee level.

Rosenfeld added that Coast's allegations about what Mayer Management might do with rents at Warner Center were also a sham, and that Casden has actually pumped substantial monies into the Warner Center project to keep it afloat.

Coast, a publicly held thrift, has $144 million in loan guarantees outstanding on the Warner Center Apartments.

Coast guaranteed low-interest City of Los Angeles housing bonds, used to finance the development of the apartments. About 20 percent of the project's apartments are set aside for low-income residents.

CoastFed Properties, a joint venture between The Casden Co. and Coast, built the apartments in 1987.

Coast and Casden are not the only unhappy players in the Warner Center saga. Even unhappier, at least financially, are the investors nationwide who bought $50,000 investment units in the apartment complex, and who own the property that Coast now wants.

The seven-year-old Warner Center project, at 5555 Canoga Ave. in Woodland Hills, was syndicated nationally, as a limited real estate partnership, by Shearson Lehman/American Express, in 1986.

Investors bought $50,000 units (similar to shares) in the 16-building complex, although half-units were sold, and some investors bought more than one unit.

In total, $23 million was raised nationwide, and the investors took the equity position in the Warner Center apartments, through a partnership named Mayer Warner Center Ltd.

Casden is one of three general partners in the limited partnership.

With Coast's foreclosure, the investors will likely lose their entire investments, and will face tax penalties to boot.

Due to vagaries of the tax code, an investor who bought a Warner Center $50,000 unit must report this year a $92,000 taxable gain because, in effect, tax losses of previous years are effectively being revoked.

Concerned by the specter of big losses and tax hits, about 150 Warner Center apartment investors have hired attorney Michael White of the Century City offices of Beigel & Sandler, and have alleged fraud, breach of fiduciary duty and negligent representation by Casden, Shearson Lehman/American Express and CoastFed Properties.

In an interview with the Business Journal, Casden's lawyer has described the investors' charges as meritless.

According to the suit filed by the investors, Shearson Lehman presented materials to the investors that posited if Warner Center Apartments only appreciated in value by 5 percent a year, then investors would reap a 1,000 percent after-tax return.

Too, the investors allege that "construction costs paid by the partnership were excessive and unreasonable."

Warner Center Apartments, like many apartment buildings in Los Angeles, must compete for tenants in a soft market. And the big complex has had to hold down rents to entice renters. Signs are posted on the structure offering "one month free."

Ultimately, the soft rents contributed to a circumstances in which the apartments could not generate enough income to make interest payments to lender Coast Federal.

It is unclear how Coast will fare after foreclosing. The big, $8.5 billion-in-assets thrift is under federal scrutiny, as are many thrifts suffering from sour loans originated in the 1980s.

In a recent report to shareholders, Coast said the market value of the 1.17 million-square-foot complex was probably less than the amount it has lent on the project.

"The fair value of the Warner Center project and certain other projects collateralizing the bonds is believed to be less than the potential liability under the related letter of credit," reported Coast.

In documents filed in Superior Court, Coast said the property was appraised for as little as $95 million in 1988, in an application to the County of Los Angeles for the reduction of property taxes. It was later appraised for between $126 million and $130 million in August 1991.

On a per-rental unit basis, at $126 million, the Warner Center complex would be worth about $98,500.

Recently, Bunker Hill Towers, a 456-unit luxury complex in downtown Los Angeles, was auctioned for $19.1 million, or about $42,000 a unit.