By ELIOT BROWN

Bernard Madoff isn’t the only headache for the owners of the New York Mets these days.

Fred Wilpon and Saul Katz, who face a $1 billion lawsuit in connection with their association with the convicted Ponzi schemer, made their fortune in real-estate investment long before they bought a stake in the Mets in 1980. But now, the largest of the real-estate funds they invest in and control, the $609 million Sterling American Property V fund, has seen values decline significantly and troubled properties accumulate.

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Saul Katz, left, and Fred Wilpon watching a Mets workout last month.

Last year, a loan servicer filed to foreclose on two office buildings in Fairfield, N.J., where the fund defaulted on a $35 million mortgage, according to loan research service Trepp LLC. Sterling said it is negotiating with the firm in an attempt to hold on to both properties.

In 2009, the Sterling fund agreed to hand over to lenders its 43-story tower at 333 Bush Street in San Francisco after a major tenant went bankrupt.

The fund’s investors have been hurt. Of the $35 million that the Teachers Retirement System of Louisiana put into the Sterling fund, its investment at the end of 2010 was valued at $18.1 million, according to the Louisiana fund’s chief investment officer.

Countless other funds and real-estate investors that invested at the market’s peak are in similar straits. Many are avoiding selling, hoping that values will increase enough to wipe out some or all of the possible losses they are facing.

But if the Madoff victims’ trustee is ultimately successful in winning damages from the Mets’ owners, they could be on the hook for as much as $1 billion in payments being sought in the lawsuit. The Wilpon and Katz families are seeking investors to buy a noncontrolling stake in the Mets to cover the team’s operating expenses and because of uncertainty over the outcome of the lawsuit, according to people familiar with the matter.

The trustee for victims of Mr. Madoff’s Ponzi scheme alleges that the Mets owners knew or should have known about the fraud. The Wilpon and Katz families have refuted the charges in the lawsuit as “baseless.”

A spokeswoman for Sterling Equities, the firm Messrs. Wilpon and Katz founded in 1972, said the real-estate holdings won’t be affected by the lawsuit, which names Sterling as a defendant. She said Sterling controls more than 6.8 million square feet of commercial space and more than 15,000 residential units through its funds and private holdings.

But the firm clearly faces losses from Sterling American Property V. It invested $150 million of its own money in the fund and now expects to return 85% of investors’ capital through its life, according to the spokeswoman.

“Fred Wilpon and Saul Katz have built a very successful real-estate business, which has prospered for more than 30 years and continues to generate strong returns for its investors,” the spokeswoman said.

Messrs. Wilpon and Katz began together as investors and developers. Much of Sterling’s activity in recent years has been focused on its Sterling American Property group of funds. Mr. Madoff himself was an investor in the funds, the Madoff victims’ trustee has claimed in court.

Historically, Sterling’s funds have performed well. The company estimates its fourth fund alone will achieve a gross return of 30%, and in total, it projects its five funds will achieve a gross return of about 19%.

Formed at the market’s peak, Sterling American Property V was by far the largest of these funds, with more than twice the equity as Sterling’s fourth fund. From 2006 onward, the fifth fund bought office buildings in midsize cities and suburbs and midrise apartment complexes from Naperville, Ill., to Mission, Kan., markets that have generally been slow to see values rebound.

“Where we’ve seen values recover recently has been the primary markets, and certainly many of those secondary cities they invested in have not seen that type of recovery,” said Dan Fasulo, managing director of research firm Real Capital Analytics.

Other investments in Sterling’s fund, such as the Devonshire condominium conversion in New York City, appear to be performing well. Sterling said it has nearly paid off its mortgage, given strong sales on the property.

But the Sterling fund faces potential problems later this year and next on its larger office properties, including the 383,000-square-foot 300 Capitol Mall in Sacramento, Calif. Partnering with Hines Interests LP, the firms put a $104 million loan on the property when they bought it in 2007. But now, revenues have fallen to the point that they don’t cover debt service, and 85% of leases expire over the next two years, according to Trepp. Also, ratings agency Fitch last year warned of possible losses to debt investors on the property.

Other properties that may need more capital include the 27-story Ten Penn Center office building in Philadelphia, for which revenue is less than expected and a loan is slated to mature later this year, and the Chicago office tower at 200 West Adams Street, for which a $100 million loan is slated to mature in January, according to Trepp.

The Sterling spokeswoman said the fund has capital available to work out troubled loans.

Write to Eliot Brown at eliot.brown@wsj.com

It is easy for Dominique Kostelac to forget the troubles of his former life as he meanders down the old wagon trail on his 33-acre farm outside Charlottesville. There are the plastic tubes he uses to tap the maple trees for syrup. Here is the island in a forgotten river where he found the remnants of a dugout canoe, which he imagines could be as old as the Indians. This is where the persimmon trees grow so heavy that a shake of the branches releases their bounty.

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Margaret Thomas
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FOR THE WASHINGTON POST
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Despite debt and other struggles, Dominique Kostelac believes his enterprise is a “game changer” for local food.

He moved to Holly Tree Farm five years ago with his wife and three kids when he was still a high-flying real estate developer cashing in on the housing boom. What followed has become an all-too-common story: The bursting of the bubble — and perhaps his own overexuberance — left him millions of dollars in debt and facing foreclosure. Or, as Kostelac puts it, “we did a big face-plant . . . and we were stranded here.”

As it happened, that face-plant was right into some of the most fertile soil in Virginia. A longtime foodie and serial entrepreneur, Kostelac is convinced that his old neighbors in yuppie Washington will pay premium prices for produce and meat from the small farmers who are his new neighbors. Now, in this refuge from his failures in the city, he sees opportunity — in the leaves of the grapevine that wraps around his front gate, the morel mushrooms that sprout beneath a shade tree and the wild raspberries that grow faster than ones he planted — that he might have overlooked before.

“Like when you go blind,” he says. “You start hearing better.”

Forming a farm club

Kostelac weaves past water coolers filled with maple sap, ignores the tray of apple cider donuts on the stove and plops in front of two laptops squeezed onto a tiny table in the kitchen in his basement. This is the headquarters of Arganica Farm Club.

Note the word “club.” One point Kostelac is adamant about is that Arganica is not a CSA, or community-supported agriculture. In that model, customers commit to buying portions of a harvest. That ensures farmers have buyers for their crop but limits customers’ control over what or how much they receive.

Instead, Arganica customers pay a fee ranging from $30 for a month to $250 a year to join the club and can buy basil ($3.25 a bunch) or brisket ($29.25 per pound) or bagels ($6.25 for six). Groceries are then delivered to their doorsteps in handmade white-washed wooden crates.

The seeds of Arganica were planted two years ago as what Kostelac calls “make-work.” After losing his shirt in the housing market, he was left with too much free time and hunted for ways to stay busy. The answer, he realized, was all around him. The farm was covered in driftwood and branches that he collected to stoke the fires that warmed the house. Why not gather the rest and sell it?

Kostelac named the enterprise Black Bear Wildwoods. He tied the branches with string made of hemp and called it sustainable. He hired many of the workers who had helped him refurbish homes in Washington to collect and deliver the bundles. Wood that didn’t sell was burned to boil down sap from the maple trees.

At winter’s end, the fires burned out. But Kostelac was just getting started.

“Why would we stop this great thing we got going?” he thought to himself. “Everybody needs work, right?”

Soon he was scouting local growers of heirloom tomatoes, calling small pig farmers and meeting with artisan breadmakers. He cobbled together a shopping list of about a thousand products, primarily from local producers.

One of them is Tom Weaver, whose family has been farming since an ancestor bought land in Orange, Va., from James Madison in 1819. Now, much of the land has been given over to raising white sows and Duroc daddies without hormones, antibiotics or nitrates under the name Papa Weaver’s Pork.

The first orders from Arganica were for 10 or 15 pounds of meat, Weaver said. Now they ask for as much as 200 pounds and pay him each week — crucial income during the winter when the farmers’ markets, another important outlet, are closed.

“It’s really ballooned for us,” Weaver said.

For him, Arganica is a no-risk proposition. That’s because Kostelac bears the burden of estimating his customers’ orders. Guess too low, and he’s out of stock. Too high, and he’s stuck with food that won’t sell or, worse, goes bad. He picks up the food from each vendor, trucks it to the District and takes the loss if it’s not up to snuff.

In the past few months, Arganica has expanded to Richmond, Hampton Roads and Charlottesville and now has its eye on Baltimore. A recent Groupon promotion netted more than 2,000 new members, boosting Arganica’s roster to more than 10,000. The sheer volume can quickly overwhelm the staff of roughly 70 full- and part-timers struggling to keep pace with demand, making even the smallest glitch feel monumental.

Today’s crisis: a broken printer.

If the customer orders aren’t printed, they can’t be packed for delivery. Kostelac logs in to a video chat with his brother and business partner, Tom, who lives in the Czech Republic and helped develop Arganica’s computer system. Kostelac likes to say he’s running a 21st-century business from an 18th-century farmhouse.

“The printing cutoff is soon, Tom,” Kostelac says. “They’re sweating bullets.”

Arganica office manager Heather Riggleman pops in from the room next door and sticks her head in front of the camera. “Hi Tom. I’m freaking out. I’m gonna turn to all capitals on Skype.”

The staff rushed the job to a print shop in Charlottesville, but they’re already behind schedule. Just another item for a to-do list that’s growing faster than crabgrass.

(Adds new information in the first paragraph.)

NEW YORK (Dow Jones)–A commercial real-estate trade group is seeking more flexibility in a new federal requirement that issuers of asset-backed securities retain a portion of the risk on their books.

The Dodd-Frank financial-overhaul law passed last summer mandated that issuers of securities backed by assets such as commercial and residential real-estate loans retain 5% of the risk. After the credit crisis, regulators wanted issuers of these securities to hold some parts of the bonds they were selling to investors to give them an incentive to make high-quality loans.

The board of directors …

Barclays Plc (BARC), the U.K.’s third-
largest bank, agreed to sell $586 million of commercial real
estate loans as it scales back its investments in property.

Crexus Investment Corp. (CXS), a commercial mortgage real estate
investment trust, will buy the 30 loans, London-based Barclays
said in a statement today. Crexus is managed by Fixed Income
Discount Advisory Company, part of New York-based Annaly Capital
Management Inc. (NLY)

Barclays Chief Executive Officer Robert Diamond is selling
assets that aren’t generating sufficient returns in relation to
the capital they require under the Basel III rules.

“The sale of the assets is part of continued efforts by
Barclays to manage its legacy commercial real estate assets for
value whilst reducing exposure over time,” Barclays said in
today’s statement.

Barclays advanced 8.4 pence, or 3 percent, to 290.5 pence
as of 10:40 a.m. in London trading.

To contact the reporter on this story:
Jon Menon in London at
jmenon1@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net

In the past few years, the federal government has used tax incentives to try to spur growth in the residential housing market. Now, commercial investors want their turn. The Community Recovery and Enhancement Act (HR 1147), a bill being pushed by lobbyists for the International Council of Shopping Centers (ICSC), would provide “short-term tax incentives to jump start reinvestment in commercial real estate”[1]. ICSC believes that the bill would help stabilize community banks, prevent foreclosures and job losses and help lenders see their way clear to refinancing for borrowers with underwater commercial properties.

“This temporary and targeted legislation [would incorporate] market factors and economic incentives rather than direct government involvement,” explains Betsy Laird, ICSC’s senior vice president of global policy[2]. The bill would require that at least “80 percent of the newly invested capital must be used to reduce the outstanding balance of the commercial loan, with the remainder going toward capital improvements such as energy efficiency enhancements and leasehold improvements to attract new tenants.” Investors would also be able to deduct losses “without regard to passive loss limitations” and the new investments would qualify for 50 percent bonus depreciation.

Do you think that this type of tax incentive would be good for the commercial real estate market, or would it create a “false boom” as the homebuyer tax incentives did in the residential market?

Thank you for reading the Bryan Ellis Real Estate Letter!

Your comments and questions are welcomed below.

[2] http://eon.businesswire.com/news/eon/20110317006220/en/Community-Recovery-and-Enhancement-Act