The soap opera at 441 Stuart St. began with a spat between neighbors. It boiled over with a fight about less than 100 square feet of space. And it will end later this month, with a foreclosure auction.

Chicago-based Corus Bank moved to foreclose on the 11-story Back Bay building earlier this spring, after the building’s developers defaulted on a $42 million construction loan.

Unlike the nearby John Hancock Tower, 441 Stuart St. won’t be remembered as a cautionary tale on the dangers of leverage and catastrophically bad market timing. This building was teed up to come online while the market was still rocketing skyward. It would have – if the developers had not gotten embroiled in a street fight with a tenant.

The building, at the corner of Stuart and Dartmouth streets in the Back Bay, sold for $37.5 million in May 2004. The buyers – a partnership between the Boston firm Gold Associates and Apollo Real Estate Advisors’ Value Enhancement Fund V (VEF) – steamed ahead with plans to convert the upper eight floors of the under-leased Class B office building into 111 luxury condominium units.

The location was one of the best in Boston: The 163,000 square-foot Art Deco building, originally built in 1937 for the New England Power Co., is sandwiched between Back Bay station and the Copley Plaza Hotel.

Gold and VEF secured a $42-million construction loan before they even submitted a formal project proposal to the Boston Redevelopment Authority. Work was set to commence in mid-2005.

Then the trouble started.

A Woman’s Gym Scorned

Healthworks leases 33,000 square feet at 441 Stuart St. The women’s gym has lease options that run until 2025. When Gold and VEF secured their final zoning appeals, Healthworks President Mark Harrington filed suit. In a 2005 affidavit, Harrington argued the condo conversion project would lessen the value of the gym’s long-term lease. Harrington was paying nearly $1 million per year in rent, the affidavit said.

Then, Harrington relented, in October 2005. He dropped opposition to the condo project in exchange for significant concessions from Gold and VEF. The developers agreed to sell Harrington his space as a commercial condo. The settlement stipulated a sale price of $6.5 million for the gym, along with 6,100 square feet of first-floor entrance space. Additionally, the developers would pay Harrington $500,000 and replace the HVAC system.

Gold and VEF would be selling space at $166 per square foot they’d bought a year before for $229 per square foot. Such was the cost of getting their condo project – dubbed the Copley Residences – off the ground.

Keep Out!

Except that the Copley Residences didn’t get off the ground. The two sides were soon at each other’s throats again. The sale of the Healthworks condo was supposed to close in January 2006. By May, each side was claiming the other had violated the 2005 settlement: the developers hadn’t sold to Harrington, and he’d refused to let contractors into his unit.

Without access to the Healthworks space, the entire redevelopment project was left on ice. Contractors had to reinforce the beams and bracing on Harrington’s lower floors to support the work upstairs. They also had to run plumbing and wiring up through his unit.

The feud escalated from there. Harrington had planned on doing $2.2 million in improvements after taking control of his condo space. He didn’t wait on his landlords, though. He allegedly pulled a building permit for his planned renovations, and put the permit in the development partnership’s name. The building’s owners retaliated by threatening to evict the gym.

Things came to a head in June 2006, when Gold and VEF filed the master condo deed, six months after the closing was to have taken place. The developers said they had shaved 100 square feet off the Healthworks condo unit to make it conform to the state building code. Harrington balked, saying the developers didn’t have the right to change the terms of their settlement.

Meanwhile VEF, which had bankrolled the building’s first mortgage and mezzanine financing, was gradually diluting Gold Associates’ ownership stake. In September, the firm seized the initiative.

VEF informed Harrington that, instead of selling him his condo unit, they were putting the entire building, and its development permits, on the market. Harrington returned to court two days later and sued VEF and Gold again. That lawsuit is still wending its way through the Suffolk County courts.

Mud Flies As A Loan Comes Due

In court filings, Harrington’s lawyers blamed VEF for orchestrating a series of “delays and breaches” intended to “gain leverage in its ongoing dispute” over the commercial condo sale. Lawyers for VEF and Gold retorted that Harrington had launched a “willful campaign of seeking to impose delay upon the redevelopment project.”

Early on in the suit, Harrington succeeded in getting a judge to slap a memorandum of lis pendens on 441 Stuart. That maneuver effectively blocked the sale of the nearly-empty building while the two sides remained deadlocked in court. And while they shot snippy legal briefs at each other, two things happened. Firstly, the market turned. And secondly, the developers’ construction loan matured.

Corus Bank’s $42-million construction loan came due in July 2007. The construction project it had bankrolled wasn’t generating any cash for the developers. Hopeful for a settlement, Corus extended the maturity date twice – to the end of 2008. Its patience, it appears, has been exhausted.

The foreclosure auction, scheduled for April 28, will wipe out VEF’s equity. The fund invested $23.7 million in mortgage financing and $9 million in unsecured mezzanine funds. There are no mortgage termination documents on file with Registry of Deeds.

The auction also puts Harrington and Healthworks back where they started. The building’s new owner will be under no obligation to sell Harrington his commercial condo space because Corus never subordinated its loan to the 2005 lawsuit settlement. The gym’s initial lawsuit opposed the condo project because in-building office traffic was critical to its business; the building in which it maintains a long-term lease is now gutted and virtually empty.