Less than two months after completing construction of a 10-story condo and retail building in the heart of Tribeca, developers of the still-vacant project have found themselves faced with a multimillion-dollar foreclosure suit.

Mitchell and Gregg Rechler, of R Squared LLC, defaulted on loans for their 16-unit co-op and retail project at 34 Leonard Street, according to a suit filed with the State Supreme Court.

Midtown-based lender IStar Financial claims the developers defaulted on the balance of a $37.5-million loan—roughly $32.3 million—on April 15, just two weeks after the project at the corner of Leonard Street and West Broadway was completed. IStar Financial did not return calls seeking comment.

“The developer is currently in discussions with the lender to determine the best steps for the future of the project,” a spokesman for R Squared said in a statement. “R Squared completed the luxury boutique residential building on budget and on schedule. Unfortunately, due to the current market conditions, sales have been limited.”

In April 2007, R Squared borrowed $29.2 million to cover the construction of the building, which occupies the lot where Buster’s Garage bar once stood, and $8.3 million for its design and marketing. Two years prior, initial designs called for a much larger building—40 feet taller and 25 feet wider—than what was eventually built. Faced with community board opposition, the design was later scaled down to 120 feet tall and 40 feet wide.

As of late last month, only five of the building’s 16 residential apartments—which range from about $1.9 million for a one-bedroom to $8.45 million for a 5,000-square-foot penthouse—had been sold, and none of those sales had actually closed. The sales office for the building is closed for the time being, and The Marketing Directors, residential brokers for the building, referred questions on apartment sales to the Rechlers.

Manhattan-based Sandaro Realty, which controls the $900,000-a-year ground lease on the building’s lot, is also named in the suit, as are three of the developers’ subcontractors.

Bay Crane Services, Barker Steel and Daurio & Rossi & Sons Construction all hold liens on the project for work performed.
The 4,100-square-foot retail space on the ground floor had also not yet been leased.

A broker for Ripco Real Estate, which has been shopping the space to prospective tenants since January, said he did not know how the foreclosure suit would affect leasing of the space.

“There has been a fair amount of interest,” the spokesman said, though no business has yet jumped at the $922,000 annual rent.

R Squared owns and operates over 7 million square feet of property throughout greater New York, according to the company’s website, including a recently completed 59-unit luxury apartment complex in Hoboken and a 360,000-square-foot shopping mall in Commack, L.I.