Nov. 10 (Bloomberg) -- Tishman Speyer Properties LP and BlackRock Realty, owners of Manhattan’s Stuyvesant Town-Peter Cooper Village, need the cooperation of tenants and politicians to restructure $3 billion of debt on the complex, real estate developer Richard LeFrak said.

“It has to be some kind of grand negotiation or compromise in which government and the tenants kind of agree on a way forward,” LeFrak said in an interview yesterday. His company owns more than 15,000 apartments in New York, at least a third under rent regulations similar to Stuyvesant Town’s.

Government-owned mortgage finance companies Fannie Mae and Freddie Mac own the biggest portion of Stuyvesant Town-Peter Cooper Village’s debt, which was packaged with other commercial mortgages and sold as securities. The property doesn’t produce enough income to cover payments and a reserve fund to make up the shortfall will probably be depleted by year-end, Fitch Ratings said Oct. 30.

Fannie and Freddie’s standing as investors make them the obvious leaders in renegotiating loan terms, LeFrak, 64, said. Fannie is also the only company likely to back a loan big enough for another investor to buy the property, he said.

Tishman and BlackRock led a partnership that bought the residential development, the largest in Manhattan, for $5.4 billion at the height of the property boom in 2006. The value has fallen to $1.8 billion, according to Fitch, and the buyers’ plans to increase revenue by raising rents to market rates was thrown into question last month when an appeals court ruled such increases violated the law.

‘Cooperative Effort’

Stuyvesant Town and Peter Cooper Village include 11,200 apartments over 80 acres (32 hectares) from 14th Street to 23rd Street on Manhattan’s East Side. MetLife Inc. developed the property in the 1940s with city assistance because New York needed housing for returning World War II veterans.

“This is such a behemoth, you can’t handle it without being part of some sort of cooperative effort,” LeFrak said.

Bud Perrone, an outside spokesman for Tishman Speyer, and Jon Cearles, a spokesman for Fannie Mae, declined to comment.

Eric Bederman, spokesman for the New York City Department of Housing Preservation & Development, declined to say whether the city will play a role in resolving Stuyvesant Town’s finances.

The department is “absolutely keeping an eye on it,” he said.

City, state and federal officials have stepped in to resolve at least one other New York apartment negotiation: a deal involving Starrett City, a 150-acre affordable housing development in Brooklyn. The property includes almost 5,900 apartments, many under the U.S. Department of Housing and Urban Development’s Section 8 program subsidizing rent based on tenant income.

Paterson’s Action

In July, Governor David Paterson signed legislation allowing owner Starrett City Associates to refinance the complex to pay for $40 million in property improvements and allow the owners to take equity out.

In 2006, the main difference between Starrett City and the Stuyvesant Town-Peter Cooper was the Brooklyn development’s participation in Section 8 and in the state’s Mitchell-Lama affordable housing program, Martin McLaughlin, a spokesman for Starrett City Associates, said in an interview at the time.

Today, the difference is that Stuyvesant Town and Peter Cooper Village are worth less than the debt owed on them and Starrett City’s appraisal was high enough to allow refinancing.

At Stuyvesant Town, the Tishman group’s winning bid was based on the assumption that the buyers could repay the mortgage by raising rents on government-regulated apartments, according to reports by Fitch Ratings. Last month’s ruling by the New York Court of Appeals in Albany said rent increases on about 4,350 homes were illegal because the property was developed with city assistance and tax breaks.

‘Default Imminent’

On Nov. 6, Tishman Speyer requested the loan be sent to a special servicer to help restructure the debt, according to Perrone. Fitch said the property doesn’t produce enough income to pay the debt and a reserve fund probably will be depleted by year-end.

The transfer means “default is considered to be imminent,” said Kevin O’Shea, managing partner in New York and head of the real estate practice for the law firm Allen & Overy.

While LeFrak isn’t involved in the Stuyvesant Town-Peter Cooper negotiations, he knows the properties well. In 2006, his firm made a bid for them and lost to the Tishman group and its partners.

Even as the development’s financial future is in doubt, the 25,000 tenants may be in a stronger position than they were three years ago, LeFrak said.

“There are political reasons to keep it as it was originally thought to be: kind of a middle-income complex,” he said. “Nobody has a crystal ball and it’s going to change a lot as these different interests weigh in.”

To contact the reporter on this story: Sharon L. Lynch in New York at sllynch@bloomberg.net.

Last Updated: November 10, 2009 13:15 EST