Stuytown Creditor Trustees Sue to Stop Foreclosure
Trustees representing senior creditors of Manhattan’s Stuyvesant Town-Peter Cooper Village sued to block a foreclosure auction led by Pershing Square Capital Management LP that may land the complex in bankruptcy.
The plan by Bill Ackman’s Pershing Square and Winthrop Realty Trust to take control of the property after buying $300 million of mezzanine debt violates terms of an existing agreement among creditors, trustees Bank of America Corp. and U.S. Bancorp. said in the complaint. The agreement gives senior mortgage holders priority over junior lenders, the suit said.
The Pershing and Winthrop venture scheduled an Aug. 25 auction to foreclose on the equity interests of the company that owns Stuyvesant Town and is responsible for paying the $3 billion first mortgage. If successful, the venture will place that entity into bankruptcy, and avoid paying the mortgage on Manhattan’s biggest apartment complex, according to the lawsuit.
“The future of this iconic enclave in the Borough of Manhattan is in imminent jeopardy,” lawyers for Bank of America N.A. and U.S. Bank said in the complaint filed in New York state Supreme Court in Manhattan.
Pershing and Winthrop paid $45 million for the mezzanine loans. They want to restructure the senior mortgage on the 80- acre property and convert the apartments into co-ops, Ackman said in an interview last week.
As junior creditors, Pershing and Winthrop must pay senior lenders $3.66 billion, which covers the first mortgage plus interest and penalties, before they do anything that might put them in control of the property, according to today’s lawsuit. Trustees for the senior creditors, acting “by and through” special servicer CW Capital Asset Management LLC, have already sought to foreclose on the complex in a separate lawsuit.
Ackman didn’t return e-mails seeking comment. Michael Ashner, chairman and chief executive officer of Boston-based Winthrop Realty Trust, said the claims by the banks are without merit.
“A number of law firms have reviewed this language on our behalf,” Ashner said in a telephone interview. “All of them have to come to the conclusion that their interpretation is unsupported, it’s incorrect.”
The joint venture hired bankruptcy lawyers from Kirkland & Ellis to represent them once the Aug. 25 foreclosure auction is complete, according to the lawsuit.
Ashner declined to comment on whether the joint venture intends to seek bankruptcy if it gains control of the property.
“We fully expect the court to validate the legitimacy of our rights to pursue our remedies so that we can move forward to provide a permanent, affordable housing solution for the residents of Stuyvesant Town-Peter Cooper Village,” he said.
Lenders said in court papers that if Pershing and Winthrop are not stopped from conducting the auction, the lenders’ ability to recover the $3.66 billion they’re owed “will be imperiled and the property and its 25,000 residents will be thrown into disarray.”
Tishman Speyer Properties LP and BlackRock Inc. bought Stuyvesant Town-Peter Cooper Village for $5.4 billion in 2006, a record New York commercial real estate deal at the time. They stopped payments on a $3 billion senior mortgage in January after the development’s value sank and the owners failed to raise rents as fast as anticipated.
Mezzanine loans are higher-interest debt tied to a borrower’s equity interests in commercial buildings. They are usually backed by a stake in the entity that owns the property, rather than by a lien on the property itself.
“The motivation for what they’re doing is clear,” said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School in Philadelphia, said of the senior creditors’ lawsuit. “This property is likely in the long run to have the benefit of appreciation of overall real estate in New York City. The uncertainty of what could happen in auction pricing is exactly what they are attempting to stop.”
Whoever ultimately wins control of the complex must determine its future with the 25,000 tenants who live there, said New York City Councilman Daniel Garodnick, a resident of Peter Cooper Village.
“No matter where this litigation leads, the tenants have a central seat at the table, and are prepared to offer their own restructuring plan,” Garodnick said in a statement.
Garodnick and other tenants have been trying to piece together a plan that would allow them to buy the complex and turn some units into co-operative apartments or condominiums that residents could purchase. They had been seeking investment partners since February.
“We are disappointed that ownership of the property has degenerated into litigation, but we are not at all surprised,” Garodnick said. “As the creditor parties fight this one out, the tenants are prepared to join with the right partner to help us achieve the goals we have articulated.”
The case is Bank of America Corp. v. PSW NYC LLC, 10- 651293, New York State Supreme Court in Manhattan (New York County).