A settlement over rental rates at Stuyvesant Town-Peter Cooper Village removes a major hurdle to a sale of Manhattan’s largest apartment complex, almost three years after the property’s previous owners ceded it to lenders.
“The importance of this evening’s announcement should not be diminished,” Harris Trifon, a credit analyst with Deutsche Bank AG in New York, wrote in a note after the law firm for the plaintiffs announced the deal late yesterday. “It has removed the last significant obstacle which needed to be cleared before a sale could take place.”
The ownership of the 80-acre (32-hectare) complex has been in limbo since early 2010, when Tishman Speyer Properties LP and BlackRock Realty LP defaulted on their debt, in part because a legal challenge from tenants prevented them from raising rents as much as they anticipated. By removing the overhang of litigation, future cash flow can be more easily determined to establish a value for the property.
The settlement calls for CWCapital Asset Management LLC, which controls the entity that now owns Stuyvesant Town, to set aside $68.75 million to reimburse tenants and former tenants at the rent-stabilized property who had been overcharged since 2003. MetLife Inc. (MET), which sold the complex to Tishman Speyer and BlackRock in 2006, will contribute $10.5 million of that sum.
CWCapital also agreed to forgo additional rent that could have legally been charged over the past three years, a sum that plaintiffs estimate at $75.7 million. The deal, which covered 4,300 apartments, also established what CW and any eventual owner can charge for the units between now and June 2020, when they may revert to market-rate rents.
The cash paid to each of the about 21,000 tenants covered in the lawsuit will amount to about $3,200, according to the plaintiff’s lawyers.
“CWCapital’s position has been that it needed to resolve this issue before it considered what the ultimate disposition of the property may be,” Greg Cross, a lawyer for CWCapital, said in a telephone interview. “When the settlement is approved, it will give us much more certainty with respect to rents and the cash flow on the property.”
CWCapital represents investors of the defaulted $3 billion senior loan on the complex, which spans from 14th Street to 23rd Street on Manhattan’s East Side. As the so-called special servicer, it is advancing interest payments on the loan to investors as it manages the property, according to data compiled by Bloomberg.
Tishman Speyer and BlackRock paid $5.4 billion for Stuyvesant Town, a record New York commercial real estate deal at the time. Tenants sued MetLife and Tishman Speyer in 2007, claiming the companies improperly forced at least one-fourth of the complex’s residents to pay market rents while the owners received more than $25 million in tax breaks.
Yesterday’s settlement assumes that all 4,300 units had been rent stabilized since January 2003 and turned over no more than once since then, according to Cross. Fewer turnovers mean fewer opportunities for the landlord to have legally increased the rent under state rules. The damages paid by CW and MetLife equal the difference between the legal rent and what they actually charged in those years.
Once the settlement is approved, CW has agreed to “preferential rents” for tenants in the class who are still living in their apartments, Cross said. Those tenants’ rent will be based on the assumption that the units have turned over no more than three times since 2003. Tenants whose apartments turned over fewer times, or not at all, will pay less. The preferential treatment applies to about 40 percent of the plaintiffs, Cross said.
When units become vacant after the settlement, the landlord may set rent based on the actual number of times that the property turned over since 2003.
“The agreed-upon rental formula will potentially raise the rental rate on the units in question, relative to what is currently being charged, generating more property-level income,” Roger Lehman, an analyst at Credit Suisse Group AG, wrote in a note this morning.
Tenants at the complex are among the interested buyers. The Stuyvesant Town-Peter Cooper Village Tenants Association has been working with Toronto-based Brookfield Asset Management Inc. (BAM/A) on a plan to acquire the complex and convert apartments into condominiums as a way of paying off bondholders.
Frustrated that CW has not listed the property for sale, tenants appealed directly to bondholders last month, asking them in a letter to compel the servicer to dispose of the property.
A hearing on final approval of the settlement is set for April 2013, and CWCapital expects that any appeals may take an additional year to 18 months to resolve, Cross said. That, coupled with required repairs to damage from Hurricane Sandy, means the complex probably won’t reach the sales market until 2014, Trifon wrote in his note.
“This is the beginning of the end,” he wrote.
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