Pershing Square Capital Management LP and Winthrop Realty Trust’s $45 million investment in Manhattan’s Stuyvesant Town-Peter Cooper Village is in jeopardy after the companies failed to stop a planned foreclosure sale.
A New York state appeals court rejected a request by Pershing, led by investor Bill Ackman, and Winthrop for a stay of the Oct. 4 foreclosure by senior debt holders, according to one-page order issued yesterday. The companies had sought to stop the auction after a lower-court judge blocked their own attempt to take control of the 80-acre apartment complex.
The foreclosure by CWCapital Asset Management LLC, which represents holders of the $3 billion senior mortgage, would wipe out Pershing and Winthrop’s $45 million investment in junior loans, the venture, PSW NYC LLC, has said in court papers. While they can’t delay the auction, the companies will continue to pursue their appeal of the lower court ruling, according to a statement yesterday. They plan to seek damages if they succeed.
“I don’t view this as being an extremely strong hand right now for Ackman,” said Mark Edelstein, chair of the real estate finance and distressed property practice at New York law firm Morrison & Foerster LLP. “But I never count Mr. Ackman out.”
Greg Cross, an attorney for CWCapital, said in an interview that yesterday’s ruling “reaffirmed” the lower-court decision and that next week’s foreclosure will proceed. The sale comes almost nine months after Tishman Speyer Properties LP and BlackRock Inc. defaulted on their loans for Manhattan’s biggest residential enclave, which is home to about 25,000 tenants.
An appeal on the lower court ruling blocking the Pershing and Winthrop venture from taking control won’t be heard for a “few months’ time,” Ackman said in an e-mail.
“The senior lenders are going to be exposed to whatever damages we suffer,” Edward Weisfelner, an attorney for Pershing and Winthrop’s joint venture, said in a phone interview. “We still remain convinced we will prevail.”
A win on appeal would be a “Pyrrhic victory” for the joint venture, said Edelstein, who isn’t involved in the case.
“By the time he wins, he’s lost, because the property’s gone,” he said.
Getting damages would also be difficult because the partnership would have to demonstrate how much it lost by not being able to foreclose and proceed with a plan to convert the property to co-operative apartments, he said.
“How can you tell how many people would have bought -- and at what price?” Edelstein said. “That’s a very high burden to prove to a court what would have happened.”
The Pershing-Winthrop group could realize some money from the foreclosure auction if the property sells for more than the $3.67 billion that senior lenders are owed, Cross said. That surplus would be “available to distribute to PSW,” he said.
The property, however, probably will trade for no more than $2 billion, said Joshua Stein, principal of Joshua Stein PLLC, a New York-based independent commercial real estate law practice that isn’t involved in the case.
Stein said a successful appeal of the Sept. 16 lower-court decision is unlikely, as is the chance that the outcome of the Oct. 4 foreclosure sale will be set aside.
“As a mezzanine lender, your main event consists of making sure there’s enough value in the asset to exceed the first mortgage,” Stein said. “If that doesn’t happen, you’re ultimately supposed to get stuck. That’s the risk you own.”
By buying mezzanine, or junior, debt, Pershing and Winthrop sought to take control of the property by foreclosing on the legal entity that owns it. Had they done so, they could have placed the entity in bankruptcy, a move that could harm senior lenders’ ability to get paid the full $3.67 billion they are owed, CWCapital’s lawyers argued in court.
The agreement that governs how different creditors get paid doesn’t allow for Pershing and Winthrop to execute their plan, the lower court ruled.
CWCapital can “credit bid” up to $3.67 billion at the auction, Stein said. Should CW take control of the property at the Oct. 4 sale, it will appoint Rose Associates Inc. as the new manager of the apartment complex, Cross said. Rose has been advising CWCapital since February.
The auction would remove much of the uncertainty surrounding Stuyvesant Town, Stein said. Creditors and property developers have been lining up with plans for its future since January’s default by Tishman and BlackRock, who bought the complex in 2006 for $5.4 billion.
“By going forward with the sale, I get rid of Ackman-Winthrop almost certainly,” Stein said. “I get rid of all these people who think they have an opportunity to do something with the asset. Then they don’t have all these people buzzing around with ideas for how to take control.”
The appeals court case is Bank of America NA v. PSW NYC LLC, 10-651293, New York State Supreme Court, Appellate Division, First Department (Manhattan).