Stuyvesant Town Bondholders Face Losses From Court Decision

Bondholders are one step closer to having to reimburse residents of Manhattan’s largest apartment complex for excessive rental costs after a court decision last week, according to Deutsche Bank AG.

The tenants are seeking more than $215 million for past rent overcharges plus legal expenses and damages, according to Deutsche Bank. A New York state appeals court upheld a lower court’s decision to deny MetLife Inc’s. motion to dismiss a class-action lawsuit brought by tenants of the 80-acre development, Stuyvesant Town-Peter Cooper Village.

The ruling “is a negative for holders of the related CMBS debt,” the analysts, led by Harris Trifon wrote in a report yesterday. “The only real question is how negative.”

Real estate developer Tishman Speyer Properties LP and asset manager BlackRock Inc. paid $5.4 billion for the properties in 2006 with plans to convert rent-regulated units to market rates, which was financed with $3 billion in debt that was bundled with other commercial mortgages and sold as bonds. Tishman and BlackRock walked away from the project in January of last year after the value of the property fell and they were prevented from raising rents.

Tenants sued MetLife and Tishman in 2007, claiming the companies improperly forced at least a quarter of the apartments to pay market rates while receiving more than $25 million in tax breaks. In October 2009 the New York Court of Appeals in Albany ruled that the increases violated the law. MetLife had been the owner since building the property in the 1940s with city assistance to house returning World War II veterans.

Investors Responsibility

Investors in five bond offerings that each contain slices of the $3 billion mortgage could share in the responsibility to pay back tenants, though the amount will likely be “considerably lower” than the headline number suggests, Bank of America Corp. analysts said in a Nov. 4 report.

“We don’t view this as a significant issue for investors that own bonds at, or near, the top of the capital structure,” said the analysts led by Alan Todd in New York.

The securities with the highest concentration of the Stuyvesant town loan are a $7.9 billion bond sold by Wachovia Corp. and a $4.4 billion offering issued by Merrill Lynch and Co., both sold during the market’s peak in 2007, according to data compiled by Bloomberg.

Cut to Junk

Junior AAA classes from those two deals, which have been cut to junk, are most vulnerable, according to Deutsche Bank. The so-called AJ portion of the Wachovia offering, which holds a $1.5 billion piece of the mortgage, is currently valued at about 60 cents on the dollar, according to Deutsche Bank.

Last week’s decision, by the state’s Appellate Division, First Department, affirmed an Aug. 5, 2010, ruling by New York State Supreme Court Justice Richard Lowe III to deny a motion to dismiss the case against MetLife.

The rights of a rent-regulated New York tenant are always superior to any owner, said Joshua Stein, principal of New York-based commercial real estate firm Joshua Stein PLLC. “Sooner or later, the tenants will get their overcharges back from someone,” Stein said. “The complicated part is who gets stuck.”

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