Fortress Circling NYC’s Stuyvesant Town Draws Sale CloserSarah Mulholland and David M. Levitt
For four years, tenants and creditors have haggled over the fate of Stuyvesant Town-Peter Cooper Village. It could all be over next month.
CWCapital Asset Management LLC, the loan servicer that has been in charge of Manhattan’s largest apartment complex since its owners defaulted on a $3 billion mortgage in 2010, is holding a foreclosure sale on June 13 for $300 million of junior loans. While CWCapital holds that debt and is poised to officially take over the property at the auction, other bidders may come with their own plans to pay off bondholders.
Annual income at the 80-acre (32-hectare) community has climbed by $54 million since Tishman Speyer Properties LP and BlackRock Inc. walked away from their investment after plans to raise rents crumbled, according to Amherst Securities Group LP. With revenue up and New York real estate luring global capital, the property that became a poster child for boom-era excess is attracting suitors including Fortress Investment Group LLC.
“Performance is improving faster than people thought,” said Ed Shugrue, chief executive officer of New York-based Talmage LLC, which oversees $2 billion of commercial real estate debt. “It’s a pretty extraordinary asset and undertaking that just needs time to sort out.”
Stuyvesant Town and Peter Cooper Village, stretching from 14th to 23rd streets on the east side of Manhattan, is a leafy enclave that’s home to more than 30,000 residents. MetLife Inc. built the property in the 1940s with city assistance to house returning World War II veterans.
Tishman Speyer and BlackRock took $1.4 billion in subordinate mezzanine debt in addition to the $3 billion mortgage when they acquired Stuyvesant Town for $5.4 billion near the property market’s peak in 2006. The senior loan was carved up and packaged into bonds with debt linked to all kinds of commercial real estate types and spread over five deals.
CWCapital, a special servicer owned by New York-based Fortress, has been managing the debt on behalf of senior bondholders since the default, the second-largest ever of a commercial-mortgage bond.
It’s a portion of the original mezzanine debt that CWCapital is foreclosing on at the auction. The firm acquired it from Bill Ackman’s Pershing Square Capital Management LP and Winthrop Realty Trust in 2010 after the investors’ attempt to take over the property by putting it into bankruptcy was thwarted by the courts.
In a mezzanine foreclosure, the winner takes over the entity that controls the property, and then needs to pay or resolve the senior mortgage, said Joshua Stein, principal of New York-based commercial real estate law firm Joshua Stein PLLC. CWCapital, as the representative for bondholders, is in effect already the creditor for that senior mortgage.
CWCapital itself has the right to bid for its $300 million stake. In most foreclosures of this type, that’s enough for the creditor to walk away with control, according to Scott Tross, a partner at Herrick Feinstein LLP who specializes in real estate litigation, restructuring and foreclosures. If CWCapital is successful, it would be able to then market the property to pay off holders of the $3 billion senior bond.
“By holding the foreclosure sale, they’re moving one step closer to having something they can actually go and sell to a third party,” Stein said in a telephone interview. “Presumably with all the interest in Manhattan real estate right now, there should be a lot of interest.”
Fortress is in discussions with lenders to finance an acquisition that values the complex at about $4.7 billion, a person familiar with the talks said last week. The firm is seeking partners to contribute about $2.4 billion in cash to the deal, said the person, who asked not to be identified because the talks are private. The size of the transaction could approach $4.9 billion including funding for taxes and fees associated with the purchase, the person said.
One outcome could be that Fortress would pay off the senior note holders and assume ownership of the property at next month’s auction, leading to a much faster timeline than had been anticipated, Barclays Plc said in a note last week.
Gordon Runte, a spokesman for Fortress, didn’t respond to e-mail and telephone messages last week seeking comment on potential plans to buy the property. Brian Moriarty, a spokesman for CWCapital, declined to comment.
While the mezzanine foreclosure and potential Fortress bid move up the timetable for Stuyvesant Town’s resolution to bondholders, the outcome remains cloudy, Credit Suisse Group AG analysts said in a May 14 report. The potential for tenants, city politics or additional bidders to intervene make an immediate sale unlikely, they said.
“There is still considerable uncertainty as to when it will ultimately occur and the path that it will take,” wrote the New York-based analysts led by Roger Lehman.
A potential hurdle to a Fortress bid would be claims that CWCapital, mandated to work in the best interests of the bondholders it represents, would be conflicted in a sale to its parent.
“In theory, there could be a problem,” said Tross of Herrick Feinstein. “You do have a public auction situation, so there is an opportunity for other people to get involved if they want to. So I don’t think it is necessarily a problem.”
Tenants at the 11,000-unit complex have been a vocal force, suing Tishman Speyer to block it from executing its plan to raise the cost of rent-regulated units to market rates and evict illegal occupants. Brookfield Asset Management Inc., a Toronto-based private-equity firm with about $175 billion under management, is working with the tenants on a bid for the property based on converting apartments into condominiums as a way of paying off bondholders.
“Brookfield is still working with the Stuyvesant Town tenants’ association on a bid,” said Andrew Willis, a spokesman for the company.
Any potential buyer also has to be prepared to deal with the intervention of politicians. New York City Mayor Bill de Blasio has made creating and preserving affordable housing a key issue of his administration.
“Stuy Town and Peter Cooper Village are critical bulwarks of affordability for middle-class families,” Alicia Glen, deputy mayor for housing and economic development, said last week. “Our housing plan emphasizes preservation, and with so many affordable units at risk in these developments, the stakes are too high to be hands-off.”
In November 2012, CWCapital and MetLife reached an agreement to settle litigation by tenants alleging rent overcharges. There are 4,311 apartments whose rents are restricted under the settlement, reached after the state Court of Appeals found that tax breaks received by the former owners limited their rights to raise rents to the market rate, said Alexander Schmidt of the law firm Wolf Haldenstein Adler Freeman & Herz LLP, which represented the tenants in court.
The restrictions would expire starting in June of 2020, as each lease runs out, and the landlord would then be entitled to a market rent, Schmidt said. A renter who renews his lease that May for two years would remain rent restricted until 2022, he said.
“Between June of 2020 and May of 2022, they’ll be rolling off unit by unit,” he said in a phone interview.
CWCapital has been able to raise rents on some units. Income at Stuyvesant Town was $177.5 million in 2013, up from $123 million in 2010.
From a bondholder’s standpoint, it shouldn’t matter who is acquiring Stuyvesant Town as long as the value is fair and fully recovers mortgage principal and costs, according to Darrell Wheeler, a debt analyst at Amherst Securities, who estimates the property could be worth $4.6 billion to $5 billion.
“To the extent they can fully cover the loan and its advances, bondholders will not likely have suffered material damages,” he said.
In an attempt to appease bondholders that own debt with that own who don’t want to have their cash returned too early, according to Bank of America Merrill Lynch analysts.
While the mortgage has been in default since 2010, it will be hard to treat the disposition as a distressed sale considering the property’s size, location and increasing revenue, according to Bank of America Corp. That means the seller will likely do everything in its power to appease bondholders, Bank of America analysts said in a May 16 report.
“Given the highly publicized nature of the trials and tribulations of the asset, especially given its rent-controlled status, we think the buyer and the special servicer will do all they can to avoid any appearance of impropriety,” said the analysts, led by Alan Todd in New York.
The property was appraised for $3.4 billion in September, according to Barclays’s analysts, who estimate the complex is now worth at least $4 billion.
The buyer will need to have plenty of cash on hand as banks won’t be willing to make the kind of loan that enabled Tishman Speyer’s boom-era acquisition, a highly leveraged bet that hinged on being able to raise rents.
“You don’t have the capital markets today where you can get crazy financing like you used to be able to,” Matthew Baron, president of Simon Baron Development, a residential developer with projects in Manhattan and Queens, said in a telephone interview. “It’s going to have to be someone with multiple billions of dollars of equity at the very least to take this thing down.”
Manhattan apartment values are 45 percent above the peak reached in 2008, according to Real Capital Analytics Inc. Given the strong appetite for real estate, Stuyvesant Town might not be a tough sell, according Lea Overby, a commercial-mortgage bond analyst at Nomura Holdings Inc. in New York.
“My guess is it wouldn’t be hard to raise overseas funds,” Overby said. “You should be able to get positive momentum from international players on the idea that New York is the best place in the world to invest.”