There's now a common bond between Stuyvesant Town-Peter Cooper Village and a sea of new homes in the Las Vegas suburbs: mortgage default.
Last week, the giant real estate firm Tishman Speyer and its investors missed the full monthly debt payment on their $3 billion mortgage, triggering default and a new era of uncertainty at the 11,200-apartment complex.
A small city in its own right, Stuy Town has always been more of an emblem of broader real estate trends than just another set of red-brick buildings. It emerged in a postwar building boom in the 1940s, and sold in late 2006 at the exuberant peak of the market for the highest price ever paid for a single property.
Now, as a restructuring looms over what is presumably the largest ever default on an individual property, a fight to shape the complex's long-term place in Manhattan is in its nascent stages. Tenants and elected officials hold that the historic property should stay a permanently affordable home for middle-class New Yorkers-a refuge insulated from the long-term upward march of rents. On the other side are the investors who bought the complex without permanent affordability requirements, and are presumably cool to the idea of anything that might further injure their red-soaked balance sheets. Already, tenants are looking to buy the property themselves; real estate firms are swirling, looking for involvement; and the Bloomberg administration is signaling a new willingness to intervene, with all looking to steer Stuy Town in one direction or another.
"There's a mountain of interest amongst the residents," Al Doyle, president of the Stuyvesant Town and Peter Cooper Village tenants association, said of a sale. "We'd like to try to be able to influence-to have a say in our housing situation."
A Restructuring Awaits
The question of Stuy Town's future is not a new one, and indeed, just three years ago, it seemed to be answered pretty definitively. With the Tishman Speyer-led team in control of the property's fate thanks to their superhigh bid, the East Side property was on course to be a luxurious Manhattan enclave, complete with shiny granite, a new movie theater, a thick forest of added trees and shrubbery and, eventually, a full stock of market-rate-paying renters.
This route was chosen-understandably, given the $5.4 billion MetLife and its shareholders received-in the face of a tremendous effort by tenants and sympathetic lawmakers to publicly pressure MetLife into keeping much of the complex affordable. Rallies with bullhorns and public grandstanding by every politician from Senator Chuck Schumer to Council Speaker Christine Quinn were apparently not enough to affect the end result.
But the reckoning of a bid with audacious assumptions about rent growth and apartment deregulation has opened the door once again to a debate over affordability. With the cash shortage-the owners assumed that by 2011 the property would be generating $480 million annually; this year, analyst firm Realpoint estimates, it will have just $285 million or so in revenue-a default now means that Tishman Speyer and its partners no longer control the property. A restructuring awaits; Tishman Speyer wants to hold on to the property, but it's not uncommon for owners in large foreclosures to be removed.
Post-Tishman Possibilities
Just what a restructuring would look like is tremendously murky, but the fate of the complex for now lies in the hands of a player that has suddenly become a new force in New York real estate: CW Capital. The Massachusetts-based real estate firm is the "special servicer" meant to sort through all the various debt holders on the $3 billion mortgage, which was chopped up into pieces and sold as bonds of a commercial-mortgage-backed security in 2007.
Given that the complex is now valued by analysts at about $2 billion-a surprise court decision that ruled that the owners were not allowed to deregulate stabilized units has helped keep the price low-many of the bondholders are sure to take a hit of some sort. It will be up to CW Capital, at the advice of various bondholders who have the most at stake, to figure out just what to do. CW Capital declined to comment.
Going forward, questions abound for the special servicer in the immediate future, particularly in the wake of last year's court decision that has left murky waters: Will the owners renovate apartments? How many vacant apartments will they rent, and at what prices? What will they do about litigation related to the rent-regulation lawsuit?
And, perhaps most significantly for Tishman Speyer in the short run: Who will manage the property? Tishman Speyer, which only put about $56 million into the deal itself, currently gets a fee to manage the property. Often in foreclosures, the special servicer removes the manager, given that it could have skewed incentives (to cut back on maintenance, for instance), particularly if it's unlikely to emerge as the owner after a restructuring.
Then there is the question of who will own the property, and how it will be restructured. A Deutsche Bank report from November said that the "most likely workout strategy," in the view of the authors, was a bankruptcy filing that could leave the Tishman Speyer team in, with a restructuring in which the mortgage holders take a hit. The costs of selling the property would be high, the authors, Richard Parkus and Harris Trifon, pointed out, and there is uncertainty over the value in the wake of the court decision.
Another option would be to foreclose and to flip Stuy Town, as the debt holders at the 1,200-unit Riverton complex in Harlem have asked for on that distressed property; this move would clearly remove Tishman Speyer. (By comparison, Riverton has been enmeshed in the courts for nearly a year, after owner Stellar Management defaulted on a $225 million loan.)
It's hard to say how smoothly everything will go over, but as a general rule, the more angry investors involved, the greater the potential for lengthy legal battles. And there are a lot of investors who have lost tens, if not hundreds, of millions (to name a few: a state of Florida retirement fund; two California retirement funds; the Church of England; and SL Green, New York's largest office landlord).
Daniel, Fannie and Freddie
Whatever happens, the tenants, who make up a large and vocal constituency for any of the local elected officials, have made clear that they want a seat at the table, and that they want affordability guarantees for the long term (which is not to say that any of the private firms involved have any obligation to listen).
The strategy thus far of the elected officials and the tenant association has been to pressure Fannie Mae and Freddie Mac, who hold a considerable amount of the debt on the property-local Councilman Daniel Garodnick said he believes it to be about $2.1 billion-to push for a solution with affordability, perhaps through a sale to the tenants.
They don't shy from playing the bailout card, as the federal government committed up to $200 billion in 2008 to back the two government-chartered companies.
"I believe they're significant players in any restructuring," Mr. Garodnick said. "If they choose to wield their influence-taxpayers bailed them out in the last 12 to 18 months and supported their restructuring-we expect that they will stay true to their charter and find a way to support the tenant goals here. ... There is no limit to their influence."
Fannie Mae and Freddie Mac counter that they do not have a legal say in the matter. They hold senior debt on the property and would be the first to be repaid in a sale, and thus, legally, the special servicer is obligated to listen to the less-senior debt holders first. (A spokeswoman for Freddie Mac said the firm does not expect losses on the property, as its holdings are credit-enhanced, a form of bond insurance.)
Still, Mr. Garodnick, who lives in Peter Cooper Village, isn't buying it, and the strategy remains to apply pressure. The tenants association launched a postcard-writing campaign to both companies, along with CW Capital, requesting a seat at the table. And Mr. Garodnick helped put together a letter from numerous elected officials, including Representative Carolyn Maloney, requesting the cooperation of Fannie and Freddie (to which the companies replied that they do not have control).
This strategy-lean on Fannie and Freddie until they cooperate with tenants, instead of selling for a higher return-worked in the Bronx on a property in which Fannie owned a $29 million loan. Affordability advocates rounded up numerous elected officials, including Senator Schumer, to repeatedly hold press conferences pressuring the companies. The result was a sale to Omni New York, an affordable-housing developer.
"We thought they would like to do something that was preservation-minded, but it was quite a bit of a struggle-quite a bit," Dina Levy, policy and organizing director for the Urban Homesteading Assistance Board, a nonprofit group involved, said of Fannie.
Still, Fannie and Freddie also receive much pressure in Washington to achieve financially solvency, a competing aim of theirs.
And Then There's Mike ...
Then there is the issue of the Bloomberg administration, and what role it will play, if any. Officials there are looking at the property closely, though it is premature to say how they could intervene if they wanted to, as, for now, it is a fully private deal. In 2006, administration officials looked at backing a tenant-led effort to buy the property, but ultimately backed off, preferring to direct its housing money for building new units in the outer boroughs as opposed to affordability preservation in the Manhattan property, which officials said at the time was more expensive.
Costs of preservation at the complex have fallen, though, and last week the commissioner of the city's Department of Housing Preservation and Development, Rafael Cestero, issued a statement saying it is the city's "overriding concern" that the apartments at Stuy Town "remain a key component of the city's affordable-housing stock for generations to come."
Of course, whatever occurs from the restructuring, it's not going to happen overnight, and it could easily remain a private transaction. All the bullhorns and bluster demanding affordability in 2006 had no effect on the result, and the private firms that have the most at risk generally have an obligation to see the maximum return.
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