AMERICAS NEWS: Down goes Stuy Town

The default of Tishman Speyer and BlackRock’s Stuy Town deal could result in an immediate revaluation of the property by as much as 70 percent. By Zoe Hughes. PERE magazine, February 2010 issue

When Tishman Speyer and BlackRock acquired the multifamily complex of Stuyvesant Town and Peter Cooper Village in 2006 for $5.4 billion, many suspected they were overpaying.

Now though the industry will find out exactly how much that price should have been, after the owners missed a $16 million debt payment in January.

A $3 billion senior mortgage secured by the property had already been sent to special servicers in November 2009 amid mass speculation of an imminent default by Tishman and BlackRock. But industry professionals told PERE they now expect special servicer CWCapital to initiate an immediate valuation appraisal following the January default, if only to avoid hefty servicer advances.

Stuy Town appraisal
reduction likely soon

Once a CMBS loan defaults on its interest payments, it is standard practice for a special servicer to pay bondholders out of their own pockets until the debt can be restructured. The sheer size of the Stuy Town loan would be a bitter pill for any special servicer to swallow, hence mounting speculation CWCapital will order a valuation appraisal before the end of February. CWCapital declined to comment citing confidentiality.

Current valuation figures for Stuy Town could range anywhere from $1.5 billion to just over $2 billion, according to market sources – equivalent to a potential loss in value of up to 70 percent in little more than three years.

Manus Clancy, managing director of CMBS data firm Trepp, said appraisal reductions were a normal course of action for special servicers and had taken place for some assets owned by mall REIT General Growth Properties following its bankruptcy (although interest payments were kept current) and the Riverton apartment complex in Harlem.

Riverton followed a similar strategy as Stuy Town, in converting rent stablised apartments to market rate units. Acquired by Rockpoint Group and Stellar Management in 2006, the Riverton deal was foreclosed on by lenders last year and had an appraisal reduction from $225 million to roughly $125 million, according to Clancy. The appraisal allowed the special servicer to reduce by approximately half the interest payments it was obliged to advance to bondholders.

In the case of Stuy Town, Clancy said an appraisal reduction – and subsequent reduction in interest payments – would leave bondholders facing shortfalls. Trepp estimates “multiple classes” of bondholders for the $3 billion senior mortgage could be wiped out by the default and appraisal reduction, possibly extending up to the B classes. Holders of the remaining mezzanine debt should also expect little value from their investment in the deal.

Tishman and BlackRock said in a statement they were working with CWCapital to continue “good-faith negotiations toward a potential restructuring of the debt”. Tishman stressed the debt for Stuy Town, as the Manhattan East Village complex is widely known, was “secured exclusively by the property and [was] not cross-collateralised with any others. It does not impact, nor is it impacted by, any other properties in which Tishman Speyer or BlackRock may be invested.”

GIC is the latest LP to count the cost of investing in the Stuy Town deal

The Stuy Town deal is probably the most anticipated real estate failure of the decade. For more than a year, industry professionals have been warning of imminent default as the complex’s $650 million reserves rapidly depleted and Tishman Speyer and BlackRock’s strategy of converting rent stablised apartments to market rates faced assault from the New York legal system.

Nevertheless, it’s something limited partners were still watching closely as they assessed damage to their own investments in the deal, with the Government of Singapore Investment Corporation the latest LP to book losses on the ill-fated purchase.

According to a Reuters report, GIC has written down its investment of $100 million in Stuy Town, although a spokesperson declined to comment further. GIC also owns a $575 million mezzanine loan backed by the property, the Wall Street Journal reported last October citing unnamed people familiar with the matter.

According to various media reports, GIC recognised the losses following the October ruling by the New York Court of Appeals that Tishman, BlackRock and previous owner MetLife improperly deregulated rent stablised properties at the residential complex.

GIC joined Florida State Board of Administration and California State Teachers’ Retirement System in writing down its investment in the deal. In September, Florida SBA revealed it was carrying its $250 million investment in Stuy Town at “zero cost valuation”, while CalSTRS had permanently written down its $100 million investment in the New York deal, according to a performance review of its real estate investments first revealed by PERE. Tishman invested $112 million of equity in the deal, sources have previously confirmed. BlackRock’s equity investment was unclear at the time of press.