The Tishman Speyer/Black Rock Realty partnership which bet $5.4 billion that they could convert Stuyvesant Town and Peter Cooper Village to market rate housing in a booming real estate market that no longer exists moved one step closer to a total loss on Friday when it missed a $16 million mortgage payment. The owners announced in early November when they transferred control of the mortgage to a special servicer that their cash flow wasn’t enough to cover debt service, and they expected their reserves to run out at the end of December.
The partnership says it’s going to continue “good-faith negotiations” with CWCapital, the special servicer, on retructuring the debt, but it doesn’t look promising.
The financial assumptions which justified the purchase rested, heavily, on plans to deregulate the compound which were derailed when a court decided in October that neither the current owners or previous owner Met Life had the right to deregulate while accepting J-51 tax breaks on the properties. Now, not only are tenants entitled to lower rents, rebates of past overpayments, and damages, the owners are facing a tenant class action lawsuit. What’s more, the current insufficient cash flow comes from tenants still paying the illegally raised rates, which isn’t going to go on forever.
According to the tenants’ lawyer, if the partnership defaults, the liability for the rent overcharges will transfer to creditors, which include Fannie Mae, Freddie Mac, the Church of England and the California Public Employees’ Retirement System.
Balanced against that, there’s very little long term upside to the owners sticking with the property. They owe $3 billion on a property which is only worth $1.8 billion now, according to debt rating agency Fitch Ratings, and as the owners pointed out Friday, Tishman Speyer and Blackrock have none of their own skin in the game at this point
The joint venture has been engaged in discussions with CWCapital, the special servicer acting on behalf of the lenders, and hopes to continue good-faith negotiations toward a potential restructuring of the debt. The debt for Stuyvesant and Peter Cooper Village is secured exclusively by the property and is not cross-collateralized with any others. It does not impact, nor is it impacted by, any other properties in which Tishman Speyer or BlackRock may be invested.”
Tishman Speyer only had $114 million of its own funds invested, and, according to Crains, they wrote that off last year.
What the putative owners do have a stake in is being allowed to continue to manage the property, something they collect a sizeable fee for but have been, according to tenants, doing poorly and spending decreasing amounts of money on. Given that, expect “good-faith negotiations” to go on for a while, if the special servicer is willing.