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An Apartment Complex
Teeters
One of the biggest, most
high-profile deals of the commercial real-estate boom is in danger
of imminent default, say people familiar with the
matter, signaling the beginning of what is expected to be a wave of
commercial-property failures.
The sprawling Manhattan apartment complex known as Peter Cooper
Village and Stuyvesant Town -- acquired for $5.4 billion in 2006 by
a venture of Tishman Speyer Properties and a unit of BlackRock Inc.
-- is running out of cash. As of the end of September, it had $33.7
million left of the $400 million in interest reserves set up to
service its debt, according to the people familiar with the matter.
At its current burn rate of about $16 million per month, the
reserve could be depleted before the end of the year, the people
said. Others have said the venture could avoid default until
February.
The spokesman for Tishman Speyer declined to comment on behalf of
the partnership.
The ownership, which includes a roster of high-profile investors
from the Church of England to the California Public Employees'
Retirement System, has no current plans to inject more capital into
the venture, according to the people. Lenders who financed the deal
first projected the complex's net operating income would triple to
$336 million in 2011 from $112 million in 2006, according to
Deutsche Bank AG. But net income is projected to be $139 million
this year, according to Realpoint LLC, a credit-rating
agency.
Investors who bought into the deal were confident that real-estate
manager Tishman Speyer would be able to greatly boost profits by
raising rents in Manhattan's sizzling apartment market. But today,
the 56-building, 11,000-apartment property is suffering from a
slowing New York economy, a lawsuit that has hindered the owner's
ability to convert rent-controlled units to market rentals, and the
debt load.
Realpoint estimates that the property is worth only $2.1 billion
now, less than half of the purchase price. By that measure, all the equity
investors and many of the lenders, including Government of
Singapore Investment Corp., or GIC; Gramercy Capital Corp.; and SL
Green Realty Corp., are in danger of seeing most, if not all, of
their investments wiped out. Hartford Financial
Services Group, which bought $100 million of the debt tied to the
property, said it has "sufficiently reserved for ths asset in the
first half of this year."
Some of the nation's largest institutional investors already
consider their investment a failure. The $133 billion Florida State
Board of Administration committed $250 million to the equity
partnership in 2007. It now counts the value as zero. A spokesman
for the pension fund declined further comment.
The failure of the high-profile investment also would further
rattle the market for apartments, offices, hotels and other
commercial property. The market this year has seen increases in
loan delinquencies and property foreclosures, stoking worries that
it will drag down the nascent economic recovery.
Commercial mortgage-backed securities -- the kind that financed a
chunk of the Peter Cooper-Stuyvesant deal -- are high on the list
of concerns. Some $700 billion worth of CMBS were issued during the
boom years but they have never been tested by a protracted
downturn.
The apartment complex was developed by MetLife for returning World
War II veterans and remained a middle-class bastion even as rents
in other parts of Manhattan skyrocketed. New York's strict
regulations prevented the owners from raising rents.
But New York rent rules were eased over the years. When the
Tishman/BlackRock venture purchased the property from MetLife in
late 2006, the new owners predicted they would be able to convert
thousands of protected apartments to higher market rents.
These projections convinced Calpers and the pension funds of
several other states to make large equity investments in the deal.
Meantime, the Tishman/BlackRock venture put a $3 billion first
mortgage on the property and another $1.4 billion of so-called
mezzanine debt.
The new owners ran into a slowing economy and resistance from
tenants that battled to block rent increases. In one of their most
successful challenges, tenants groups filed a lawsuit charging
MetLife and the new owners with improperly converting
rent-regulated units while receiving tax benefits from the city.
The appellate division of the State Supreme Court in March ruled in
the tenants' favor. The state's highest court is expected to rule
on an appeal this month.
But even a victory by the Tishman/BlackRock partnership likely
won't save the deal from a default. One indication: a "special
servicer" is in the process of taking over the deal's CMBS debt,
say people familiar with the matter. Special servicers are experts
in dealing with troubled loans. The transfer to the special
servicer, CW Capital, could occur as soon as this month, the people
said.
Once that happens, the special servicer likely will try to
negotiate with the partnership to restructure the debt.
Major players in these talks will likely be Fannie Mae and Freddie
Mac, which together own more than $1.5 billion of the most highly
rated, triple-A slices of the CMBS debt, according to people
familiar with the matter. They would likely benefit from a fast
foreclosure because, as senior lenders, they would be paid back
first.
A Fannie representative declined to comment. A spokesman at Freddie
confirmed its holding of the debt. "We don't expect to incur any
losses on these securities," he said.
Another big player in the
restructuring talks could be Singapore's GIC. The fund owns a $575
million mezzanine loan backed by the property, according to people
familiar with the matter. Also, GIC owns about $100 million to $200
million in equity, the people said.
Both investments might be
wiped out unless GIC maneuvers to have more influence in the loan
workout process, possibly by buying more senior debt. GIC declined
to comment.
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