NY court rules against Stuyvesant Town owners

By Ilaina Jonas and Joan Gralla

NEW YORK (Reuters) - New York State's highest court on Thursday ruled that the landlords of Manhattan's largest apartment complex improperly raised thousands of rents, further pushing the owners of the $5.4 billion deal struck at the height of a commercial real estate boom toward default.

The ruling is another blow to a property that already has seen much of its value evaporate during the downturn in the U.S. commercial real estate market.

"I think everyone's wiped out," Dan Fasulo, managing director of real estate research firm Real Capital Analytics, said of the non-senior investors in the 2006 sale.

The New York State Court of Appeals, in a ruling on a lawsuit filed by tenants, found that Tishman Speyer and BlackRock Realty Advisors, which bought the sprawling Stuyvesant Town and Peter Cooper Village complex in 2006, and original owner MetLife illegally converted rent-stabilized apartments into substantially more expensive market-rent units.

Even before the court's ruling Rob Speyer, president of Tishman Speyer, said the joint venture that bought the property would have to restructure the debt.

"My guess is the borrowers take this thing into bankruptcy or threaten to if they don't get a workout, which would mean most of the capital stack will convert to equity," said an attorney who did not wish to be identified because his firm represents an investor in the deal.

The middle class enclave -- whose list of notable present and past residents includes political consultant David Axelrod, conservative columnist David Brooks, mystery writer Mary Higgins Clark and comedian and actor Paul Reiser -- was built in the late 1940s to house returning World War II veterans.

A lower court will have to decide whether tenants are entitled to back rent and damages that could run as high as $600 million, said tenant's attorney Alexander Schmidt, partner in Wolf Haldenstein Adler Freeman & Herz LLP.

"All this case does is complicate and prolong any renegotiation of this deal," said Mike Kelly, president of Caldera Asset Management, which specializes in restructuring and managing multifamily property.

Despite the ruling's potential impact on pushing the apartment complex toward bankruptcy, its impact on Tishman Speyer and BlackRock Realty may be limited.

Tishman and BlackRock along with their own fund investors contributed $224 million to the purchase of the complex, which includes 56 apartment buildings, housing about 25,000 residents on 80 acres near Manhattan's East River, according to a person familiar with the deal. Tishman itself is on the hook for up to $56 million, a source close to the deal said.

BlackRock Realty, the real estate arm of money manager BlackRock Inc, last year wrote off its investment in the limited liability company that BlackRock and Tishman formed to buy the property.

Others who contributed $1.65 billion in equity -- the riskiest piece of any investment -- include $500 million from the California Public Employees' Retirement System, known as Calpers; $100 million from the California State Teachers' Retirement System, known as Calstrs; and $100 million from the Government of Singapore Investment Corp (GIC).

"While we respect the court's decision, we view this as an unfortunate outcome for New York," Tishman Speyer said in an e-mail via a representative. "The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years."

"We are disappointed by the court of appeal ruling and are carefully considering our next steps as the litigation proceeds," said Chris Breslin, a spokesman for MetLife.