Stuyvesant Town woes may pave way for loan changes

By Ilaina Jonas

NEW YORK (Reuters) - The joint venture that borrowed heavily to buy Stuyvesant Town and Peter Cooper Village in 2006 could be among the first to take advantage of changes in U.S. tax law that let borrowers seek payment relief, when it said last week that it could not keep paying interest on a $3 billion loan.

On Friday, the $3 billion senior mortgage was transferred to the special servicer CWCapital after the borrower -- real estate private equity firm Tishman Speyer and BlackRock Realty Advisors, the real estate arm of money manager BlackRock Inc -- asked for relief from paying the debt service on the $3 billion mortgage.

"We requested it now so we can begin to negotiate a restructuring before it goes into default," a spokesman for Tishman Speyer said.

The $3 billion senior mortgage was securitized into five commercial mortgage-backed security (CMBS) deals. Special servicers are the only ones who can modify troubled loans underlying CMBS.

Many commercial real estate experts don't believe that the special servicer will foreclose on the property, which would be costly to the bondholders and would require more cash for the property.

Instead, they expect Tishman and its partners to work out some type of deal that may allow them to manage the property, collecting lucrative fees that could be roughly 2 percent of all the rent on the 11,227 units.

The borrower on the Stuyvesant Town loan is the joint venture Tishman and BlackRock formed to buy this bastion of middle-class housing on 80 Manhattan acres for $5.4 billion three years ago, near the top of the commercial real estate market.

It is also a reminder of pain still to come from the demise of the U.S. commercial real estate boom of 2004 through early 2007, which was created by over-borrowing and aggressive underwriting of future rents and income. U.S. commercial real estate values are off 40 percent on average. Real estate research firm Property & Portfolio Research Inc. said it does not expect values to hit bottom until early next year.

"There's a lot of losses being taken in commercial real estate by lending institutions and holders of securitizations, but this is fairly large," said Daniel Alpert, founding managing director of investment bank Westwood Capital LLC, in New York. "This will move the needle of the banking level."

AVOIDING DEFAULT

It was a long but quick fall from the ambitious plan that Tishman Speyer and BlackRock envisioned for the Manhattan complex of 56 high-rise apartment buildings originally constructed to house returning World War II veterans. The plan was to bring most of the units up to market rent and eventually sell them as condominiums.

Although the loan is still current, the money borrowed to pay the interest is running out and is expected to be fully depleted by the end of the year. Moving to special servicing was no surprise to many real estate professionals or Fitch Ratings, which downgraded the bonds last month.

"They obviously knew this was coming," said Lawrence Longua, director of New York University's Schack Institute of Real Estate. "We all did. They have some plan or else they wouldn't have requested going to special servicing.

Tishman and BlackRock are one of the first high-profile sponsors to take advantage of changes the U.S. Treasury Department made in September that allow sponsors to negotiate with special servicers before a default or imminent default on a loan.

The new rules could harm efforts to revive the moribund CMBS market because it will encourage even current borrowers to seek to restructure their loans, and bondholders will have less clarity about their investments, Longua said.