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Court ruling may cost NYC apartment owners billions
December 1, 2009 / 12:20 AM / 8 years ago

Court ruling may cost NYC apartment owners billions

* Stuyvesant Town/Peter Cooper worth about $1.86 bln

* Other NYC apartment buildings’ values off more than 60 pct

* Bankruptcy may be the best solution for Stuyvesant

By Ilaina Jonas

NEW YORK, Nov 30 (Reuters) - A recent decision by New York’s highest court that the owners of Stuyvesant Town/Peter Cooper Village unlawfully deregulated apartment rents is likely to significantly harm New York apartment investment for several years, according to a Deutsche Bank report released on Monday.

The New York State Court of Appeals ruling has significant ramifications not only for Stuyvesant Town/Peter Cooper Village but for thousands of New York City apartment properties that got the same tax break received by the owners of the sister developments that encompass 80 acres, 52 buildings and more than 11,000 apartments on the east side of Manhattan.

“The court ruling may result in billions of dollars in losses, both to property owners and commercial mortgage-backed securities (CMBS) bondholders,” said the report by Deutsche Bank analysts Richard Parkus and Harris Trifon.

Last month, the court ruled that the current owner -- a consortium lead by Tishman-Speyer and BlackRock Realty Advisors, a unit of BlackRock Inc (BLK.N) -- and former owner MetLife Inc (MET.N) had illegally decontrolled and raised rents on thousands of rent stabilized apartments in Stuyvesant Town/Peter Cooper Village.

Landlords for years had deregulated apartments, following the State Division of Housing and Community Renewal’s interpretation of the law that enacted the tax abatement plan.

However, when Stuyvesant Town/Peter Cooper Village was sold for $5.4 billion in 2006, its well-organized tenants challenged the practice. The resulting opinion by the New York State Court of Appeals leaves much of the other issues, including $215 million in overcharges plus punitive damages, up to the lower court to revisit.

“It is perhaps ironic that since 1992, when the properties first began receiving the (tax incentive) the cumulative tax benefit has been a mere $27.4 million,” the analyst said. “By comparison, $532.8 million of property taxes have been levied against the property during the same period.”

Since the decision, Stuyvesant Town/Peter Cooper Village owners have transferred the $3 billion of secured loans to special servicers, who oversee troubled loans that have been securitized into CMBS. The owners have all but depleted a $400 million reserve set aside to pay the interest on the loans.

Because the loan is with a special servicer, an automatic 25 percent appraisal reduction will likely be put into effect in the near future. At $750 million, it will be the largest to date for a CMBS loan.

The Deutsche Bank team estimates that Stuyvesant Town/Peter Cooper Village has lost about 65.6 percent of its value, chiefly from the collapse of the U.S. real estate market, and is worth about $1.86 billion. The equity and mezzanine loans have been wiped out.

Because of its massive size there are very few prospective owners for the projects. Although Deutsche Bank analysts have said MetLife would be the most natural fit, the insurance giant told Reuters earlier this month that it was not interested.

“We have not and do not expect we would revisit the decision we made in 2006 to sell the property,” Chris Breslin, a spokesman for MetLife, said in an email.

Deutsche Bank analysts believe that the current owner -- PCV/ST -- will likely file for bankruptcy. This way, the mezzanine lenders and the tenants group would be likely to become the unsecured creditors. It also would mean the senior loan would likely be restructured, with the CMBS bondholders taking a hit.

A Tishman-Speyer representative could not be reached for immediate comment.

Several hundred properties in the same tax abatement program also have been included in CMBS deals. The court’s decision is likely to affect 366 loans totaling $5.8 billion in 95 CMBS deals, the Deutsche Bank analysts said. Many of the properties are likely to see the same value decline as Stuyvesant Town/Peter Cooper Village.

In the short-term, owners will face potential lawsuits from tenants, legal costs and difficulties determining the correct rent. However, the effects will echo into the long term and investors are likely to shun investing in rent-stabilized apartments since the growth in rents is now severely restricted.

Reporting by Ilaina Jonas; Editing by Phil Berlowitz ilaina.jonas@thomsonreuters.com ; +1 646 223 6193; Reuters Messaging: ilaina.jonas.reuters.com@reuters.net

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