September 16, 2010 / 8:24 PM / 7 years ago

StuyTown auction to proceed as Ackman loses in court

NEW YORK (Reuters) - A New York state judge cleared the way for a foreclosure auction of Stuyvesant Town/Peter Cooper Village in Manhattan, rejecting the efforts by a prominent investor to win control of the giant housing complex for a cheap price.

Justice Richard Lowe of the state supreme court in Manhattan ruled in favor of bondholders who hold a $3 billion mortgage on the 56-building, 80-acre property, which houses more than 25,000 people.

Lowe also lifted a stay that prohibited CWCapital Asset Management LLC, which represents the bondholders, from completing a foreclosure auction now set for October 4.

The ruling is a defeat for hedge fund investor William Ackman's and his Pershing Square Capital Management LLC, which had sought control of the complex in a joint venture with Winthrop Realty Trust, known as PSW NYC LLC.

PSW had acquired a $300 million defaulted junior loan in August for just $45 million, and sought to use it to foreclose on the equity in the owner of the property, known as StuyTown.

"We strongly disagree with the ruling and we will be appealing it soon," Michael Ashner, Winthrop's chief executive, said in an interview.

Gregory Cross, a lawyer representing CWCapital said: "The judge has given up the green light to proceed with the foreclosure sale, and we presently intend to move forward on Oct 4."

Among the expected bidders is a joint venture among hedge fund Centerbridge Partners, billionaire investor Wilbur Ross and Richard LeFrak, a leading New York property developer.

Ackman's bid "was a way to speculate on the value of the property," LeFrak, chairman and chief executive of the LeFrak Organization, said in an interview. "It was an option at a pretty cheap price to get control of it without too much money."

'Irreparable Harm'

A sale would mark a turning point for the complex, which was acquired in 2006 by an investor group led by Tishman Speyer Properties for a record $5.4 billion.

That group defaulted on its senior mortgage in January after the property's value sank and a court barred it from raising rents as high as it wanted.

Stuyvesant Town has become a poster child for the U.S. commercial property boom and subsequent bust. The property is valued at less than half its 2006 price.

Had PWC prevailed, it could have put the complex into bankruptcy. Pershing controls 77.5 percent of the venture.

PSW had hoped to foreclose without first paying off the $3.66 billion owed to senior lenders, including interest. A court ruled in June the lenders were entitled to this sum, in the wake of the January default.

However, Lowe concluded the senior lenders would suffer "irreparable harm" if Ackman went ahead, saying it would deprive them of the right to control management of the property and the ability to recover their $3.66 billion.

He also suggested Ackman knew what he was getting into by acquiring the defaulted junior loan.

"Subordinated loans are inherently more risky than their senior counterparts -- a reality of which the junior lender, as a sophisticated party, was no doubt aware," Lowe said.

Lowe also noted a societal interest in protecting the complex, which was built after World War Two to house middle-class New Yorkers.

"The public interest is served by maintaining stability in what PSW concedes is the largest residential property in Manhattan and home to a significant portion of the city's moderate income housing," he wrote.

Tenants' Future

The $5.4 billion purchase was financed in part by a $3 billion mortgage that was securitized into bonds and backed by the property.

It also included equity and $1.4 billion worth of junior loans that were backed by shares of the owner.

Proceeds from a foreclosure sale would go to repay the bondholders. If the apartments continue as rentals, the complex would be unlikely to generate enough money to repay the entire amount owed.

Some interested investors have said the complex would be worth more if the units were sold to tenants as co-operative apartments.

City Councilman Dan Garodnick, a lifelong resident of the property, said in a statement that "tenants remain eager to take concrete steps toward securing a stable, permanently affordable future for this property."

The case is Bank of America NA et al v. PSW NYC LLC, New York State Supreme Court, New York County, No. 651293/2010.

Reporting by Ilaina Jonas and Jonathan Stempel; Editing by Andre Grenon and Steve Orlofsky

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