| NEW YORK
NEW YORK 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.
BlackRock referred calls to Tishman Speyer's representatives.
Tenants who brought the lawsuit argued that a tax abatement program prevented Tishman from removing their apartments from New York City's rent-stabilized program that limits rent increases and converting them into market-rate units until 2017. Loss of the ability to raise rents to market prices further pressured Tishman's financing at a time when real estate prices already were falling.
When MetLife sold the apartment complex, 72 percent, or about 8,025 of the units, mostly one- and two-bedroom apartments, were rent-stabilized. The court decision will allow the owners to bring vacant apartments back up to market rents.
When the deal was struck, rent-stabilized units were on average less than half the cost of market rents.
Including $400 million in interest rate reserves, a $190 million general reserve, and $240 million in closing costs and other expenses, the Tishman/BlackRock group paid about $6.29 billion to get the property.
Yet within a year after the deal closed, the capital markets began to dry up and the recession came on with enough force to send U.S. real estate prices down by 40 percent.
"No one will be surprised if it turns out the Stuy Town complex has lost over $3 billion in value since it was purchased," said Manus Clancy, senior managing director for Trepp, which tracks commercial mortgage-backed securities.
The court ruling strips away several hundreds of millions more dollars, experts said.
"The lawsuit doesn't really stipulate a cure," Clancy said. "Are they going to roll back rents? Who's on the hook for it? Is it MetLife? Is it Tishman Speyer? It's very hard to know how deep this goes."
The owners have staved off default by living off interest rate reserves, which have about two months' funds left.
Other investors in the deal included the Florida Retirement System Pension Plan, which at the end of May wrote down its $250 million equity investment to zero.
Real estate investment trusts SL Green and its offshoot Gramercy Capital invested $200 million in the most junior part of the $1.4 billion mezzanine debt, the source said. GIC contributed $575 million and Hartford Financial Services Group Inc invested $100 million. Deutsche Genossenschafts-Hypothekenbank AG (DG HYP) also had $100 million in mezzanine debt.
Some $3 billion of mortgage debt, comprised of 10-year interest-only loans due in 2016, are securitized in commercial mortgage-backed securities (CMBS) in five deals.
"CMBS deals with sizable exposure to Stuyvesant Town are now more susceptible to further negative rating actions as a result of today's ruling," Mary MacNeill, managing director of Fitch Ratings said in an e-mail, adding the complex's cash flow will not improve sufficiently before the reserves run dry.
(Additional reporting by Lilla Zuill and Ross Kerber in Boston; Editing by Leslie Adler and James Dalgleish)