Stuyvesant Town In Effective Default, As Loan Moved To Special Servicing; Mezz Lenders SL Green And Fortress Wiped Out

Look for the next batch of CRE numbers to be the worst ever as Tishman and BlackRock move the loan backing Stuyvesant Town to special servicing, in essence throwing in the towel, and pushing the affordable home complex into default. According to Fitch the property's worth has plunged from $3 to $1.8 billion. This means that not only Tishman and BlackRock have lost all their value, but Fortress and SL Green who own a $1.4 billion mezz loan in the property are also wiped out. Also, as Fannie and Freddie are the largest holders of the securitized mortgage, look for another set of requests for governmental bailouts out of the nationalized GSE's.

From Bloomberg:

Tishman Speyer Properties LP and BlackRock Realty, the owners of Manhattan’s Stuyvesant Town- Peter Cooper Village, moved closer to restructuring $3 billion in debt on the apartment complex as the property verges on default, Fitch Ratings said.

The companies turned the loan over to mortgage servicer CW Capital on Nov. 6, Fitch said in a statement. Fitch said the property doesn’t produce enough income to pay the debt and a reserve fund probably will be depleted by year-end. A sale is more likely than a restructuring because the complex has lost so much value, said Kevin O’Shea, managing partner and head of the real estate practice at the law firm Allen & Overy.

And somehow US taxpayers are once again on the receiving end of BlackRock and Tishman Speyer's bubble-inflated stupidity:

The biggest holders of the securitized mortgage are Fannie Mae and Freddie Mac, the government-owned home-loan finance companies. Freddie Mac has said it doesn’t expect to lose money on the bonds backed by the property. Tishman Speyer and BlackRock paid $5.4 billion for Stuyvesant Town in November 2006, near the top of the market, in the biggest deal in New York residential real estate history. They counted on increasing rents but were blocked by a tenant lawsuit and rising costs. Since 2007, U.S. commercial property values have fallen about 40 percent and apartment rents declined nationwide. The drop in prices and the credit freeze have made refinancing many loans impossible.

As for the politically correct semantics from Tishman itself, they are of course forthcoming:

“We requested that the joint venture’s loan be moved to special servicer in order to facilitate negotiations on a restructuring of the debt load,” said Bud Perrone, a Tishman Speyer spokesman. “The loan is not in default.”

Well, yes it is. Just ask mezz lenders SL Green and Fortress:

The transferring of the loan to special servicing means holders of the $1.4 billion of mezzanine debt, including Fortress Investment Group Inc. and SLGreen Realty Corp., may have lost their money.

CW Capital, Tishman and BlackRock are likely to begin talks soon. Among the scenarios that could be pursued include an outright sale, a debt restructuring, and the conversion of bondholder stakes to equity. In a case like this, bankruptcy is another possible path.

The problem with this property (and many others in CRE which are finally starting to feel the sticky consequences of melting icecream) is that it simply can not cover its debt payments:

Tishman Speyer and BlackRock each invested $112.5 million in Stuyvesant Town out of total equity financing of $1.9 billion. They took out a $3 billion mortgage from Wachovia Bank and $1.4 billion of mezzanine debt. About half the equity was set aside in reserves to pay interest, property taxes and such.

“Cash flow generated by the property remains insufficient to service the debt,” Fitch said. “Debt service reserves are expected to be depleted by the end of December.”

The $3 billion mortgage was bundled with other loans that formed five pools of commercial mortgage-backed securities that were sold in 2007 to investors. Fannie and Freddie are the largest holders of the senior-most classes of the loan.

And as the property slips into a full fledged default, and all the various stakeholders come to the table, many investors will look here to see how many comparable complex defaults take place.

One scenario would be that the lenders don’t foreclose, leave the current ownership in place, and collect all of the rental income after paying operating expenses, including a management fee to the owners, said O’Shea.

“All the net revenue generated by the property goes to the lenders now anyway,” he said.

Stuyvesant Town could be transferred to the lenders through a consensual or a contested foreclosure, although it’s unlikely because Fannie Mae and Freddie Mac aren’t in the business of owning real estate, O’Shea said.

As long as the net revenue is being paid to the lenders, there’s little economic incentive for them to take ownership since such a transfer would trigger a tax equal to 2.625 percent of either the debt being foreclosed or the property’s market value, whichever is higher, said O’Shea.

The fate of Stuyvesant Town probably won’t be clear for several months. Different classes of bondholders might have competing aims, dragging out any resolution. The senior classes, more insulated from losses, might push for an immediate sale, while more junior bondholders might seek a loan extension in the interests of recouping more value when the real estate market recovers. The legal questions surrounding future rent increases at Stuyvesant Town further cloud the outcome.

h/t Ed