One of the biggest, most high-profile deals of the commercial
real-estate boom is in danger of imminent default, say people familiar
with the matter, signaling the beginning of what is expected to be a
wave of commercial-property failures.
The sprawling Manhattan apartment complex known as Peter Cooper
Village and Stuyvesant Town -- acquired for $5.4 billion in 2006 by a
venture of Tishman Speyer Properties and a unit of BlackRock
Inc. -- is running out of cash. As of the end of September, it had
$33.7 million left of the $400 million in interest reserves set up to
service its debt, according to the people familiar with the matter. At
its current burn rate of about $16 million per month, the reserve could
be depleted before the end of the year, the people said. Others have
said the venture could avoid default until February.
The spokesman for Tishman Speyer declined to comment on behalf of the partnership.
The ownership, which includes a roster of high-profile investors
from the Church of England to the California Public Employees'
Retirement System, has no current plans to inject more capital into the
venture, according to the people. Lenders who financed the deal first
projected the complex's net operating income would triple to $336
million in 2011 from $112 million in 2006, according to Deutsche Bank
AG. But net income is projected to be $139 million this year, according
to Realpoint LLC, a credit-rating agency.
Investors who bought into the deal were confident that real-estate
manager Tishman Speyer would be able to greatly boost profits by
raising rents in Manhattan's sizzling apartment market. But today, the
56-building, 11,000-apartment property is suffering from a slowing New
York economy, a lawsuit that has hindered the owner's ability to
convert rent-controlled units to market rentals, and the debt load.
Realpoint estimates that the property is worth only $2.1 billion
now, less than half of the purchase price. By that measure, all the
equity investors and many of the lenders, including Government of
Singapore Investment Corp., or GIC; Gramercy Capital Corp.; and SL Green Realty Corp., are in danger of seeing most, if not all, of their investments wiped out. Hartford Financial Services Group,
which bought $100 million of the debt tied to the property, said it has
"sufficiently reserved for ths asset in the first half of this year."
Some of the nation's largest institutional investors already
consider their investment a failure. The $133 billion Florida State
Board of Administration committed $250 million to the equity
partnership in 2007. It now counts the value as zero. A spokesman for
the pension fund declined further comment.
The failure of the high-profile investment also would further rattle
the market for apartments, offices, hotels and other commercial
property. The market this year has seen increases in loan delinquencies
and property foreclosures, stoking worries that it will drag down the
nascent economic recovery.
Commercial mortgage-backed securities -- the kind that financed a
chunk of the Peter Cooper-Stuyvesant deal -- are high on the list of
concerns. Some $700 billion worth of CMBS were issued during the boom
years but they have never been tested by a protracted downturn.
The apartment complex was developed by MetLife for returning World
War II veterans and remained a middle-class bastion even as rents in
other parts of Manhattan skyrocketed. New York's strict regulations
prevented the owners from raising rents.
But New York rent rules were eased over the years. When the
Tishman/BlackRock venture purchased the property from MetLife in late
2006, the new owners predicted they would be able to convert thousands
of protected apartments to higher market rents.
These projections convinced Calpers and the pension funds of several
other states to make large equity investments in the deal. Meantime,
the Tishman/BlackRock venture put a $3 billion first mortgage on the
property and another $1.4 billion of so-called mezzanine debt.
The new owners ran into a slowing economy and resistance from
tenants that battled to block rent increases. In one of their most
successful challenges, tenants groups filed a lawsuit charging MetLife
and the new owners with improperly converting rent-regulated units
while receiving tax benefits from the city. The appellate division of
the State Supreme Court in March ruled in the tenants' favor. The
state's highest court is expected to rule on an appeal this month.
But even a victory by the Tishman/BlackRock partnership likely won't
save the deal from a default. One indication: a "special servicer" is
in the process of taking over the deal's CMBS debt, say people familiar
with the matter. Special servicers are experts in dealing with troubled
loans. The transfer to the special servicer, CW Capital, could occur as
soon as this month, the people said.
Once that happens, the special servicer likely will try to negotiate with the partnership to restructure the debt.
Major players in these talks will likely be Fannie Mae and Freddie Mac,
which together own more than $1.5 billion of the most highly rated,
triple-A slices of the CMBS debt, according to people familiar with the
matter. They would likely benefit from a fast foreclosure because, as
senior lenders, they would be paid back first.
A Fannie representative declined to comment. A spokesman at Freddie
confirmed its holding of the debt. "We don't expect to incur any losses
on these securities," he said.
Another big player in the restructuring talks could be Singapore's
GIC. The fund owns a $575 million mezzanine loan backed by the
property, according to people familiar with the matter. Also, GIC owns
about $100 million to $200 million in equity, the people said.
Both investments might be wiped out unless GIC maneuvers to have
more influence in the loan workout process, possibly by buying more
senior debt. GIC declined to comment.
—Nick Timiraos contributed to this article.
Write to Lingling Wei at lingling.wei@dowjones.com and Craig Karmin at craig.karmin@wsj.com
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