A look back: Working through the StuyTown workout

Roughly 10 years after Tishman Speyer Properties and BlackRock’s deal to acquire New York’s Peter Cooper Village-Stuyvesant Town apartment complex,...

Roughly 10 years after Tishman Speyer Properties and BlackRock’s deal to acquire New York’s Peter Cooper Village-Stuyvesant Town apartment complex, the transaction continues to fascinate the city’s commercial real estate market. The 80-acre property, which endured a protracted workout after Tishman and BlackRock gave back the keys in 2010, was sold last year to a Blackstone Group– and Ivanhoe Cambridge-led joint venture with the announced aim of maintaining about 5,000 units of affordable housing.

The background of the deal is well-known. In 2006, MetLife agreed to sell the 11,232-unit complex to Tishman and Blackrock for $5.4 billion. At the time, the sale was the most expensive in residential real estate history and the two companies financed the purchase with about $3bn of CMBS debt and another $1.4bn of mezzanine debt that was Stuyvesant Town - Peter Cooper Villagesplit into 10 tranches.

But a confluence of factors, including a slower than expected conversion of units to market rate, falling New York City apartment rents, and a court ruling that determined that Tishman and BlackRock had improperly raised the rents on about 4,400 affordable units, led the owners to default on its senior and mezzanine debt in early 2010.

In the aftermath of the default, Bill Ackman’s Pershing Square and Winthrop Realty Trust acquired the most senior three tranches of mezzanine debt with the intention of foreclosing, paying down the senior debt – perhaps with help from a bankruptcy proceeding – and then selling the property, according to published reports.

This plan went awry, however, when special servicer CWCapital, which was handling the workout, won an injunction that would have forced Pershing and Winthrop to pay down the senior lender before any sale occurred. But the appellate division of New York’s State Supreme Court’s interpretation of the wording of the loan documents of the roughly $3bn senior loan was problematic, according to Joshua Stein, a New York-based commercial real estate lawyer.

The crux of the ruling, Bank of America NA et al v. PSW NYC LLC, New York State Supreme Court, New York County, No. 651293/2010, focuses on Section 6(d) of the deal’s Intercreditor Agreement. “The language in Section 6(d) says the mortgage lender and the more senior lenders can’t accelerate repayment of their loans as the result of a junior mezzanine lender’s foreclosure sale, as long as the junior mezzanine lender cures the defaults on the senior loans,” Stein said.

But in its ruling, the New York State Supreme Court interpreted that clause to mean that the mezzanine lenders couldn’t foreclose at all unless they repaid all the senior loans. According to the court, section 6(d) didn’t just give the mezzanine lenders a possible option to avoid acceleration of the senior loans if they foreclosed. “If I look at section 6(d) in the intercreditor agreement, there is nothing here that says the junior mezzanine lender has any obligation to pay the mortgage loan, or has to pay it if as a condition to foreclosing. It just says they have to cure defaults under the senior loans if they want to avoid acceleration of the senior loans,” Stein said. “If they don’t cure the defaults – in this case, pay off the mortgage loan – then they face acceleration but I don’t see anything saying they can’t proceed with their foreclosure sale.”

Stein also noted that, in contrast, a different section of the intercreditor agreement lists a few conditions the mezzanine lender must meet before they can hold any foreclosure sale. “When the people who wrote the intercreditor agreement wanted to set conditions the mezzanine lenders would have to meet before they could foreclose, they knew how to do that. Nowhere does the agreement say that one of those conditions is repayment of the mortgage loan,” he added.

For many observers, however, Pershing Square and Winthrop’s legal right to foreclose without payment of the senior loan wasn’t what was in question. “Legally, [Pershing Square and Winthrop] might not have had a terrible case, but politically it would never happen,” said a trader. “[Stuyvesant Town] is such a big part of the NYC rent-controlled community that it was impossible to see how they were going to let it fall into the hands of a hedge fund guy. To think it wouldn’t become political was naïve at best.”

At the time, the complex was home to many pensioners and others living on fixed-incomes who made up a sizeable voting bloc in that district, as well as a large population of civil servants and politicians. “I do believe there’s a strong compelling reason for it to be maintained and sometimes you have to do the political thing rather than the most legal,” the trader said.

Ultimately, Pershing Square and Winthrop turned the property over to CWCapital and walked away, avoiding what would have been a messy bankruptcy court battle in the midst of intense public interest. Under CWCapital’s management and buoyed by a recovery in commercial real estate prices in Manhattan, the property recovered a significant portion of its value and was sold last year. A second trader noted that because CMBS is a longer-term product, it gives markets time to recover after downturns. “If you had to try to sell at the bottom of the market, it would have been a disaster,” he added.

CWCapital did not respond to a request for comment. Fortress Investment Group, LLC purchased the special servicer for $300m in 2010.