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Stuyvesant Town Down by Half, Teeters on Court Ruling

Owners of America’s most expensive multifamily complex face a double whammy:

First, Tishman Speyer Properties LP and its partners have seen the value of the Stuyvesant Town-Peter Cooper Village apartment complex fall by more than $3.2 billion and the group is at risk of defaulting on its loans, according to credit rating company Realpoint LLC. The 80-acre property, bought for $5.4 billion in 2006, has a market value of about $2.13 billion, Realpoint said.

Second, Tishman Speyer’s lawyers were in the New York State Court of Appeals asking a judge to reverse a lower court decision that said it didn’t have the right to deregulate more than 4,000 apartments and raise rents for some tenants.

Realpoint’s valuation is based on an assumption that Tishman Speyer and its partner in the transaction, BlackRock Realty LP, won’t be able to carry out their strategy of converting rent regulated units to market rates, said Steve Kuritz, senior vice president at Horsham, Pennsylvania-based Realpoint. Tishman Speyer obtained financing for the purchase based on plans to increase some rents.

“If the decision is upheld by the Court of Appeals, it will make it difficult, if not impossible for the developers to continue to pay their debt service,” Bret Salzer, managing principal at FrontView Advisors LLC, a real estate investment firm in New York, said in an e-mail. Tishman helped finance the purchase with a $3 billion loan that was bundled into commercial mortgage backed securities.

Rent Increases

The lawsuit was brought by tenants who claimed Tishman and the previous owner, insurer MetLife Inc., improperly forced at least 25 percent of the units in the complexes to pay market rate rents while the landlords received more than $25 million in J-51 tax abatements. The city J-51 program provides tax breaks to landlords that upgrade their buildings.

New York State Supreme Court Justice Richard Lowe, in Manhattan, dismissed the tenants’ original lawsuit in 2007. A Manhattan appeals court later reinstated the suit and ruled on the tenants’ behalf. Bud Perrone, a spokesman for Tishman Speyer said: “We remain firmly convinced that Justice Lowe’s initial decision to dismiss the lawsuit was the correct one and appreciate the opportunity to present our case to the Court of Appeals.”

Under Kuritz’s $2.13 billion valuation, Tishman owes more to bondholders than the apartment complex is worth. Investors in an additional $1.4 billion mezzanine loan borrowed to finance the deal are “wiped out,” Kuritz said.

Values Fall

“When you have such substantial differences in values, the borrower, their only option really is to just turn it over” to the lender, Kuritz said.

After the March ruling, Tishman halted plans to deregulate rent stabilized apartments, which reduced the income it was relying on to pay debt.

Tishman has “essentially depleted” a $400 million reserve fund set up in 2006, after using it to make loan payments, Fitch Ratings Service said in a report on Aug. 28. About $49 million remains in that fund and it could run out by the end of the year, Fitch said in report in which it downgraded four issues of commercial mortgage-backed securities on the property.

Default isn’t the only consequence if Tishman Speyer loses its appeal. A ruling for the tenants could mean the company will have to pay hundreds of millions of dollars in rent rebates to tenants, said tenant lawyer Alexander Schmidt in an e-mail. Under New York State law, the tenants can seek triple damages if they prevail in the state’s highest court.

Restructuring Likely

Rob Speyer, co-chief executive officer of Tishman Speyer, said that it’s likely the debt on the complex will need to be restructured. One-bedroom apartments at Stuyvesant Town start at $2,333 a month, according to a Web site for the property. Two-bedrooms start at $3,304 and three-bedrooms at $3,713. Those prices include two months of free rent on some units. The apartments are “spacious and contemporary” and reflect “the ultimate living experience in Manhattan,” the Web site says.

In oral arguments today at the Court of Appeals in Albany, the two sides debated the meaning the phrase “by virtue of” as it is used in amendments approved by state lawmakers to rent stabilization law. Those amendments prohibited deregulation of rents on apartments with monthly rents of $2,000 or more and tenants earning over $175,000 “by virtue of” their receipt of tax benefits under a New York City program known as “J-51.”

Court Arguments

Tenants claim that decontrol of so-called luxury apartments with rents aren’t allowed for buildings benefiting from tax abatement under New York City’s “J-51″ program. Tishman claimed that the decontrol of high rent apartments is allowed because the buildings came under rent stabilization rules in 1974, and not because of J-51 tax benefits obtained in 1992.

Tenants were represented in oral arguments by Alexander Schmidt, a partner in the New York law firm of Wolf Haldenstein Adler Freeman & Herz. Tishman was represented by Jay Kasner, a partner in the New York office of Skadden, Arps, Slate, Meagher & Flom.

The question before the court was whether the housing developments “became subject to rent stabilization law by virtue of receiving” J-51 tax benefits, said Kasner. “No they did not.” He said that finding is supported by past actions of New York City’s Department of Housing Preservation and Development which has an established policy of awarding J-51 tax benefits to buildings where apartments were decontrolled for high income tenants and rents above $2,000.

Schmidt said the city department was in error, and that one of the public policy goals of the J-51 program was prevent public funds from being used for deregulated apartments.

An immediate court decision isn’t expected. The court typically issues decisions within six weeks of a hearing, said Gary Spencer, a court spokesman.

The case is Amy Roberts v. Tishman Speyer Properties LP, 100956/2007, filed in New York State Supreme Court (Manhattan).

Source: Tishman Speyer’s Stuyvesant Town Lost $3 Billion, Oshrat Carmiel and Patricia Hurtado, Bloomberg.com, 9/11/09

According to the NY Post,

Currently, just 39 percent of the apartments are higher-priced rentals, up from 27 percent at the time of purchase. If Tishman loses the case, brought forth by angry tenants, it could be forced to reverse its hard-won conversions and say goodbye forever to the money it spent evicting tenants and renovating their apartments for higher-paying renters…Lawyers for the defense, which includes insurance company MetLife, begged the court to allow it to at least retain the conversions it has obtained thus far — even if the lower court’s ruling is upheld. Meanwhile, the developers are blowing through a $650 million cash reserve established at the time of purchase to pay for things like mortgage interest. The reserve has dwindled to just $62 million, and is expected to vanish sometime between December and March.