Stuy Town: What’s Next?

Given that the complex is now valued by analysts at about $2 billion-a surprise court decision that ruled that the owners were not allowed to deregulate stabilized units has helped keep the price low-many of the bondholders are sure to take a hit of some sort. It will be up to CW Capital, at the advice of various bondholders who have the most at stake, to figure out just what to do. CW Capital declined to comment.

Going forward, questions abound for the special servicer in the immediate future, particularly in the wake of last year’s court decision that has left murky waters: Will the owners renovate apartments? How many vacant apartments will they rent, and at what prices? What will they do about litigation related to the rent-regulation lawsuit?

And, perhaps most significantly for Tishman Speyer in the short run: Who will manage the property? Tishman Speyer, which only put about $56 million into the deal itself, currently gets a fee to manage the property. Often in foreclosures, the special servicer removes the manager, given that it could have skewed incentives (to cut back on maintenance, for instance), particularly if it’s unlikely to emerge as the owner after a restructuring.

Then there is the question of who will own the property, and how it will be restructured. A Deutsche Bank report from November said that the “most likely workout strategy,” in the view of the authors, was a bankruptcy filing that could leave the Tishman Speyer team in, with a restructuring in which the mortgage holders take a hit. The costs of selling the property would be high, the authors, Richard Parkus and Harris Trifon, pointed out, and there is uncertainty over the value in the wake of the court decision.

Another option would be to foreclose and to flip Stuy Town, as the debt holders at the 1,200-unit Riverton complex in Harlem have asked for on that distressed property; this move would clearly remove Tishman Speyer. (By comparison, Riverton has been enmeshed in the courts for nearly a year, after owner Stellar Management defaulted on a $225 million loan.)

It’s hard to say how smoothly everything will go over, but as a general rule, the more angry investors involved, the greater the potential for lengthy legal battles. And there are a lot of investors who have lost tens, if not hundreds, of millions (to name a few: a state of Florida retirement fund; two California retirement funds; the Church of England; and SL Green, New York’s largest office landlord).


Daniel, Fannie and Freddie

Whatever happens, the tenants, who make up a large and vocal constituency for any of the local elected officials, have made clear that they want a seat at the table, and that they want affordability guarantees for the long term (which is not to say that any of the private firms involved have any obligation to listen).

The strategy thus far of the elected officials and the tenant association has been to pressure Fannie Mae and Freddie Mac, who hold a considerable amount of the debt on the property-local Councilman Daniel Garodnick said he believes it to be about $2.1 billion-to push for a solution with affordability, perhaps through a sale to the tenants.

They don’t shy from playing the bailout card, as the federal government committed up to $200 billion in 2008 to back the two government-chartered companies.

“I believe they’re significant players in any restructuring,” Mr. Garodnick said. “If they choose to wield their influence-taxpayers bailed them out in the last 12 to 18 months and supported their restructuring-we expect that they will stay true to their charter and find a way to support the tenant goals here. … There is no limit to their influence.”

Fannie Mae and Freddie Mac counter that they do not have a legal say in the matter. They hold senior debt on the property and would be the first to be repaid in a sale, and thus, legally, the special servicer is obligated to listen to the less-senior debt holders first. (A spokeswoman for Freddie Mac said the firm does not expect losses on the property, as its holdings are credit-enhanced, a form of bond insurance.)

Still, Mr. Garodnick, who lives in Peter Cooper Village, isn’t buying it, and the strategy remains to apply pressure. The tenants association launched a postcard-writing campaign to both companies, along with CW Capital, requesting a seat at the table. And Mr. Garodnick helped put together a letter from numerous elected officials, including Representative Carolyn Maloney, requesting the cooperation of Fannie and Freddie (to which the companies replied that they do not have control).

This strategy-lean on Fannie and Freddie until they cooperate with tenants, instead of selling for a higher return-worked in the Bronx on a property in which Fannie owned a $29 million loan. Affordability advocates rounded up numerous elected officials, including Senator Schumer, to repeatedly hold press conferences pressuring the companies. The result was a sale to Omni New York, an affordable-housing developer.

Stuy Town: What’s Next?