Sandy is still causing headaches. Bureaucratic ones.

After Hurricane Sandy, rent-stabilized tenants living in damaged buildings with diminished services were told—and believed—that they would be able to get rent reductions for the entire time they were without services.

The Rent Stabilization Code stipulates that reductions are given from the time the service is lost. But, as rent-stabilized residents at Peter Cooper Village and Stuyvesant Town have discovered, they might only be eligible for reductions starting in March—a four-month discrepancy that could be worth thousands of dollars per tenant.

According to a recent fact sheet from the state's Division of Housing and Community Renewal, rent reductions will only be awarded from the month that the department notifies landlords of diminished services, rather than from the time when the services were lost. For the 1,200 tenants of Stuy Town and Peter Cooper Village who filed with their claims with the Department on Feb. 26, the difference is significant. Rather than receiving rent reductions starting in late October, when flooding damaged the building's security systems, laundry rooms, elevators, building intercoms, bike and carriage room storage and trunk storage, reductions would only start applying in March, or even April.

Now, politicians are trying to untangle the mess.

"Unlike the Rent Stabilization Code this seems to be an administrative policy that doesn't have a basis in law," State Assemblymember Brian Kavanagh told The Observer. "We're talking about a fact sheer versus a formally adopted code."

Earlier this week Mr. Kavanagh, State Senator Brad Hoylman, Councilmember Dan Garodnick, U.S. Representative Carolyn Maloney and borough president Scott Stringer sent a letter to the Division of Housing asking for clarification on the discrepancy and an explanation on its basis. They have yet to receive a response and the Division has not yet returned a request for comment from The Observer.

Mr. Kavanagh said that tenants could be denied a significant amount of compensation to which they are entitled if the Division's standard is applied rather than the Rent Stabilization Code's. Moreover, the Divison is not even applying reductions from the date they were filed, but from the beginning of the month that notifications are served on the landlords. Meaning that in some cases, rent reductions could be delayed a number of additional weeks, or even months.

Tenants may also have reason to be concerned as it's not the first time that the Division of Housing has shifted its policies and interpretations to be more landlord friendly. Incidentally, the last case also involved rent-stabilized tenants in Stuy-Town and Peter Cooper Village.

The tenants lived in apartments that had been removed from rent stabilization even though the landlords were receiving J-51 benefits. In 2000, the Division of Housing—which had earlier issued an opinion letter stating that J-51 units were exempt from deregulation—adopted a regulation that the exemption didn't apply to buildings like Stuy Town, which would have been rent stabilized even if the landlords did not receive J-51 benefits. The regulation was eventually struck down in court as illegal.

As for the market-rate tenants living in the complex? Neither the Rent Stabilization Code nor the Division's rules and regulations apply to them. But there's a class action lawsuit that they could join.

kvelsey@observer.com

Tenants will receive $68 M. in damages.

The tenants of Stuyvesant Town and Peter Cooper Village have finally settled their class action suit, winning $68.7 million in damages that will be awarded to tenants who were overcharged on their rent between January 2003 and December 2011 as a result of illegal rent deregulation.

The settlement means an end to the lengthy Roberts v. Tishman Speyer legal battle. Tishman Speyer defaulted on its loans in 2010 and the property is now owned by CW Capital Asset Management LLC. The damages, to be paid by CWCapital (on behalf of the
bondholders' trust) and former owner MetLife Inc, will be divided among 21,250 tenants in 4,300 units.

The settlement, pending final court approval that could come as early as April 2013, will mean that damages of some $10,000 will be awarded to each of the 4,300 units deemed to have been affected by overcharging. It also means that tenants' plans to buy the complex themselves in a bid to protect the buildings as a increasingly rare refuge for Manhattan's middle class might finally move forward.

Tenants sought $215 million in compensation for the rent overcharges, which is far more than the current award, but the plaintiff's attorneys say that the final agreement will bring the total recovery in the lawsuit to at least $146.8 million. In addition to compensating tenants for past rent overcharges, the agreement also includes savings in the form of future rents, which will be based on a formula that factors in market conditions and tenant turnover rates.

"We believe this settlement provides an extraordinary recovery for our clients and we couldn't be happier for them," said Ronald Aranoff of Bernstein Liebhard, one of the plaintiff's lead attorneys, in a statement.

The agreement also guarantees rent stabilization through 2020, when the complex's J-51 tax benefits expire, reinstating the benefit to a number of residents whose units had been erroneously deregulated. Tenants who signed market rate leases will be offered modified rents or their original rent grown by the yearly rent guidelines board increases.

The settlement comes after some 18 months of negotiations. The complex has been mired in drama ever since Tishman Speyer bought the complex for $5.4 billion in 2007 with plans to draw an upscale clientele in the market for luxury apartments.

CW Capital Partners took care to point out that they took over the complex almost four years after the suit was first filed.

“Since then we have worked hard to try to balance the interests of residents and bondholders, recognizing that our fiduciary responsibility to investors must respect the concerns of tenants who call Peter Cooper Village Stuyvesant Town home," wrote CW managing director Andrew MacArthur in a release.

The settlement deals with less than half of the complex's 11,229 units spread out across 56 buildings.

Rather than heralding the announcement, lifelong resident and council member Dan Garodnick issued a cautious statement.

Hence why one shouldn't turn their stairway into a bathroom. (Photo: Flickr, frankfarm)

There’s never a shortage of stories about negligent apartment managers and landlords, and the overlords at Stuyvesant Town and Peter Cooper Village have proved that they are not the exception. As charming as this 25,000-resident complex in the East Village seems with its brick exteriors and tree-lined paths, everything is not peachy-keen.

A recent FDNY inspection has found that a number of fire code violations exist in the complex’s 110 buildings, according to the Post. Several fire doors don’t close properly, a few hundred apartment doors don’t close or latch on their own, and the stairwells, which serve as emergency exits, have become toxic wastelands.

“[This] presents a very real danger to the lives and safety of the residents of the community,” Al Doyle, the former president of the Tenants Association, wrote in a letter to the FDNY. You think?

A tenant survey conducted in the spring also found that the stairwells have become the preferred bathroom for some tenants, as well as hot spots for alcohol, tobacco and drug use.

The FDNY has set a date for when the Peter Cooper Village/Stuyvesant Town complex must fix the violations, one that Sean Sullivan, the general manager of the complex, told DNAinfo he is not worried about meeting. “We take fire safety very seriously,” he said, adding that “all issues [will be] resolved well before the FDNY’s required timeframe.”

As for the illicit activities taking place in the stairwells, Mr. Sullivan hopes that residents (that is, civilized, reasonably normal residents) will rat the wrongdoers out. Here’s hoping they do.

Bill Ackman and partner "have proposed a partnership with the 25,000 tenants there that would create an affordable housing co-op and allow the investors to reap a profit," reports The New York Times. 

The tenants' association wouldn't have to pay for its stake, but it would have full veto rights over all major decisions and would be involved in the plan to turn the units into affordable co-ops, says the letter Mr. Ackman sent to the association, according to Crain's.

The partnership, which consists of Mr. Ackman's Pershing Square Capital Management and Winthrop Realty Trust, is embroiled in a complex legal batle with a rival lending group to foreclose on the property. The partners have purchased $300 million of Stuy Town's secondary loans, while another group of lenders, which holds the property's $3 billion mortgage, has moved to block them from foreclosing.

The case is set to be decided by the end of this month, but the Ackman partnership may hope it can gain the upper hand by appealing directly to tenants who are anxious to hold onto their homes in one of the country's most prominent middle-class housing complexes. “Working together," the letter reads, "we believe that we will be able to effectuate an affordable non-eviction conversion while protecting the long-term affordability of the property for current and future tenants and ensuring that those who wish to remain rent-stabilized renters can do so.”

If successful, this would be the largest co-op conversion in the country's history, according to the Times.

lkusisto@observer.com

From the latest brief in the ongoing fight, filed yesterday by CW Capital:

Without any explanation, PSW injects the doctrine of last antecedent to convince this Court that an entire clause that follows a semicolon modifies a sentence fragment that precedes the semicolon. Once again, PSW's assertions lack any legal support. Under New York law, it is well-established that a semicolon creates independent and separate sentences.

And this syntax attack came after PSW assailed CW Capital for a liberal use of ellipses in its first brief, saying "CWCAM needed to delete more than half of the language of the latter [a relevant section of the intercreditor agreement], including both the subject and the verb."

Ouch.

The CW filing from yesterday was a reply brief—the issue of the grammar is actually a bit more significant than it lets on in that excerpt—in advance of tomorrow's court hearing, in which a judge could render a highly significant decision for the 11,200-apartment complex. Specifically, Justice Richard Lowe III is bringing both CW Capital and the PSW team in to hear the merits of whether PSW, led by Winthrop and investor Bill Ackman, can legally whisk away the property from CW Capital, which has been trying for nine months to finish a foreclosure. Mr. Ackman and his team, who are holders of mezzanine debt, want to foreclose themselves, jumping in front of CW Capital, which represents the senior mortgage.

With the fate of the ever-desirable property at stake, the swords are certainly drawn.

CW Capital's latest brief, submitted by lead attorney Gregory Cross of Baltimore-based Venable, is more than a little caustic. Among other legal aspersions, the brief accuses PSW of "revisionist history;" it says the firm makes arguments that are "hollow and simply wrong;" and it vows that "the inaccuracies of PSW's assertions will be quickly revealed."

Here's another:

PSW does not cite a single case, industry expert or secondary source material in support of the intercreditor interpretations it advances. The absence of any support for PSW's assertions is striking, but explainable. No support exists.

Colorful language aside, the brief represents a CW Capital response that essentially reiterates its position that the intercreditor agreement bars PSW from foreclosing without first paying off CW Capital (for $3.6 billion). PSW holds that, by its reading of the agreement, it does, actually, have the ability to foreclose (and has invested $45 million in the assumption that its play will work).

The fun starts at 9:30 a.m. Thursday at 60 Centre Street.

Update 5:00 p.m.

In a reply filing this afternoon to CW Capital's reply brief (which itself was a reply to a reply by PSW), Winthrop CEO Michael Ashner hit back at CW Capital, which had accused him of "greenmail" when CW Capital was approached about buying up some of the mezzanine debt. (Greenmail is when one investor buys up shares of a target company's stock, and forces that company to buy the stock back at a higher price or to face takeover).

From an affidavit by Mr. Ashner: 

I deeply resent the implications contained in the Hundertmark Affidavit [a prior filing by CW Capital] that I engaged in 'greenmail.' I never solicited any offer from CWCAM. Any and all conversations regarding my intentions were conducted between myself and other Mezz 1-3 holders, and did not involve any requests for 'greenmail.'

The full reply brief from CW Capital is here. 

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The special servicer on the loan, CW Capital, has taken court action against Winthrop and Mr. Ackman, the activist investor and hedge fund manager, who both bought up the top layer of a second mortgage on the property and last week filed to foreclose on the existing owners. (The owners, a partnership led by Tishman Speyer, defaulted on the mortgages in January. The plaintiffs in the suit are the actual holders: Bank of America and US Bancorp.)

CW Capital had told others it was caught off-guard and was frustrated with the move by Mr. Ackman and his Pershing Square Capital, given that the special servicer had been moving relatively smoothly along—to many people's surprise—with a foreclosure of its own. That foreclosure would have wiped out the holders of the second mortgage in addition to the owners.

Along these lines, CW Capital was not very popular with many of the second mortgage holders, and many observers had been holding their breath for legal action of some sort before CW Capital eventually foreclosed.

And voilà.

CW Capital feels that the Ackman/Winthrop group does not actually have the ability to foreclose itself given that CW Capital is very far along in its own foreclosure process.

Here's more on the lawsuit from Bloomberg:

Bank of America Corp. and U.S. Bancorp sued to block an entity seeking to foreclose on the equity interests of the owner of Manhattan's Stuyvesant Town and Peter Cooper Village apartment complex.

...

 "The future of this iconic enclave in the Borough of Manhattan is in imminent jeopardy," lawyers for Bank of America N.A. and U.S. Bank said in the complaint filed today in New York State Supreme Court in Manhattan. The Pershing and Winthrop plan violates terms of the intercreditor agreement for the property, according to the suit. The agreement, which governs how the loan is to be repaid among competing creditors, says junior lenders get second priority after the senior mortgage holders.

In a statement representing the Ackman/Winthrop team, Michael Ashner, CEO of Winthrop, expressed confidence:

We are fully confident that the court will validate our efforts to provide permanent affordable housing options to the residents of Stuyvesant Town and Peter Cooper Village.

And here's a statement from Councilman Dan Garodnick, who lives in Peter Cooper Village:

We are disappointed that ownership of the property has degenerated into litigation, but we are not at all surprised.  As the creditor parties fight this one out, the tenants are prepared to join with the right partner to help us achieve the goals we have articulated. 

ebrown@observer.com

In mid-July, Bill Ackman was relaxing on Nantucket when he got a call on his cell phone. On the other end was Michael Ashner, the CEO of Boston-based Winthrop Realty Trust, who had a plan to grab control of the 11,200-apartment property that occupies a healthy 80-acre chunk of Manhattan's East Side.

"They contacted me and said, 'This is an interesting situation; would I be interested in being involved?'" Mr. Ackman, the loquacious, successful hedge fund manager, recalled.

He was.

Now, about three weeks later, Messrs. Ackman and Ashner are mounting an aggressive effort, akin to a hostile corporate takeover, to seize control of the property that was perhaps the real estate boom-turned-bust's highest-profile failure: Stuyvesant Town and Peter Cooper Village.

The move--announced Monday as Mr. Ackman's Pershing Square Capital and Winthrop acquired $300 million of a second mortgage and filed a foreclosure motion on the property's owners--would seem to lend itself to a battle. After all, the holders of the $3 billion first mortgage, which is controlled by the special-servicer firm CW Capital, had been humming along on a foreclosure of their own that would have placed them in control and wiped out any of the other investors, such as Winthrop.

Of course, time will tell whether CW Capital does indeed launch a fight--it has suggested to others it might, given that it was upset with Mr. Ackman and Winthrop's move--or whether it amicably sits down and works something out with the opportunistic investors.

Regardless, the move injects some new drama into the colossal property's narrative, as it will either be taken over by a hedge funder (who just bought the behemoth retailer General Growth Properties in a similar fashion), or there will be a fight to push him out.

More and more, it seems that high-profile names fighting for control will be the legacy of Stuy Town. For its historic sale in 2006, most every big name in New York real estate--not to mention finance--lined up to try to buy the property, all of which would have overpaid by today's numbers.

And now, between Mr. Ackman, Fortress Investment Group (which just agreed to buy CW Capital) and suitors such as landlord Richard Lefrak who are raptly watching from the outside, the nondescript red-brick apartment buildings, originally built for the middle-class, are quickly becoming the site of a big-name skirmish once again.

"That's a lot of testosterone fighting over this," said one person involved in discussions with some of the parties.

A FEW QUESTIONS emerge from this: Why? Given that it's filled with drab buildings and far away from the traditional high-value battlefields of midtown--what's the gigantic allure? And given that there's always an attraction to Stuy Town that defies rationality, won't new owners always overpay when it inevitably trades hands again?

Mr. Ackman, for his part, simply says he's motivated by the value of the deal. He and Winthrop paid just $45 million for the $300 million in debt, and now have the potential to grab the rest of the property, which has $3 billion in first-mortgage debt. "I think it's worth a lot more than $3 billion," he told The Observer in a phone interview on Monday. "We can sell units to tenants at much lower than market prices and still make enough money to pay off the first mortgage and still make profit for us."

This latest chapter all started when Winthrop looked around for options after the owners, a partnership led by Tishman Speyer, defaulted on their debt at the start of the year.

Winthrop had put in $25 million to get a senior piece of the second "mezzanine" mortgage. The firm then sought out the other holders of the $300 million top layer of that mortgage and managed to put together agreements to buy, at a steep discount, the debt, which would then give it the ability to foreclose on the owners.

Enter Mr. Ackman. The investor put up much of the money; the two firms formed a partnership (77.5 percent Pershing Square; 22.5 percent Winthrop), and, on Sunday, they slipped a foreclosure notice--which escaped wide notice--in The New York Times business section. (The city's biggest office landlord, SL Green, which holds junior mezzanine debt, had been part of the deal, but appears to have dropped out, according to people familiar with the talks.)

Now the partnership has set up meetings with tenant leaders--who are a powerful political force that might be able to be brought on board with a co-op conversion plan--and others involved. As for the tenants, Winthrop and Mr. Ackman seem to acknowledge that if a co-op conversion were to be successful, the residents would have to be on board.

"It's a $3 billion real estate transaction," Mr. Ackman said. "They need help. They need us, we need them. I think that's the right way to look at it, and there's plenty of room to make a deal where everyone's happy."

WHETHER THINGS GO well with CW Capital will probably be evident in a matter of weeks. Mr. Ashner and Mr. Ackman have scheduled Aug. 25 as the date when they will grab effective ownership of Stuy Town, if no subordinate investors or others, CW Capital included, raise hell. And CW Capital, in turn, would need to give a month's notice to itself foreclose on the property.

Still, Winthrop and Pershing have a sword to fight back with against CW Capital, should they need it. If they are able to seize control, they could quickly throw the property into bankruptcy and avert the CW Capital-led foreclosure.

That is not what Mr. Ackman and company would rather do.

"We believe our plan will provide maximum value for all classes of bondholders," said Carolyn Tiffany, president of Winthrop, "and we look forward to working cooperatively with CW Capital if at all possible."

ebrown@observer.com

The judge overseeing the $3 billion foreclosure in federal district court, Alvin Hellerstein, granted the motion to foreclose yesterday.

From Mr. Hellerstein's ruling:

In their unopposed motion for summary judgment, Plaintiffs have established the existence of an obligation secured by a mortgage and the Borrower Defendants' default on that obligation. Accordingly, Plaintiffs are entitled to summary judgment on their motion to foreclose on the Property.

The process is a slow one, but all thing told, the special servicer in charge of the mortgage, CW Capital, is working relatively swiftly.

"They're moving very quickly on this," said Harold Shultz, a senior fellow at the Citizens Housing and Planning Council who has been following the foreclosure and distressed residential properties citywide.

Of course, there are a few steps yet before the existing owners, a partnership led by Tishman Speyer, cedes the deed to CW Capital, the special servicer overseeing the foreclosure. The judge ordered an auction of the property, to be sold either as one chunk or two (with Peter Cooper Village and Stuyvesant Town sold separately). Should the auction proceed as did a recent foreclosure at Riverton Houses, CW Capital would presumably put in the high bid for the property (as it would simply be paying itself, and can bid more than its likely market value). 

ebrown@observer.com

92

Al Doyle wants to be a homeowner.

Six months ago, the idea was a far-off concept. But since then, the mustachioed, lifelong Stuyvesant Town resident who is president of the property's tenants association has seen the desire for a tenant-led purchase of the 11,200-apartment morph into an actual plan of action, as the idea has suddenly enlivened the city within a city on the East Side. A recent meeting on the topic drew more than 1,200 residents; more than 6,000 residents have signed a "unity pledge" expressing the intent to buy, and such chatter is as constant as the complex's red brick facade.

"We talked about it in our board meetings-we talked about it in our general meetings," Mr. Doyle said. "People would write letters to the editor of the Town and Village, and it seemed that everywhere we turned, almost everybody we talked to wanted to have this type of opportunity."

And so, now five months after the owners-a partnership led by Tishman Speyer that bought the complex in a record $6.3 billion deal in 2006-defaulted on the overleveraged deal, the tenants are on a mission. They hired real estate attorneys and financial advisers, and are now formulating a co-op or condo conversion plan that would raise enough money to buy the property's $3 billion mortgage from the debt holders. If the foreclosure goes as hoped, finishing up as soon as this fall, Mr. Doyle and the tenants could be in a position to own one of the largest properties in the city.

Councilman Daniel Garodnick, who lives in Peter Cooper Village, is quarterbacking this long-shot effort. Four years ago, the 38-year-old onetime litigator at Paul Weiss led the push for another tenant-backed bid, when the building went up for sale. The tenants offered $4.5 billion (built on what were surely unrealistic assumptions) in a high-profile auction, one in which the bidders expected to immediately deregulate rent-stabilized apartments. Mr. Garodnick's group lost, but in the ensuing years he carved out a role as a frequent antagonist of the winning bidders, Tishman Speyer.

Now Mr. Garodnick is trying to get out ahead of a standard auction. The main reason for a tenant-led purchase, in his view, is a great fatigue with the existing private structure, one that encourages whoever the owners are to repeat the prior pattern of deregulating apartments.

"I think people want stability," said Mr. Garodnick. "They want to get out of this model where the property is changing hands every three to five years, and where owners have a business plan that is designed to push people out."

At its roots, there's a note of irony to the ambitious plan. The tenants are attempting a coup founded in socialistic ideals at the very property that represents one of the more spectacular capitalist failures of the era.

Specifically, the tenants would have to pay off the holders of the $3 billion mortgage, which was securitized in 2007-chopped up and sold in pieces to a multitude of investors. After it completes foreclosure, the firm in charge of the mortgage, the "special servicer" CW Capital, would be in a place to either sell or restructure.

The details of the tenants' plan are being handled by Meredith Kane, a well-respected real estate attorney at Paul Weiss, and Moelis & Co., a real estate financial adviser. The two, who only get paid if they put together a successful deal, spend their days meeting with various government officials, investors, middlemen and landlords who are interested in the concept of a tenant bid, along with others who might provide the financing. Fannie Mae and Freddie Mac, for instance, are being looked at to provide part of a mortgage and have met with the tenants, according to people familiar with the meeting. They have also met with City Comptroller John Liu, a trustee of the city's pension funds.

At a distance, the deal doesn't seem impossible. Divide $3 billion by 11,200 apartments, and it only comes out to $268,000 for a Manhattan apartment.

But on a closer look, there is good reason for skepticism. Ask around the real estate world, and one is hard-pressed to find anyone who believes that the tenant bid, in its broad concept, can raise anywhere near enough money to satisfy the mortgage holders. (Based on the current rents, the property is likely worth about $1.9 billion, but investors eyeing long-term rent increases would presumably pay more.)

The chief problem is the multitude of goals articulated by the tenant leaders and Mr. Garodnick. For instance, they want to convert the complex from rental to ownership, and are resolute that no one can be evicted and anyone who doesn't want to buy can keep paying their regulated rent. They also want those who do buy to pay below-market rates and be able to sell for a profit. Additionally, they desire long-term affordability restrictions, and to have Stuyvesant Town serve as a middle-class oasis in Manhattan.

But with every inclusive protection and affordability restriction comes an added cost. In a no-eviction plan, there is far less certainty of how many people will buy; those paying the least in rent would be least likely; and it's unclear if different tenants would be allowed to pay different prices. The more uncertainty and the less market-rate sales, the less likely it is that the tenants will be able to find investors.

"It doesn't matter with the restrictions or not-they're not going to get to $3 billion," said an executive who has looked closely at the property. "I don't know who would finance it."

And while there are sure to be requests for government help of some sort, few officials, as of yet, seem to be running toward the tenants with open arms.

"We're creating and preserving affordable housing for half a million New Yorkers through our housing plan, and naturally we'd like for Stuyvesant Town to be a part of it," Eric Bederman, a spokesman for the Bloomberg administration's Department of Housing Preservation and Development, said in a statement. "But right now there remain many questions about Stuyvesant Town's long-term ownership and financing structure. We're keeping a close eye on how things progress."

In the meantime, CW Capital could find it more in its interest to hold on to the property for a few years, selling it off when the economy improves. And as the large-property sales market begins to return, there is surely a long line of well-capitalized investors who have long been drawn to the property and might be willing to pay more than the current rents would support (Real estate scion Richard LeFrak, for one, has made it clear he'd like to own it someday).

Time, of course, will tell, and the tenants do have a few things working in their favor, the most notable being that they can be a defiant group with political heft if they don't like their owner. (Tishman Speyer ran into constant resistance as it tried to take measures to boost returns from the property.)

To Mr. Garodnick, this means that no one else could put together a co-op or condo conversion bid, as they would not have the support of the tenants and would not be able to raise as much money in the current economy.

"The conversion piece of this is what distinguishes us from other bidders," Mr. Garodnick said. "We believe that our proposal is going to be the most valuable."

ebrown@observer.com

In deal after deal, the Golden State's two main pension funds—the California Public Employees' Retirement System and the California State Teachers' Retirement System, which collectively manage a mammoth $330 billion on behalf of teachers and civil servants—ramped up their previously small New York portfolio. Aggressively bidding on properties, they scooped up two midtown skyscrapers, some residential buildings and two development sites, and they were lead investors in the largest-ever sale of a single property: Stuyvesant Town-Peter Cooper Village, which was bought in a $6.3 billion deal.

Perhaps offering a window into the funds' larger troubles today—they are, by some estimates, being swallowed by a $425 billion shortfall for California pensions—the investments are a spectacular lesson in poor timing, and have left a legacy of distressed assets on the New York skyline.

A Calstrs New York real estate fund is among the sorriest in its core domestic portfolio; the $600 million the funds put up to buy Stuy Town has vaporized, with no return expected. Two development sites in Lower Manhattan and in Harlem, where a hotel and an office tower were once envisioned, now sit stalled. A midtown skyscraper is headed toward default, and another has seen vacancies jump as rents fall.

Of course, most every investor who played the New York game at the end of the last cycle lost money. But the California funds were an extraordinary case, as they used their own cash to take major stakes in skyscrapers, often with few other partners.

By contrast, the bulk of the Manhattan landlords who overpaid in 2006 and 2007 kept their own money in their pockets, leveraging huge amounts of debt with small bits of personal equity. And many of those landlords had bought successful properties during safer times to fall back on.

Calpers and Calstrs had limited New York experience, having invested in only two successful projects of note: the Time Warner Center and 120 Broadway.

A KEY FIGURE in California's New York tale is Larry Silverstein, the 78-year-old developer of the World Trade Center. Calstrs decided it wanted more New York real estate in its portfolio, and, as pension funds often do, it forged a tie with a local landlord, starting a fund called Metro Fund LLC. Funded chiefly by Calstrs, it was to have $2 billion in buying power. Mr. Silverstein would take that money and invest it, hoping for returns of his own.

And so he did. In the summer of 2006, Metro Fund spent $416 million on a 35-story, glass-and-aluminum-clad skyscraper at 575 Lexington Avenue, between 51st and 52nd streets, at the center of Manhattan's—America's—prime business district.

That December, the fund purchased Moody's old headquarters, a 13-story, 441,000-square-foot building at 99 Church Street, for $170 million, then tore it down with the hope of building a Robert A.M. Stern-designed, 80-story, 912-foot tower with condos and a Four Seasons hotel. It was to open in 2011.

And in late 2007, as the credit crisis was first making its presence felt, the fund bought the soaring, 50-story skyscraper at 1177 Sixth Avenue, between 45th and 46th streets in Times Square, for $1 billion, or $1,000 per square foot.

In the deals, Mr. Silverstein took the lead, and those on the other side of the transaction didn't deal with Calstrs at all.

Multiple executives involved on the sellers' side said they were intrigued as to why Mr. Silverstein, with so much else going on, was interested in buying so many office buildings. "It didn't even make sense to me why a guy who had so much else on his plate would bother with this," said one executive.

Of course, he did not have much of his own money in the deal. In at least two of these deals, as is common in similar pension-fund arrangements, Mr. Silverstein put in 3 percent of his own money, with much or all of the rest coming from Calstrs, according to mortgage documents and executives involved with a sale.

And now, the deals are going sour.

The latest Calstrs real estate performance report, with values and returns through September, lists Metro Fund as among the worst-performing funds in its domestic core portfolio, with a rate of return of negative 82 percent since its inception. (This stat is likely skewed by the inclusion of the development site at 99 Church, which is sitting vacant with no revenue coming in.)

The high sales prices paid by the fund assumed rents would continue to soar, and the buildings now cannot cover their mortgage payments.

In March, the loan on the 2006 purchase of the skyscraper at 575 Lexington was sent into special servicing for a potential restructuring. Mortgage documents filed with the S.E.C. indicate that the assumptions underlying the Bank of America loan for $325 million were highly ambitious. Though the income for the tower was only $9.8 million in 2005, the year before it traded hands, Mr. Silverstein and Calstrs expected it to grow to $21.6 million by the loan's maturity, in October 2013, if not before. According to research firm Real Capital Analytics, "The building is in danger of imminent default."

The development site at 99 Church, once an office building with rent coming in, is now rent-less, as Mr. Silverstein searches for financing in a very rough market for hotels.

At the 1177 Avenue of the Americas tower, the loan is current. But vacancy is up to more than 25 percent from less than 5 percent, according to the database CoStar.

In a statement, Silverstein spokesman Dara McQuillan defended the venture with Calstrs, noting that the fund has signed a number of new leases and suggesting that it is looking to stay for the long term.

"Our investment strategy, as reflected by our Metro Fund activities, is to acquire strong assets, make substantial improvements, and manage them for long-term success," he said. "Since acquiring these properties with Calstrs in 2006 and 2007—and despite the economic downturn—we have successfully leased more than 360,000 square feet and raised occupancy levels in each building. New York remains a great place to own and manage commercial real estate, and we remain bullish on the fund's long-term prospects."

Calpers had a similar experience, although its was far more concentrated, in the one disastrous purchase of Stuyvesant Town, led by Jerry and Rob Speyer's Tishman Speyer. The fund was the single largest investor there, putting in $500 million (Calstrs separately put in $100 million); it once expected rents would rise year after year, as rent-stabilized apartments were rapidly converted to market-rate apartments. Some estimates put the property's value at less than $2 billion based on current income, and the equity partners are expecting a full loss.

Through a fund run by MacFarlane Partners-which has now resigned as fund manager, amid criticism-Calpers bought a stake in a prominent development site on 125th Street, next to the Metro North stop, for more than $55 million in 2006. A plan for a Major League Baseball-anchored tower, developed by Steve Roth's Vornado Realty Trust, fell apart in 2008, and the fund's stake-60 percent, according to a tax break application filed with the city-is now worth a fraction of what it once was, with no development publicly planned.

NEW YORK WAS was by no means the only place the California funds ran into trouble, due to the unfortunate strategy of pouring money into real estate nationally-and outperforming similar funds at the time-in the last years of the boom. In 2005 and 2006, Calpers put more than $26 billion into real estate, with most of the investment considered risky; in the prior two years, it invested about $8 billion in real estate. Calstrs pursued a similar approach.

As of its latest performance reports, Calpers posted one-year returns of negative 48 percent on its real estate portfolio, worse than other similar funds (pension funds often endeavor for an 8 percent return). Calstrs showed returns of negative 43 percent.

Both funds are now reviewing and restructuring their real estate investment policies, along with changing some investment advisers. As for their future in New York, time will tell whether the funds will be willing to put in more money in order to save their properties from foreclosure, should they indeed continue down that route.

A spokesman for Calpers, Clark McKinley, said in a statement that the fund is evaluating its relationships with managers, and may end some partnerships. "Calpers is in a major restructuring mode, reducing risk and leverage," he said. "We have adopted new policies and have new leadership since the Peter Cooper investment."

A spokesman for Calstrs declined to comment. California's governor, though, summed it up rather ominously-and accurately. "In California, we had the Internet bubble, then the housing bubble," Arnold Schwarzenegger said on April 14, in one of his weekly messages to the state. "Next is the pension bubble. And it's starting to burst."

ebrown@observer.com, drubinstein@observer.com 

Editor's note: This story reflects corrections made on May 14.