Stuy Town / Peter Cooper Village CMBS Downgraded

A: And here we go. Fitch ratings downgraded four CMBS transactions due to exposure to $4.5Bln in commercial mortgages tied to Stuyvesant Town / Peter Cooper Village. The downgrade reflected the likelihood of default as debt service cushions are almost depleted.

Via Housingwire.com, "Fitch Downgrades Four CMBS Transactions on Likely Default":

Fitch Ratings downgraded four commercial mortgage-backed securities (CMBS) due to exposure to pieces of a $4.5bn commercial mortgage that is likely to default.

The loan secures Stuyvesant Town/Peter Cooper Village, a collection of 56 multistory buildings on 80 acres with a total of 11,227 apartment units. The Stuy Town loan continues to underperform, along with other loans in the affected transactions, Fitch says.

Of the $4.5bn loan, $3bn is securitized and the remaining $1.5bn of mezzanine debt held outside the trust. Fitch determined cash flow generated from the property remains well below the amount needed to service the current outstanding debt, and the borrower as a result must use debt service reserves to cover operating shortfalls. Fitch notes the general reserve and replacement reserve are “essentially depleted” and the debt service reserve balance fell to $49.3m, from $400m at issuance.

Tishman, along with the now bankrupt Lehman, also purchased Archstone Smith for $22.2Bln in what was the industry's largest public to private merger in the multifamily REIT sector. But it didn't end there, Tishman also went after the CarrAmerican real estate portfolio in late 2006 for $2.8Bln. Clearly they were on board the credit gravy train that ended up taking Lehman down. Add them all together and what you get is a story in Bloomberg last week that Tisman Speyer's real estate holdings fell by approximately 33.5% from peak. Ouch!

Whatever model the buyer used to rationalize the purchase at the time needs to be adjusted now that Manhattan real estate caught up with the credit dislocations that occurred less than one year after the purchase. Today's rental market is one that is trending down, while at the time of the purchase rents were rising to their ultimate peak around Fall of 2007. I would estimate rents today in that area to be down a minimum of 10%-15% from peak, with further downside possible as NYC's unemployment rate continues to rise.

The entire complex houses about 11,200+ apartments, 70% of which are rent stabilized. The rent stabilization rules require the tenant to use the apartment as their primary residence + earn less than $175,000 for two consecutive years + rent below the $2,000/month threshold. Tishman Speyer, along with the real estate arm of Blackrock, agreed to buy the land + buildings for $5.4Bln in late 2006. MetLife was the timely seller.

Tishman Speyer was sued by the Stuy Town tenants association earlier this year for improper practices to find tenants in violation of rent stabilization laws. The goal was remove as many rent stabilized tenants as possible so that market rate rents could be collected.

The reserve fund has about $49.6 million left and the burn rate quoted in the NY Post a week ago was $11.3M a month. However, this burn rate that is depleting the reserve funds should fall as we enter September. September is known to be one of the busiest rental months in Manhattan as the school year kicks off, so time will tell how many vacancies are filled and if rental rates stabilize.

Alex Finkelstein over at The Real Estate Channel chimes in:

"Based on current performance and the uncertainty surrounding ongoing litigation, we do not expect property performance to improve sufficiently to service the securitized portion of the $4.5 billion debt before reserves are depleted', says Fox. Capital expenditures for converting stabilized units to market rents have ceased because of a moratorium on conversion imposed by the Court of Appeals as a result of the litigation.

While this has reduced capital expenditures, the use of debt service reserves has increased because the Court also requires the borrower to separately escrow the difference between stabilized and market rents on former stabilized units, Fox says.

Previously, this difference was available for debt service. Once debt service reserves have been depleted, the borrower has the option to replenish them or cover the operating shortfalls out of pocket.

Fitch's analysis is based on updated expectations of limited unit turnover and stabilized expenses. Based on this estimate of cash flow, losses could be as high as 20% of the $3 billion A note balance.

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