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.Here it is in a nutshell: HUGE LEVERAGED BUYOUT NEAR THE PEAK OF THE MARKET + DESTABILIZATION LAWSUIT DELAYS CONVERSION TO MARKET RATE RENTS + MARKET WAVE DOWN AFTER LEHMAN + LOWER RENTS + HIGHER VACANCIES = BIG BIG TROUBLE!
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.This will be a story hitting headlines multiple times as the saga concludes.
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.
Posted by sechel
Mon Aug 31st, 2009 08:12 PM
what happens to the unfortunate people that live there. will get basic services?
Posted by MeekSheep
Mon Aug 31st, 2009 08:28 PM
The people that live there will be fine. Even at 30% off market peak it's still a valuable holding if the buyer is willing to hold in perpetuity.
Posted by Noah
Mon Aug 31st, 2009 09:22 PM
well I havent check in lately, but for most residents I dont think you will notice any change. No way the owners screw up by cutting services to tenants at this point in time on a property with such mass exposure in media. That word would spread like wild fire and cause way more problems for the owners/creditors.
However, any unfinished work may be delayed. Im out of rentals and hardly in those towers. So I dont know if there is anything planned that was not completed or even started yet.
Posted by cynical
Mon Aug 31st, 2009 10:01 PM
If the court of appeals overturns the lower court's ruling (which favored the tenants), I hope that the tenants go ballistic and march on city hall! I have no faith in city government, and I think the system is corrupt. I wouldn't be surprised if the real estate community is paying off the judges.
Posted by tenant
Tue Sep 1st, 2009 06:57 AM
noah,
the lawsuit grounds listed are incorrect. the plaintiffs allege that met life and tishman illegally destabilized the apartments. met life chose to enter a tax program that gave them preferential tax treatments until 2015 in return for making large improvements. under the terms of that tax program the landlord is not allowed to destabilize, regardless of what the rent reaches or the tenants income.
the heat will be on. but we've noticed plenty of smaller issues. it's not like living in a ghetto, but some things are noticeable.
cynical, the appellate division (which ruled in favor of the tenants) is not very tenant friendly. the court of appeals in albany is very friendly to tenants. and the appellate division's ruling was unanimous, 5-0. it would take quite a bit for the court of appeals to overturn.
Posted by Fred
Tue Sep 1st, 2009 09:48 AM
Price discovery on these CMBS will be like catching water. We are probably looking at discounts of 60% to 70% easy.
Posted by In Debt We Trust
Tue Sep 1st, 2009 10:59 AM
Rent stabilization kicks in at $175k/salary?
Isn't that a bit high?
Posted by Noah
Tue Sep 1st, 2009 11:44 AM
IDWT - yes! I think so. But certainly no one benefiting will complain and they usually do what they can to report under that number if they make more.
Posted by lr10021
Tue Sep 1st, 2009 12:23 PM
Who is holding the 1.5B mezzanine loan?
Posted by here we go again
Wed Sep 2nd, 2009 08:26 PM
today fitch downgraded Laurence Gluck's Riverton House debacle. why is no one addressing the ethics of these kinds of business risks. these guys are playing with real people's lives! this is all very disturbing.
Posted by sad truth
Fri Sep 11th, 2009 08:18 PM
The following is excerpted from Mother Jones Magazine regarding Gluck and Riverton;
It all sounds like a classic tale of the bust except that, unlike ordinary people caught up in foreclosure proceedings, Gluck and his partners have made a fortune off Riverton Houses. Just as homeowners often take out some extra cash when they refinance a property, team Gluck pulled out $67 million—the high-roller version of cash at closing. A homeowner would be on the hook for that extra cash, but Gluck's group purchased Riverton through a limited liability shell company, which allows it to shelter its refinancing windfall in case of a default. Minus the down payment, the partners walk away with nearly $42 million. The Riverton deal exemplifies a strategy known as predatory equity.