Picking Up Pieces at Stuyvesant Town

In the coming weeks, control of Stuyvesant Town/Peter Cooper Village will pass from one of New York’s most glamorous and powerful real estate families to a company that most people have never heard of, a major player in an industry that few even know exists.

Last week’s decision by the partnership led by Jerry Speyer and son Rob to hand back the keys to the complex after defaulting on a mortgage payment lays the groundwork for the transfer. Stepping into the breach will be CW Capital, a special servicer. Such companies work out troubled-property loans to salvage whatever it can for lenders.

“There is no question that CW Capital is up to the task,” says Richard Parkus, an analyst at Deutsche Bank. “They are seasoned guys.”

CW Capital will need all of its skills to sort out the wreckage left by the implosion of the largest single residential real estate purchase in history. Lenders who have lost billions of dollars as the property’s value shriveled by more than half are jockeying to reclaim what’s left of their doomed investments. Meanwhile, prospective buyers are circling, tenants are demanding that services be maintained and that they get a seat in the negotiations, and politicians are vowing to protect the complex’s rent-regulated status.

“Figuring out the future [of Stuy Town] won’t be a simple process, and it won’t necessarily be a fast process,” says Dan Garodnick, a City Council member who lives in the complex.

For openers, the collapse has affected scores of investors around the world who now find themselves trapped in a giant maze of often competing interests.

“The problem is that when these deals were being put together, no one was thinking they might unravel in three or four years,” says Michael Carp, executive vice president at Berkadia Commercial Mortgage, another special servicer.

DICED UP AND DISTRIBUTED

Like most big real estate deals of the boom years, the debt that helped finance the $5.4 billion Stuy Town deal was diced up and sold to a variety of investors, each with different rights, depending on the risk incurred. The expected controlling position of CW Capital, a Washington, D.C.-based unit of a Canadian money management firm, stems from its representing holders of the most senior portion of the debt.

CW Capital will have two immediate concerns. It must select a replacement for Tishman Speyer to manage the 80-acre, 11,000-unit complex. Some expect CW Capital will tap Rose Associates, which ran the property for its former owner, MetLife Inc. Other potential managers include WinnCompanies, which says it has been talks with CW and is very interested.

Far thornier will be figuring out how much rent can be charged and what rebates are due tenants, following last year’s court ruling that Tishman Speyer had illegally deregulated rents on roughly 4,000 units. The court didn’t say whether its ruling should be retroactive. Tenant lawyers estimate their clients are owed $200 million in rebates.

The tenants’ lawyer had been negotiating with Tishman Speyer on a settlement, but CW Capital’s position is unclear. The special servicer didn’t respond to requests for comment.

CW Capital can have the property appraised after issues regarding rebates and future rental income are settled. The appraisal will be key to restructuring the loan and/or selling the property.

Several groups have already tentatively expressed interest in buying Stuy Town. They range from Donald Trump to a venture including the LeFrak family.

The appraisal will also clear a path for a restructuring of the debt by allowing CW Capital and others to determine which mortgage holders still have a claim. Analysts say the property is worth about $1.8 billion. But some of those who have lost money may go to court before they give up.

Meanwhile, a group of mezzanine lenders—who provide the money to fill the gap between the first mortgage and the buyers’ equity—have threatened to push the property into foreclosure and seize control. That effort could yet be revived.

In the middle of all this will stand CW Capital, the second-largest special servicer in the county when ranked by the dollar amount of loans it is servicing, according Fitch Ratings. As of the end of last year, CW Capital was attending to $15.5 billion worth of distressed loans. In the third quarter of last year, the company recovered 87% of what its clients were owed, the third-best rate in the industry.

CW Capital was selected because one of its sister companies holds junior bonds in one of the pools where the Stuy Town loan resides. Such arrangements are standard in these circumstances even though they raise concerns about conflict of interest.

Stephanie Petosa, a managing director at Fitch, notes that as more loans enter special servicing and tight credit conditions make it hard to sell properties and restructure debt, CW Capital and all the special servicers will face an unprecedented environment.

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