Stuyvesant Town’s Lenders Take Over Property

Lenders formally took control of Stuyvesant Town and Peter Cooper Village on Tuesday, ending a four-year odyssey that put the affordable middle-class enclave at the center of both the biggest real estate deal in history and a major financial debacle.

CW Capital, the company representing the complexes’ senior lenders, is now expected to begin negotiations with tenants over what could be the country’s largest conversion of rental buildings to a condominium or cooperative. That could start battles among the 25,000 tenants over whether the apartments should remain affordable or be allowed to trade openly on the real estate market.

The changes occur under strikingly different circumstances than in 2006, when a partnership of Tishman Speyer Properties and BlackRock Realty bought the 80-acre property from the original owner, Metropolitan Life, for a record-breaking $5.4 billion.

The red brick buildings, built by Met Life more than 60 years ago for returning World War II veterans, were considered by investors to be a gem in the rough because of their Manhattan location and sturdy construction.

The buyers expected to triple their net income by 2011 by replacing longtime residents paying regulated rents with tenants paying higher market rates. But their plans fizzled after residents resisted and the partners failed to convert enough apartments to market rents. In January, they defaulted on a $16.1 million monthly mortgage payment.

The casualties from the ruptured deal spanned the globe, as analysts revised the value of the property to $1.9 billion, less than one-third of the acquisition cost. The Church of England, the government of Singapore and several public American companies lost hundreds of millions of dollars, while three public-employee pension funds in California and Florida saw their combined $850 million investment evaporate.

On Tuesday, CW Capital, which represents a multitude of investors who held the $3 billion first mortgage, effectively took control by buying out the interests of William A. Ackman, chairman of the hedge fund Pershing Square Capital, and Michael L. Ashner, chairman of Winthrop Realty Trust. The two had paid $45 million for a $300 million block of secondary loans with the hope of taking the property away from CW Capital.

Their strategy failed after CW Capital blocked them in court, although Mr. Ackman and Mr. Ashner are getting back all but the legal fees they spent. By buying the men out for $45 million, CW Capital was able to avoid future litigation, but more important, it allowed them to structure the transfer in a way that avoids, or at least defers, upward of $100 million in state and city taxes.

“This brings one chapter to a close,” said Gregory A. Cross, a lawyer for CW Capital. “We have control of the property, and we’ve resolved all the outstanding litigation. We now have maximum flexibility in dealing with the different constituencies, in particular, the tenants.”

CW Capital has told the tenant association and real estate executives that its first priority is to try to reach a settlement over rents and overcharges for about 4,300 apartments at Stuyvesant Town and Peter Cooper Village. Last year, the New York State Court of Appeals ruled that the owners of the complexes had wrongfully deregulated and raised rents for those apartments while getting special tax breaks from the city.

The ruling brought the 4,300 units back under the city’s rent regulations and put the owners in jeopardy of having to repay an estimated $200 million in rent overcharges.

“We want to settle the case,” said Alexander H. Schmidt, the lawyer for those tenants.

In a separate but related move, the tenant association has talked to CW Capital about an “affordable” conversion plan, which would require a delicate balancing act between the company’s obligation to recover the lenders’ $3 billion investment and the tenants’ desire for apartments at below-market rates.

The association’s president, Al Doyle, and City Councilman Daniel Garodnick, a lifelong resident of the complexes, have said they want to preserve the complexes’ historic roles as an affordable housing development for the middle class. They say that some units should remain as rent-regulated apartments.

Figuring that no investor today would be able to raise more than $3 billion to pay off the mortgage, CW Capital has hired two experts in the conversion field, the lawyers John Kelly and Jay Neveloff, to help devise a plan.

The challenge for tenant leaders is to maintain unity among residents, particularly when it comes to the profit on reselling apartments. On a recent Saturday, Mr. Garodnick stood beside a table for three hours on the oval at the center of Stuyvesant Town, answering questions from hundreds of passing tenants.

“I don’t think greed will be the defining motivation for most tenants,” Mr. Garodnick said. “The key is to create the right cocktail that maximizes choices for tenants while maintaining the community as a place for middle-class people into the future.

“We’ll engage with CW Capital and try and mix that cocktail.”

Many older tenants want the complexes to remain a middle-class refuge. Linda Lorraine, who raised two children in Stuyvesant Town and is now retired, said she did not think she could afford to buy her apartment. “I’m rent-stabilized,” Ms. Lorraine said. “I’m here many years, so I think I would just stay rent-stabilized. I don’t plan on moving.”

But some younger tenants do not have the same attachment. “I don’t plan on being here forever,” said Meghan Gibson, 23, who shares an apartment with two roommates. “If I did become an owner, I would want it to go up in value for the day I would sell it.”



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