By Sabina MollotInvestment analysts have put a $4.4 billion value on the massive Stuyvesant Town apartment complex on Manhattan’s East Side.
The team of experts from J.P. Morgan that analyzed the current debt structure of the 11,200 apartment complex concluded that the most likley buyer of the distressed property will be a partnership formed late last year between its current tenants and property behemoth Brookfield.
But it warned that it could take years to unravel the tangled web of legal and financial woes that have engulfed the development since former owners Tishman Speyer handed the keys back to lenders after defaulting on the $5.4 billion mortgage it took out with partner BlackRock in 2006.
“We believe the Brookfield/Tenants Association acquisition is the most likely outcome,” the JP Morgan report said. “This is primarily because, even though the revenue generated by Stuyvesant Town is still substantially below what the market can bear, the costs and the timeline of a deregulation strategy are a significant obstacle to a potential acquisition of the property as a pure rental building.
“In fact, recent legislation has made it significantly more expensive to bring legal rents for the complex up to market rates.”
J.P. Morgan, which has no involvement with Stuyvesant Town, issued its findings while tracking the progress of the property, which was last appraised in September 2011 at $3 billion.
The report stated that due to the ongoing “complex legal issues” being worked through, it could take at least 12-24 months for the complex could be sold.
Despite announcing it would submit a bid for Stuy Town with Bookfield by the spring, the Tenants Association has since said it would probably not happen until this summer. As of this week, there was no proposed date for an announcement.
Meanwhile, loan servicer CWCapital has said that ongoing litigation surrounding the impact of a J51 tax abatement on rents at the complex will need to be resolved before a sale happens. J.P. Morgan noted that the earliest a resolution settlement could happen is mid-2013.
In the report, it was also noted that plaintiffs in the J51 case have waived their claim for treble damages and that “the liability associated with rent overcharges is joint and several, meaning it would pass onto any eventual buyer.
“Furthermore since the Roberts plaintiffs have not been certified as a class, other current and former tenants could in principle sue the owners (again with joint and several a class, other current and former tenants could in principle sue the owners (again with joint and several liability), leading to further litigation and potentially greater liability. As a result, CWCapital has been quite clear in their commentary that this case must be resolved before the workout can move forward,” said the report.
As for the projected one to two-year timeline, J.P. Morgan said that takes into account time for a class certification and to finalize a settlement, followed by a notice period for hearing objections by class members, and then finalizing the settlement and condo conversion paperwork. Additionally, that time could be delayed even further by appeals.
Ultimately, the three authors of the report concluded that the TA/Brookfield non-eviction condo plan made more sense than a plan that would deregulate units or rely on other ways to raise rents, such as getting vacancy allowances and improvement increases for apartment renovations.
In J.P. Morgan’s view, a condo structure would yield higher returns since condo prices in nearby Kips Bay and the East Village “have performed quite well, outpacing Manhattan more broadly, and are by some measures pre-crisis levels.”
In response to the report, Council Member Dan Garodnick said, “This report shows what we have been saying all along, which is that a tenant-led deal with a strong partnership will be the best possible outcome for residents and for CWCapital. I think this was encouraging that an independent analysis came to that conclusion.”
Garodnick also added that, even though the property has been valued at $4.4 billion in a partial condo conversion, “That doesn’t mean that’s what a bid has to be.”
Some residents have expressed concern about the bid price climbing too high to keep units affordable. However, Garodnick noted, the goal of the tenant-led deal in the first place was to bring stability to the community.
Al Doyle, president of the Tenants Association, said he too was encouraged by the report’s conclusion.
“It’s an independent analysis of the situation and it points to the fact that possibly the best road to recovery, and to a resolution, is through the Tenants Association and Brookfield.”
A spokesperson for CWCapital did not respond to a request for comment.
CW, which is the special servicer and de facto owner of ST/PCV, represents the lenders of the property’s $3 billion senior debt. There is also $1.4 billion in mezzanine debt held by CW and others.
The authors of the report were Edward J. Reardon, Meghan C. Kelleher and Joshua D. Younger of J.P. Morgan Securities, LLC.