By Konrad Putzier
Fortress Investment Group is starting a push to take over StuyTown, but first the firm has to untangle a web of debt layers and potential conflicts of interest.
After years of remaining silent on its plans for putting Stuyvesant Town/Peter Cooper Village up for sale, CWCapital made a move last week to foreclose on a portion of the property’s mezzanine debt.
It was then reported that Fortress, CW’s parent company, was preparing a $4.7 billion bid.
Neither Fortress nor CWCapital would comment on that report, but in a brief written statement, the special servicer of the property, which also manages a chunk of the mezzanine or junior debt, said that a sale was scheduled to take place on June 13.
The company went on to say the action “will have no impact on our residents or on property operations.”
The move has shone a spotlight on StuyTown’s complex debt structure. Its previous owner, Tishman Speyer and BlackRock, took up a $1.4 billion mezzanine loan on top of $3 billion in senior CMBS debt to fund the purchase for $5.4 billion. When Tishman Speyer and Black Rock defaulted on their loans, the CMBS bondholders and mezzanine lenders became de-facto owners of StuyTown.
According to Bloomberg, CWCapital bought a $300 million portion of the mezzanine debt in 2010, which it is now foreclosing on. A recent Credit Suisse report noted that it is “not completely clear” who owns the rest of the mezzanine debt, but Bloomberg cited attorney Scott Tross as saying that foreclosing on the $300 million loan would give CWCapital control of the complex.
While senior debt is typically secured by a building, mezzanine debt uses a building’s holding company as collateral. By foreclosing on StuyTown’s mezzanine debt, CWCapital could take control of its holding entity and offer the buildings for sale.
But this is where a potential conflict of interest looms. Most of the proceeds from a sale would go to the bondholders of StuyTown’s senior debt. As the seller, CWCapital would be required to act in their best interest and achieve the highest possible price.
But if Fortress ends up bidding for StuyTown, CWCapital would be faced with a conflict of interest between the bondholders it is representing and its own parent company.
In response to the planned foreclosure, which was first reported in the New York Times, ST-PCV Tenants Association Chair Susan Steinberg said she was tired of seeing the community being treated “like a football.”
“Everything that went into building a unique residential complex for the middle class has been upended in the interest of the bottom line,” she said. “We are being punted towards a goal that isn’t ours.”
She added that it was time to have tenants own the place. But that was before hearing about the potential Fortress bid.
The Tenants Association had partnered with Brookfield Asset Management in 2011 in the hopes of buying the complex and going condo. CWCapital had declined to negotiate though saying no business could be discussed until “Roberts v. Tishman Speyer” was settled. But after the settlement, there was still no chatter about bidding or a conversion.
Council Member Dan Garodnick said anyone could bid in the foreclosure, but CWCapital itself could be the winning bidder, using its unique position as debt servicer.
“They could bid billions of dollars without writing a check,” he said, “Because they are owed money here.”
He added that the move to foreclose on the mezz debt wasn’t really a surprise, since technically the property’s already been in foreclosure for years.
“It just hasn’t been formalized because there hasn’t been any action to foreclose on the lenders,” said Garodnick. Ultimately, he said what matters is that tenants’ rights are preserved.
In an official statement, the Council member also said the great bidding war of ‘06, in which potential owners were wrongly led to believe the sky was the limit on what they could charge for rents, shouldn’t be repeated.
“We cannot allow an overheated auction with wild expectations that puts a target on the back of rent-stabilized tenants.” he said. “We have seen that movie before. Tenants, and the City of New York, cannot afford to let that happen again.”
That view was shared by Assemblyman Brian Kavanagh, who said any developer with eyes on this particular prize needs to know that “This is a community that will stand up for itself.” He also said he hoped the real estate industry will have learned from Tishman Speyer’s mistakes of unrealistic expectations and disregard for the Rent Stabilization Law.
“They shouldn’t bank on being able to remove any of the tenants,” said Kavanagh. The “Roberts v. Tishman Speyer” class action suit will keep ST/PCV stabilized until the J-51 tax abatement expires in 2020. On the other hand, with one-bedroom apartments in Stuy Town going for rents that start at close to $3,000, many of the newer residents of the community still consider themselves stabilized in name only.
Developer Richard LeFrak, who bid on the property in 2006, is possibly interested in doing so again, according to the Times piece. Another developer, Gerald Guterman, who’s openly expressed a desire to turn ST/PCV co-op, said that now he’s not sure what he wants to do.
Noting that the announcement by CW only gives potential bidders a month lead time, he quipped, “Fortress makes an offer today. You think it’s because they own CW and they’re not giving outsiders the opportunity? How do you have time to (plan) unless you are familiar with what’s going on?”
As for the reported bid amount, Guterman said he isn’t sure how that sale price could make it possible for current tenants to buy if given the option. He also wasn’t sure if the price is worth it considering all the students and others living in apartments converted with pressurized walls. “It’s still a number where I could do it but I’m not sure I want to,” he said.
Meanwhile, last August, while still a candidate for mayor, Bill de Blasio penned an op-ed, saying the city should make sure ST/PCV remains affordable.
“While Peter Cooper Village-Stuyvesant Town is privately owned, the city has an obligation to keep its homes affordable for hardworking New Yorkers and their families,” he said. “PCV/ST was created through the power of the city and its use of eminent domain – therefore, it’s the responsibility of the city to ensure that these homes and other affordability housing are never beyond the reach of middle class New Yorkers.”
A spokesperson for the mayor did not respond to a request for comment on this story, but Garodnick said he learned that a tenant-led bid would have the support of the city’s housing commissioner, Vicki Been, and the deputy mayor for economic development, Alicia Glen.
News of the imminent sale comes on the heels of a settlement over five MCIs between CWCapital and the Tenants Association and word that “Roberts v. Tishman Speyer” tenants will finally be paid the money they’re owed by CW.
With Tishman having paid a record-breaking price of $5.4 billion, along with $1.4 billion in mezzanine debt, there was $3 billion in senior debt (the lenders of which are represented by CW) and $1 billion in equity.