NY supreme court has ruled today that the owners of the Stuyvesant apartment complex inappropriately began charging market rents on thousands of units and according to NYT may owe as much as $200 million in overcharges back to tenants. My previous post regarding the struggling deal done at the height of the market is here . The ruling may also affect many other owners throughout the city.
New York Observer headlines it as “Apocalypse Now at Stuytown” .
WSJ reports this morning that the Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan is “in danger of imminent default.” Gee, what a surprise! It was purchased in 2006 at the height of what some CRE pros are affectionately referring to now as the “cocaine era” of commercial real estate. Real Capital reports that the property was purchased at $5.4 billion, which equates to about $481,000/unit or a 3.2% cap rate. On a price per unit basis this is not unheard of for Manhattan. For a project of this size, though, and with so many rent regulated units, the 3.2% cap rate is really a headscratcher, and was even during the bubble days. Granted, Manhattan cap rates trend lower than most markets, and investors there seem to tolerate extremely low cap rates in return for the safety of investing in a market with incredible demand drivers and relative safety of principal. But the low cap rate, combined with aggressive underwriting and high leverage was a recipe for disaster once the recession hit and the owners’ business plan faltered.
Greatly compounding the risk in the deal was a high loan to value and extremely aggressive underwriting of operating performance. The deal was financed with 80% plus leverage, thanks largely to CMBS debt, which has now been transferred to special servicer CW Capital, one of the biggest players in the special servicing world (where CMBS loans go when they have or are about to go bad). The operating projections assumed that many of the rent controlled units could be converted to market rate and that overall operating income would triple (!) in just a few years. Well, needless to say but rents have not kept pace with projections, and a tenants’ lawsuit has largely kept the owners from executing on their plan to convert rent controlled units to market rate.
Most astounding is that some of this risk was in fact foreseen by the lenders. Why else would they have required a $400 million interest reserve? That’s right, the deal included a $400 million interest reserve to cover debt service shortfalls. Obviously the deal had “negative leverage”. The price paid was so high, and the leverage ratio so great, that the deal probably was forecast to run deficits–operating income could not cover the debt service until a few years down the road when operating income would, ahem, triple (allowing the owners to flip the deal at huge profit in theory). Given its size this deal will surely be closely watched as a gauge of how the CMBS system will handle troubled deals such as this and the outcome may affect sentiment, positively or negatively, about the risks which CRE presents to the wider economy.
WSJ link here .
Wikipedia:
Interesting blog about Stuyvesant Town: http://stuytownreport.blogspot.com/
Tenants’ Association: http://www.stpcvta.org/
