WORLD PROPERTY CHANNEL ®

Stuyvesant Town & Peter Cooper Village

Patience has run out for Bank of America Corp. and U.S. Bancorp.  The two lenders have held a $3 billion unpaid mortgage on Manhattan's largest apartment complex since 2006.

Now they are calling in the note.  They have formally set a public auction for Oct. 4.  They hope to receive back a large portion of their loan from investors who may see a new life for the 54-building, 11,250-unit apartment complex known as Peter Cooper Village and Stuyvesant Town.

But the foreclosure auction date could run into snafus.  Another New York City-based investor group that holds a junior mortgage on the same property is challenging the auction set by the big banks.

The move comes after the banks sued in New York State Supreme Court last month to block a group led by activist investor William Ackman from foreclosing on the property, The Wall Street Journal reports.

William Ackman

Ackman's firm, Pershing Square Capital Management, made a move for control of the complex earlier last month by teaming up with Winthrop Realty Trust. Together they snapped up $300 million of the complex's junior debt and launched a foreclosure proceeding.

Justice Richard B. Lowe III, who heard the arguments from both sides last week said he would make a decision before Sept. 30.

"No one will be able to complete a foreclosure without the judge's approval," Mark Edelstein, head of the real-estate group at law firm Morrison & Foerster LLP, told the WSJ.

The fight underscores the value that many still see in the complex that has become a national symbol of the real-estate collapse, according to the WSJ.

Mark S. Edelstein

With 11,250 apartments in the middle of Manhattan, it would still be enormously valuable to investors at the right price, the WSJ reports.

Meantime, the battle is being closely watched in real-estate and financing circles because of the amount of money at stake for numerous investors who bought the debt tied to the property.

The complex -- developed after World War II as a bastion for the middle class -- has been up for grabs ever since a group led by Tishman Speyer Properties and BlackRock Inc. said early this year that it was giving up the property to creditors.

The Tishman group, which purchased the complex in 2006 for $5.4 billion in a highly leveraged transaction, ran out of cash to pay debt service, as Real Estate Channel previously reported. (Please see related postings at the bottom of this article.)

The financial woes of the complex have become politically charged as tenants and others struggle to protect its affordability, the WSJ reports.

The apartments are subject to the city's rent regulations and last year a group of tenants succeeded in a court battle that forced the complex's landlords to roll back certain rent hikes.

The battle over the complex mirrors hundreds of fights that have erupted throughout the country over distressed commercial real-estate assets, according to the WSJ.

In many situations, investors like those in Ackman's group, have bought junior debt on properties, and then wrestled with the holders of the first mortgage for control.

Investors who hold the $3 billion first mortgage on the complex, including Fannie Mae and Freddie Mac, have a claim that has priority over the one held by Ackman's group.

Edward Weisfelner

But the lawsuit filed on behalf of these investors charges that if the Ackman group succeeds in taking over the property by foreclosing -- and stepping into the owner's shoes -- it will try to avoid paying the first mortgage by putting the complex into bankruptcy proceedings, the WSJ reports.

Such a move would violate the agreement governing the rights of creditors, says the banks' suit. That agreement would require the $3 billion first mortgage to be paid off before holders of the junior debt could foreclose, according to the suit.

At the same time, the lawyer for Ackman's group, Edward Weisfelner, argued that if the senior lenders foreclose, his clients would be "wiped out."

Please see related Real Estate Channel postings:

• Fortress Swoops Down on Distressed Commercial Assets with $550 Million Buy, July 15, 2010
• Tishman Speyer and BlackRock Give up Manhattan's Largest Apartment Complex to Creditors, Jan. 25, 2010
• Tishman Speyer Partners Head for Default on $3B Loan, Nov. 11, 2009
• Tishman Speyer and Partners Face $200M in Rent Overcharges at Manhattan Apartments, Oct. 22, 2009
• Manhattan's Stuyvestant Town and Peter Cooper Village Finances Continue to Lag, Fitch Reports, Aug. 31, 2009
• Fed's Legacy Bond Program Under Way But Commercial Real Estate Traders Remain Cautious, July 13, 2009
• Clock Ticking on Tishman Speyer's $4.5B Loan Payments, Jan. 26, 2009  

 

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