Stuy Town: The Final Chapter?

A US District Judge has ruled that a group of lenders can foreclose on Peter Cooper Village and Stuyvesant Town (from now on collectively referred to as Stuy Town). There are quite a few interesting substories to this latest chapter in one of the largest (and worst) real estate deals ever executed. So now what happens? The properties will be sold either together or in two pieces. The highest bidder will be chosen by a formal federal bankruptcy judge. But, who is going to buy it?

Well that brings us to interesting substory number one. Are the tenants going to lose out on another shot to buy the property. In 2006 a group of renters were outbid by a joint venture consisting of Tishman Speyer and BlackRock Realty. Now they potentially face competition from the current lenders. While it hasn’t been confirmed, a viable option for the creditors would be to make the high bid and hold onto the property until prices rise and they can recoup more or all of their losses. Currently the property is projected to be valued anywhere between $1.6 and $2.2B, down from the 2006 purchase price of $5.4B. The loan originally taken out was for $3.0B and in the lawsuit, it was deemed that the lenders are owed $3.76B. Along with the offer from the group of owners, which will be backed by CWCapital and others, there is probably going to be an offer from a team of investors including Wilbur Ross and the LeFrak Organization. This auction should be very interesting, and potentially heated as the group of tenants want to convert part of the property to condos, and have a non-eviction policy to protect themselves and other tenants from rent increases (something that was supposed to happen the last time around, but apparently didn’t. There is an ongoing lawsuit).

Let’s assume that the creditors don’t win or don’t offer a bid (no clue what the chances of this are, but just for giggles). This leaves the mortgage bond holders at risk for quite the loss given the current value of the property. Who owns half of the total loan worth of mortgage bonds? None other than Fannie Mae and Freddie Mac. So Fannie and Freddie stand to lose a lot of money on this deal, right? Well, according to a statement in January they weren’t going to lose anything. How did they accomplish this? Apparently Fannie and Freddie bought credit default swaps, protecting themselves against default. There must’ve been a thought in the back of their minds that this deal was bad from the beginning. I think it can be assumed that the only entity that this deal was beneficial for was MetLife, who sold the building at the wildly inflated price. Fannie and Freddie surprisingly played this one extremely well (for once?).

So who can lose from this? Well, obviously BlackRock and Tishman Speyer lost, as did the equity and mezz partners who have already quit.  But the lenders and mortgage bond holders still stand to lose a lot, especially if the government starts lobbying as it did last time. It’s no secret that Senator Charles Schumer (D-NY) personally called the CEO of MetLife to pressure him into accepting the tenant group’s offer. Whether or not the government will have more clout this time around or not remains to be seen, but accepting a lower price just so the tenants can win is ludicrous. It would burn the lenders, and the other investors, as well as set a dangerous precedent for the government to interfere in a private business transaction.

Best case scenario: the tenant group is the highest bidder, and everyone gets what they want/deserve. The tenants finally get rent stabilization, the lenders get some of their money back, and BlackRock and Tishman Speyer get nothing. Meanwhile, MetLife is probably laughing and sipping mai tai’s from their private box above the fray, because they can afford that.