Bankruptcy Was Not an Option for Largest Failure in CMBS History

In a remarkable move, Tishman Speyer Properties and BlackRock Realty, last week turned the 80-acre properties Stuyvesant Town and Peter Cooper Village back to its lenders. With investors in the project having defaulted and the properties now being valued at less that $2 billion, this seemed like the only option. Just three years ago, the two companies bought the 11,000-unit developments for close to $6 billion.

New York–In a remarkable move, Tishman Speyer Properties and BlackRock Realty, last week turned the 80-acre properties Stuyvesant Town and Peter Cooper Village back to its lenders. With investors in the project having defaulted and the properties now being valued at less that $2 billion, this seemed like the only option. Just three years ago, the two companies bought the 11,000-unit developments for close to  $6 billion.

“This is a major developer with ongoing concerns and the property was so under water that bankruptcy was not an option,” Ed Edward A. Mermelstein a real estate attorney and co-founder of international real estate law firm Edward A. Mermelstein & Associates, tells MHN. “Turning the property over to its creditors was the only option. The properties had lost too much value.”

Another reason they moved so quickly is that the company has a spectacular reputation with so many assets performing well. “They needed to do this to move on. A temporary fallout is inevitable—it is after all the largest failure in CMBS history and will be brought up every time this part of history is discussed,” says Mermelstein.

He says properties that were purchased at the peak of the bubble and are based on projections that weren’t accurate and are in fact showing negative values will all face similar fate. “Many of them are living on their interest reserves but that can’t go on forever,” he explains.

Edward E. Neiger, founder and partner at Neiger LLP, is a corporate and personal bankruptcy attorney. He has worked on some of the largest corporate bankruptcy filings, including WorldCom, Parmalat, Atkins, Ames, Formica and Vertis. He says bankruptcy was not an option for these two properties because they had lost too much value.

“The idea of Chapter 11 is to restructure debt and make it more palatable, but in this case the value of the collateral is half of the value of debt and it is therefore illogical to restructure. The other possibility in bankruptcy is liquidation but that attracts a lot of attention and definitely tarnishes the image of everyone in the deal,” says Neiger.

The next buyer will get the property at market value and the pressure to maintain affordability will be very high. “The buyer will have to reassure the tenants as well as the local government that its affordability will be maintained,” says Mermelstein. Tishman Speyer and BlackRock, joint owners of the properties, will continue to manage the property until new owners are found, spokesman Bud Perrone said in a statement.

Meanwhile several buyers have shown interest in the properties and billionaire investor Wilbur Ross recently told Bloomberg News that he is considering buying Stuy Town and Peter Cooper Village with partners including developer Richard LeFrak. LeFrak’s group already owns and operates around 23,000 apartments in the New York metropolitan area, of which 11,000 are rent-regulated.