Fortress Is Said to Prepare $4.7 Billion Stuyvesant Town Bid

May 14, 2014 10:28 am ET

(Updates with deputy mayor comment in 18th paragraph.)

May 14 (Bloomberg) -- Fortress Investment Group LLC is preparing a bid to buy Stuyvesant Town-Peter Cooper Village, the Manhattan apartment complex whose future has been in limbo since its owners defaulted on a $3 billion mortgage four years ago, according to a person familiar with the plans.

The New York-based private-equity firm is seeking financing for an offer valued at about $4.7 billion, said the person, who asked not to be identified because the discussions are private. A deal would involve bringing in equity partners to contribute cash, the person said.

Stuyvesant Town, Manhattan’s biggest rental community, is currently under the control of CWCapital Asset Management LLC, which is owned by Fortress. CWCapital is a special servicer in charge of representing bondholders after owners Tishman Speyer Properties LP and BlackRock Inc. walked away from their investment in January 2010, one of the highest-profile casualties of the property-market crash. New York apartment values have since jumped as rental demand rebounds.

“Stuytown has certainly come a long way since the depths of the crisis,” said Ben Thypin, director for market analysis at real estate research firm Real Capital Analytics Inc. The $4.7 billion value considered by Fortress “reflects that resurgence in pricing.”

Gordon Runte, a Fortress spokesman, declined to comment, as did Brian Moriarty, a CWCapital spokesman.

CWCapital said yesterday that it has begun the process of foreclosing on the property’s mezzanine debt, which is junior to the senior mortgage. That paves the way for the company to proceed with a sale of the 80-acre (32-hectare) complex.

Highest Price

As a special servicer, CWCapital must represent mortgage holders and work in its clients’ best interests to get the highest price possible, said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor.

“Negotiating on behalf of a client against someone who ultimately reports to the same boss you report to is fraught with conflict of interest,” Gordon said in an e-mail.

Tishman Speyer and BlackRock purchased the 11,000-unit complex for $5.4 billion in 2006, a record for a New York commercial property at the time. The $3 billion senior loan that financed the transaction was carved up and bundled into commercial-mortgage bonds that also contained debt tied to offices, hotels and shopping centers.

Failed Deal

Tishman Speyer, which based its acquisition on plans to raise the cost of rent-regulated units to market rates and evict illegal occupants, defaulted after tenant litigation blocked that effort and the apartment market crumbled following the global financial crisis. The deal came to epitomize the lax lending based on unrealistic projections of future income that fueled the real estate bubble.

Stuyvesant Town was appraised at $3.4 billion in September, according to Barclays Plc, up from about $2.8 billion when CWCapital took it over. Barclays estimated in a May 2 report that the property could fetch $4 billion to $4.3 billion in a sale, which would result in zero losses to bondholders.

The jump in values underscores a rebound in Manhattan’s rental market from the depths of the recession. The median apartment rent in the borough in March was $3,200 a month, approaching the 2006 high, according to appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

Never Stronger

“The Manhattan apartment market has never been stronger,” said Dave Bragg, an analyst at Green Street Advisors Inc., a Newport Beach, California-based real estate research firm. The company estimates that Manhattan apartment asset values are about 9 percent above the 2007 peak.

Tenants at the complex have sought to put together their own bid to buy the property, working with Brookfield Asset Management Inc. on a plan that would include converting apartments into condominiums as a way of paying off bondholders.

“Brookfield is still working with the Stuyvesant Town tenants’ association on a bid,” said Andrew Willis, a spokesman for the Toronto-based company.

Daniel Garodnick, a New York city councilman and lifelong resident of the complex, said tenants “are not going to sit on their hands” if a Fortress bid were to occur.

“We have seen the effects of enthusiastic buyers as they relate to rent-stabilized tenants, and it’s not necessarily a good fit,” Garodnick said in a telephone interview.

City Discussions

New York City Mayor Bill de Blasio has made creating and preserving affordable housing a key issue of his administration. The city is in “active discussions” with lenders, Garodnick and tenants in hopes of reaching a “joint approach” for Stuyvesant Town, said Alicia Glen, de Blasio’s deputy mayor for housing and economic development.

“Stuy Town and Peter Cooper Village are critical bulwarks of affordability for middle-class families,” Glen said in an e- mail. “Our housing plan emphasizes preservation, and with so many affordable units at risk in these developments, the stakes are too high to be hands-off.”

While Stuyvesant Town likely will attract many bidders, some potential buyers may be dissuaded by the complex’s troubled history, said Joshua Stein, principal of New York-based commercial real estate law firm Joshua Stein PLLC, and author of “Stein on New York Commercial Mortgage Transactions.”

“There used to be a saying: If you’re a restaurant you don’t want to open up in a place where other restaurants went out of business,” Stein said in a telephone interview. “All these bidders who otherwise might be very interested may say, ‘you know what? Too many people have had too many unpleasant surprises at this location.’”

--With assistance from Katherine Burton, David M. Levitt and Henry Goldman in New York and Hui-yong Yu in Seattle.