Commercial Real Estate Dominos Falling

Large commercial real estate groups have been embattled since August 2007 and in survival mode for the past 12 months. The underwater loans have been rolled forward over and over again with the hope of asset price increases across the board. This simply will not happen fast enough and will begin taking down companies and causing massive deflation in the industry. Risky developments, such as the the largest apartment complex in Manhattan, will have to be bled out of the system. The numbers being played with dwarf those of the housing market.

In addition to the $3 billion senior loan, there is $1.4 billion of mezzanine debt secured by the borrower's equity interest. Wachovia reported a debt service coverage (DSC) of 0.71x and occupancy of 96% for the three-month period ended March 31, 2009.

Bad News Indeed for Tishman, BlackRock and other NYC Apartment Landlords

By Mark Heschmeyer

October 28, 2009

The grand experiment of converting New York City's rent-controlled apartment units to luxury market rentals has apparently come to a grand costly end. Last week, the New York Court of Appeals essentially ruled that Tishman Speyer Properties, LP and BlackRock Realty, the owners of Stuyvesant Town and Peter Cooper Village have wrongly been inflating rents at the 11,227-unit apartment complex totaling 10.2 million square feet on the east side of Manhattan.

The New York Court of Appeals affirmed an order of the New York Appellate Division and concluded that the current and former owners of the property were not entitled to take advantage of the luxury decontrol provisions of the New York Rent Stabilization Law while simultaneously receiving tax incentive benefits from the city.

Standard & Poor's Ratings Services said its believe the ruling has the potential to cause significant cash flow reductions at the property, resulting in an increased risk of default on $3 billion in loans held by the owners and eventual transfer of the loan special servicing.

The Stuyvesant Town and Peter Cooper Village loan is the largest exposure in the three commercial mortgage-backed securities: Wachovia Bank Commercial Mortgage Trust series 2007-C30 (WBCMT 2007-C30; $1.5 billion, 19%) and ML-CFC Commercial Mortgage Trust 2007-5 (ML-CFC 2007-5; $800.0 million, 18%) transactions. It is also the fifth-largest exposure in the Wachovia Bank Commercial Mortgage Trust Series 2007-C31 (WBCMT 2007-C31; $247.7 million, 4%) transaction. In addition to the $3 billion senior loan, there is $1.4 billion of mezzanine debt secured by the borrower's equity interest. Wachovia reported a debt service coverage (DSC) of 0.71x and occupancy of 96% for the three-month period ended March 31, 2009. The loan was current in payments as of the October 2009 remittance report. The current balance of the debt service reserve was $24.4 million as of the October 2009 remittance report, and S&P said it believed it is likely to be depleted by the end of the year.

Looking beyond Stuyvesant Town and Peter Cooper Village, there are other loans that might also be affected by the ruling because they followed very similar conversion plans: The others are: The Belnord, a luxury apartment building on the Upper West Side, securing a $375 million loan included in JP Morgan 2007-LDP9; and The Parkoff Eastside Portfolio, a $170 million loan in Morgan Stanley 2007-HQ12, securing six Upper East Side apartment buildings.