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Defaulted Manhattan Complex Rewards Patient Money

Gary Delgado learned last week from a note slipped under his door that the rent for his two-bedroom apartment at Manhattan’s Stuyvesant Town will jump by $920 to $4,220 a month in July. Unable to move immediately, he says he’ll stick it out for another year.

“We’ll do it, but this takes away from tuition,” said Delgado, 48, who has two sons in college. “I can’t turn on a dime.”

The bad news for Delgado, an education consultant, is the latest good news for bondholders of the property, whose owners walked away in 2010 from its $3 billion mortgage. Mid-lease rent increases by the landlord on 1,300 tenants in the complex will boost revenue, raising the value of the 80-acre asset enough for creditors to break even on their investment, according to Lea Overby, a debt strategist at Nomura Holdings Inc.

Three years after the second-biggest commercial mortgage-backed securities default in history, the company controlling the property may be able to sell at the full value of the debt as investor interest in Manhattan apartments surges. Rents are approaching all-time highs set in 2006, when Tishman Speyer Properties LP agreed to pay $5.4 billion for the 11,000-unit complex along the East River, near New York University and Union Square and a short commute to Wall Street.

‘Trophy Assets’

“I was very negative on the terms of the loan,” Overby said when the deal was first announced. “The thing I’ve learned is you really have to give a lot of credit to great assets in amazing locations. There’s something to be said about trophy assets in Manhattan.”

Median rents in the borough climbed 6.5 percent in April from a year earlier to $3,195, bringing them to within 2 percent of their peak, according to a report this month by Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Property investors are clamoring to capture the rising rates, more than doubling the volume of multifamily sales in the borough last year to $9.1 billion, Real Capital Analytics data show.

Tishman Speyer and BlackRock Inc. (BLK) bought Stuyvesant Town-Peter Cooper Village from Metlife Inc. (MET) at the height of the U.S. commercial property boom as cheap financing emboldened investors to ever larger deals. A $3 billion loan that helped back the deal was carved up and bundled into five commercial-mortgage bonds that also contained debt tied to offices, hotels and shopping centers.

Tishman Speyer’s plan to make interest payments relied on remodeling apartments at the complex — built in the 1940s to ease a housing shortage for returning World War II veterans — raising the cost of rent-regulated units to market rates, and evicting illegal occupants.

‘Patient Money’

Billionaire investor Sam Zell in October 2006 described it as a “patient money deal” since three-quarters of the tenants fell under laws that set rents below market value and limited increases.

Residents responded by suing Tishman Speyer and previous owner MetLife Inc. in 2007, claiming the companies improperly forced at least one-fourth of the complex’s residents to pay market rents while the owners received more than $25 million in tax breaks.

Unable to push through rent increases, thwarted by the litigation, and facing a deteriorating rental market after the global financial crisis, Tishman Speyer missed a $16.1 million payment on the mortgage in January 2010.

Special Servicer

CWCapital Asset Management LLC, a special servicer that represents lenders in soured loans, took control of the complex and appraised it that year at $2.8 billion, according to data compiled by Bloomberg. The firm is responsible for advancing interest payments on the loan to investors and managing the property until its sale, according to Bloomberg data. A spokesman for CWCapital declined to comment on the rent increases or its strategy for a sale.

Prospects for the property began to recover in 2012, when Manhattan rents increased by about 5.3 percent each month over the same month the previous year, according to Jonathan Miller, president of New York appraisal firm Miller Samuel. Rents this year are continuing to climb at the same pace, bolstered by improving employment and tenants who are lingering in the leasing market because they can’t find anything to buy, Miller said.

CWCapital also lowered labor costs and management fees, Fitch Ratings said in an April report. Still, the debt was considered the largest contributor to expected losses in bonds called WBCMT 2007-C30 that contained it, Fitch said in a report downgrading some of the securities.

Legal Case

CWCapital signaled it would seek to boost revenue at the site as early as last year, when it asked tenants to sign forms attached to their leases that acknowledged it might alter their rents mid-lease once a settlement in the long running legal case was reached, according to Alexander Schmidt, the lawyer who represented tenants at Stuyvesant Town in the class action lawsuit known as Roberts v. Tishman Speyer.

“Once we found out that they intended to enforce that lease term there was nothing we could do to stop them, absent derailing the entire settlement, so we built in protections,” Schmidt said.

The eventual settlement required CWCapital to give tenants at least 30 days’ notice and 60 days to vacate their properties if such rent increases were to occur. Tenants who chose to vacate also won’t be penalized for breaking their lease, Schmidt said. The settlement, which determines what CWCapital and future owners may charge tenants through 2020, went into effect May 14, the day after the deadline passed to appeal it, Schmidt said.

Clear Message

That same day, CWCapital told tenants of the increase.

“The message I’m getting is loud and clear: pay or leave,” said Kirstin Aadahl, 41, who received a notice increasing the rent on her one-bedroom apartment by $550, three months after she signed a two-year lease.

Aadahl, a teacher whose five-year old daughter attends kindergarten at the local public school, said she’d accept the rental increase for now.

“We’re going to do everything we can to stay here, this is our home,” she said. “ This is a big blow here. It’s a very stressful serious time.”

CWCapital estimates it will take 18 months to implement the legal agreement, and it doesn’t intend to consider a sale until then, the company said in an April 15 servicing note. CWCapital will spend that time focusing on “operational issues” related to the settlement as well as repairing damage done by Hurricane Sandy last year. Minimal Loss

The complex was valued at $3.2 billion in September, according to servicer data compiled by Bloomberg. A valuation of more than $3 billion, which doesn’t include the rent increases, would translate to “a zero to very minimal loss” for bondholders, said Roger Lehman, an analyst at Credit Suisse Group AG. The value of the property probably needs to be greater than $3.5 billion to cover the interest and other expenses advanced so far by CWCapital, he said.

The prospect of bondholders recouping their investment is of little comfort to Aadahl, Delgado and other residents facing rent increases.

“They’re churning these apartments,” said Delgado, who was among tenants picketing outside of the Stuyvesant Town-Peter Cooper Village leasing office over the weekend, warning would-be tenants of the landlord’s midterm lease increases. “Every time a vacancy occurs, they get an extra buck.”

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