Friday Letter New kid in Town

Brookfield is the latest private equity real estate firm to pursue ownership of the troubled Stuyvesant Town apartment complex. 

Going after a distressed asset as massive as and with as troubled a history as New York’s Stuyvesant Town-Peter Cooper Village isn’t for the faint of heart. Still, Toronto-based Brookfield Asset Management did just that this week when it joined the property’s tenant association in a bid to take over the 80-acre, 11,232-unit apartment complex.

Brookfield and the association plan to propose a non-eviction condominium conversion plan that would allow Stuyvesant Town – Peter Cooper Village residents to buy their apartments while also allowing rent-stabilised tenants to continue renting if they choose not to buy. Under the proposal, Brookfield would provide the capital needed to finance the acquisition and condominium conversion, as well as ultimately owning and managing the apartments not purchased by tenants. The bid will be developed over the coming months to submit to CW Capital, the special servicer that represents the bondholders of a $3 billion senior mortgage on the property.

Brookfield, however, need only look at the property’s recent past to know that it needs to tread carefully. In October 2006, New York-based private real estate owner and developer Tishman Speyer purchased the property for $5.4 billion from MetLife, with the intention of converting the rent-stabilised units into market-rate apartments. The conversion plan ran into trouble just months later, when a group of tenants filed – and ultimately won – a lawsuit that alleged Tishman and MetLife illegally deregulated the apartments while receiving a tax abatement. In January 2010, Tishman defaulted on its loan as a result of a drop in the property’s value and its failed plan to raise rents.

Brookfield seems to have started off on the right foot by winning the endorsement of the tenants’ association, which selected the firm as its capital partner in its bid to purchase the complex. The asset manager is no stranger to executing complicated deals, either, most notably leading the restructuring of General Growth Properties last year. It also owns more than 10,000 apartment units within its funds or via its Fairfield Residential subsidiary.

Brookfield declined to provide specifics on how it would fund the transaction or how it would generate returns if it were to assume ownership of the property, since the firm is still in the early stages of working on a deal. A likely scenario is that CW Capital will remain a stakeholder until the debt to bondholders is repaid, receiving the majority of the proceeds of each apartment sale, perhaps in an 80:20 split with Brookfield.

“The complex is worth the most as part of the potential condominium conversion by far” and would return the most value to bondholders under such a proposal, said Dan Fasulo, managing director at market research firm Real Capital Analytics. Brookfield, he added, “should have no problem selling those units whatsoever.”

Still, many other questions still hang over the Brookfield deal. Critically, the condominium conversion plan will only work if a large number of tenants decide to buy their units. Other uncertainties include the financing prospects for the transaction and what laws may affect the future of the complex, such as whether buyers would be required to have income restrictions. As Fasulo quipped, “It’s a hell of a lot of brain surgery.”

There is speculation, however, that Brookfield already has worked out a preliminary agreement with CW Capital. “I don’t think they’d be flying in there blind,” said one source. That seems to make sense because, like with brain surgery, executing a distressed transaction is about being able to see clearly.