Tishman Speyer and BlackRock Realty Advisors were dealt a devastating blow in the fight over their $5.4 billion Stuyvesant Town deal after New York’s highest court ruled the firms improperly deregulated rents at the sprawling complex.
New York State Court of Appeals today sided with tenants of Stuyvesant Town and Peter Cooper Village, who had claimed Tishman and BlackRock, and former owner Metlife, should not be allowed to convert rent-stabilised properties into market rate apartments while at the same time being part of a city tax abatement programme for major renovations.
The appeal judges said in their verdict: “We agree.” Stuyvesant Town, NYC
The decision leaves open the threat that Tishman and BlackRock, including Metlife, may have to pay back up to $600 million in back rent and damages to tenants of some 4,000 apartments. Real estate professionals widely agreed the ruling would hasten the complex’s journey towards default.
“The situation pretty much speaks for itself,” said a spokesman for CMBS data provider Trepp. “The property has never been able to generate nearly enough cash to service its debt service, the interest reserve is dwindling, and now the property faces the prospect of taking a hit to its income.”
Tishman and BlackRock paid $5.4 billion for the complex, which comprises 11,227 residential apartments, 100,000-square-feet of retail space, 20,000-square-feet of office space and six parking garages spread over 80 acres of prime Manhattan real estate.
Tishman Speyer
Tishman invested $112 million of equity into the deal, with the expectation that it would be able to convert approximately 8 percent of the units to market rate each year generating net cash flow of $334 million by 2008. Two years after closing the transaction, net cash flow was just $136 million, with a debt service coverage of around 0.70. 
[This is an] unfortunate outcome for New York. The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years.
The deal’s reserves are expected to run out in around two months, with Trepp warning today’s decision would likely lead to an appraisal reduction on the property’s loans and potential rent reductions. The New York-based firm said the CMBS servicers would move quickly to avoid a possible interest shortfall (of up to $6 million a month), adding: “For the WBCMT 2007-C30 deal which has $1.5 billion in exposure to Stuy Town, this could create interest shortfalls for 10 or more classes. If it actually goes into default, we would expect legal fees to drive these shortfalls even higher.”
A number of limited partners who invested in the deal have already written off their equity, including Florida State Board of Administration, which invested $250 million, and California State Teachers’ Retirement System (CalSTRS), which invested $100 million.
Tishman Speyer said in an emailed statement that while it respected the court’s decision, it was an “unfortunate outcome for New York. The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years.”
Alexander Schmidt, of Wolf Haldenstein Adler Freeman & Herz, who represented the tenants
But Alexander Schmidt, of Wolf Haldenstein Adler Freeman & Herz, who represented the tenants said it was a “tremendous victory” and “potentially a landmark ruling for thousands more tenants around New York City”. [This is a] tremendous victory … [and] potentially a landmark ruling for thousands more tenants around New York City.
Two of the six judges in the Appeal Court dissented from the ruling, warning there would be “significant, if not severe, dislocations in the New York City residential real estate industry as a result of today's decision”.
Many predict the issue will become embroiled in further legal wrangling, with the dissenting legal opinion adding: “Thirty-five years ago [the courts] described the rent laws as ‘an impenetrable thicket, confusing not only to laymen but to lawyers’. The thicket has only grown denser since then.”
The case rested on the fact that Tishman, BlackRock and Metlife improperly deregulated units at Stuyvesant Town and Peter Cooper Village, while being part of New York City's “J-51” tax abatement programme, which was created to encourage owners to refurbish their properties and make capital improvements. The nine tenants who brought the lawsuit complained that apartments could not be deregulated while a landlord was part of that programme – something Stuyvesant Town will be part of until 2017.
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