Winthrop, Pershing defend Stuy Town mezz foreclosure

A war of words has broken out over New York’s iconic multifamily complex Stuyvesant Town and Peter Cooper Village after Winthrop Realty Trust and Pershing Square Capital defended their right to launch a mezzanine foreclosure against the property.

Bank of America and US Bancorp, trustees for the mortgage holders, recently filed a lawsuit trying to stop the foreclosure by Winthrop and Pershing Square, arguing the REIT and hedge fund had to pay down the property’s $3 billion first mortgage before being allowed to take control of the 11,000-unit property.

However, the two investment firms have fired back against the injunction warning the deal’s intercreditor agreement provides no such rule, and pledging to fight for the right to foreclose.

Stuyvesant Town

At the heart of the dispute is the fear that Winthrop and Pershing will throw the 80-acre Stuy Town, as the complex is known, into bankruptcy protection to force a restructuring of the $4.4 billion debt load, including $3 billion of securitised senior mortgage notes and $1.4 billion of mezzanine debt.

However in its lawsuit, Winthrop and Pershing said “no final decision to seek bankruptcy protection” had been made but such a move was “inherent in every secured lending transaction and does not itself cause harm to the lender’s economic interest”.

Special servicer CWCapital Asset Management, which took over the assets in January after original owners, Tishman Speyer and BlackRock Realty, defaulted on a $16 million debt payment, was already in the process of foreclosing on Stuy Town itself when Winthrop and Pershing launched their mezzanine foreclosure action earlier this month.

Winthrop acquired the $300 million slice of the three most senior mezzanine loans in 2007 and sold them on 6 August this year to PSW – a joint venture of Winthrop and Pershing – for $45 million or 15 cents on the dollar. PSW then filed a mezzanine foreclosure action, setting the date of the hearing for 25 August. Boston-based Winthrop will own a 22.5 percent stake in the loans, while Pershing Square will retain a 77.5 percent stake.

The firms said the foreclosure action was due in part because under CWCapital’s foreclosure plan, PSW’s economic interests would be “wiped out”, denying the firms the “unique opportunity to acquire the equity interests in the senior borrowers and to recapitalise Stuyvesant Town”.

CWCapital, they alleged, was now resorting to “baseless scare tactics” in trying to stop the mezzanine foreclosure by suggesting that Winthrop and Pershing were “interloper[s]” and that the action would “imperil the property and throw the residents into disarray”.

We are disappointed that ownership of the property has degenerated into litigation, but we are not at all surprised. New York council member Dan Garodnick

“Since its February 2010 foreclosure action, CWCapital has squandered months of lead time, and now desperately and improperly seeks to have the senior lenders leap frog over PSW’s [Pershing Square Winthrop] legitimate rights and wipe out the economic interest of all other parties.”

Winthrop and Pershing said in early August it planned to convert Stuy Town into co-op units “which will require the restructuring of the property's first mortgage debt”.

In mid-August New York council member Dan Garodnick said he was “disappointed that ownership of the property has degenerated into litigation” but that he was “not at all surprised”.

“As the creditor parties fight this one out, the tenants are prepared to join with the right partner to help us achieve the goals we have articulated [and which] include: giving tenants an opportunity to buy their units, or remain as renters; protecting long term affordability for future generations of New Yorkers; ensuring quality maintenance services; preserving the historic configuration of the property and keeping open spaces from development; maintaining the property as a single, unified whole; and ensuring a long-term, stable ownership and capital structure.”