BofA, US Bancorp sue to stop foreclosure of massive NYC apartment complex
by Austin Kilgore
10:46 AM August 19, 2010
reoi.com
Bank of America and US Bancorp filed a lawsuit Wednesday to stop the foreclosure auction of New York City’s largest multifamily development, Peter Cooper Village-Stuyvesant Town (Stuy Town, pictured above).
The hedge fund that’s helping mall owner General Growth Properties emerge from the largest bankruptcy in the history of the United States, Pershing Square Capital Management, is now a key player in an attempt at resolving one of the largest-ever commercial mortgage defaults.
But the lawsuit, filed in state court Wednesday, seeks to stop the foreclosure proceeding that was scheduled for next week by the New York City-based hedge fund.
In early August, Pershing Square Capital Management partnered with Winthrop Realty Trust, a Boston-based real estate investment trust (REIT) that specializes in mortgage investments, to purchase the senior-most mezzanine debt of Stuy Town. The debt has a face value of $300m ($100m for each of the three mortgage pools), but the joint venture purchased it for $45m. Pershing Square controls 77.5% of the joint venture.
The Peter Cooper Village-Stuyvesant Town site includes 56 multi-story buildings that span 80 acres and includes 11,227 apartments. It’s home to more than 25,000 residents and is the largest multifamily development in Manhattan.
To take full control of the development, Pershing and Winthrop plan to foreclose on the subordinate mezzanine debt holders, and scheduled a public auction for August 25 at the New York City law offices of Brown Rudnick LLP. According to an announcement of the auction, real estate investment bank The Carlton Group will facilitate the auction.
The mezzanine debt is tied to the borrower’s equity position in the Stuy Town development. By forcing the foreclosure auction on the debt, Pershing Square and Winthrop can wipe out the subordinate mezzanine creditors and assume control of the development. That would make the joint venture the party responsible for reconciling the $3bn in outstanding debt on the development.
But BofA and US Bancorp — trustees of senior creditors owned $3.66bn in principal and outstanding interest — argued in their lawsuit that the debt held by their clients is senior to the Pershing Square/Winthrop mezzanine loans, and allowing the auction to go forward would allow the joint venture to put the ownership entity of the development into bankruptcy, hurting the senior creditors’ ability to recoup their losses. In February, BofA and US Bancorp sued to force the foreclosure of the development, asking for the proceeds of the sale to go to creditors it represents.
Fannie Mae and Freddie Mac are two of the biggest debt holders, along with other investors that purchased commercial property securities. The suit was widely reported on late Wednesday by multiple New York-based media outlets, and online records in the New York State Supreme Court confirm the suit’s filing. The plaintiff’s attorney, David Rice, did not immediately respond to requests for comment late Wednesday.
Speaking on behalf of the joint venture, Michael Ashner, CEO of Winthrop Realty Trust, said in a statement to REO Insider: “Our partnership is confident that the court will uphold our rights as creditors and allow us to continue on a path to provide permanent affordable housing options to the residents of Stuyvesant Town and Peter Cooper Village.”
A representative for Pershing Square said the company’s CEO, Bill Ackman, is the only person authorized to comment to the media, but is unavailable because he is out of the country.
The delinquency and subsequent default of the debt on the development in January 2010 came as the development lost value, and its owners, Tishman Speyer and BlackRock, faced legal challenges on attempts to raise rents, a key strategy in the planned revenue generating process. The Tishman and BlackRock failure to pay creditors rocked the commercial mortgage sector, as it was one of the largest commercial mortgage defaults in US history.
In a press release announcing the purchase of the mezzanine debt, the joint venture said it intends to restructure the debt and convert the properties to for-sale co-op housing.
“We are looking forward to working with the Tenants Association, community leaders, creditors and other interested parties to ensure that our investment and our approach to recapitalizing Peter Cooper Village/Stuyvesant Town will bring long-term stability to the property and its residents,” Michael Ashner, Winthrop’s CEO, said in the press statement.
“We understand the importance of this property in providing housing for moderate income New Yorkers,” Ashner added. “Among our goals is the continued supply of affordable housing for its residents for years to come.”
Since the spring 2009 bankruptcy of GGP, Pershing Square positioned itself as the shopping mall REIT’s largest shareholder and a majority unsecured creditor. Pershing Square and Fairholme Capital Management contributed $4bn to GGP’s recapitalization. GGP is currently in the process of executing its restructuring plan, which calls for a combined $6.55bn in equity investments from Pershing Square, Fairholme and Brookfield Asset Management, for GGP to spin off some of its assets into a separate company, and issue a debt offering to supplement the additional capital investments.
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