Apartment Complex Cause For CMBS Transaction Downgrades

Debt-service reserves for The Stuyvesant Town/Peter Cooper Village loan are likely to run out by the end of this year, according to recently completed analysis by Fitch Ratings. In this scenario, a default on the loan is likely if an equity infusion or recapitalization does not take place.

Pieces of the $3 billion pari passu Stuy Town loan are securitized in the following transactions:

  • WBCMT 2007-C30,
  • COBALT 2007-C2,
  • ML-CFC 2007-5, and
  • ML-CFC 2007-6.

Fitch downgraded these four commercial mortgage-backed securities transactions due to the continued underperformance of the Stuy Town loan and other loans in the transactions. The outcome of the ongoing Stuy Town litigation may have future rating implications for the four transactions.

Stuyvesant Town/Peter Cooper Village comprises 56 multistory buildings, situated on 80 acres, and includes a total of 11,227 apartments. The loan sponsors, Tishman Speyer Properties LP and BlackRock Realty, acquired the property with the intent of converting rent-stabilized units to market rents as tenants vacated the property.

"Based on current performance and the uncertainty surrounding ongoing litigation, we do not expect property performance to improve sufficiently to service the securitized portion of the $4.5 billion debt before reserves are depleted," says Fitch senior director Adam Fox.

In addition to the securitized balance, there is an additional $1.5 billion of mezzanine debt held outside the trust. For the year ended 2008, the servicer reported that the debt service coverage ratio (DSCR) on the mortgage was 0.69 times (x), as compared to the year ended 2007 DSCR of 0.55x. For the first quarter of 2009, the servicer reported a DSCR was 0.71x. As of July, approximately 60% of units were rent-stabilized units, and 40% were market units with a vacancy rate of approximately 4.1%.

Fitch reviewed first-quarter financials, debt-service reserve draws and the most recent unit conversion statistics for the Stuyvesant Town/Peter Cooper Village loan. Cashflow generated from the property remains significantly below what is needed to service the current outstanding debt, Fitch says, and the borrower continues to use debt service reserves to cover operating shortfalls.

Capital expenditures for converting stabilized units to market rents have ceased because of a moratorium on conversion imposed by the Court of Appeals as a result of the litigation. While this has reduced capital expenditures, the use of debt-service reserves has increased, because the court also requires the borrower to separately escrow the difference between stabilized and market rents on former stabilized units. Previously, this difference was available for debt service. Once debt-service reserves have been depleted, the borrower has the option to replenish them or cover the operating shortfalls out of pocket.

Fitch's analysis is based on updated expectations of limited unit turnover and stabilized expenses. Based on this estimate of cashflow, losses could be as high as 20% of the $3 billion A note balance. However, although a default is expected in the near term, a lengthy workout is also expected.

While final resolution for this lawsuit may not occur for several months or years, Fitch believes the ultimate value of the properties will be, in large part, determined by the lawsuit's resolution.

SOURCE: Fitch Ratings


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