One day after the Federal Reserve’s Beige Book suggested a recovery in US commercial real estate was a ways off, the New York Times reported on a court decision that could affect on thousands landlords across the city:
The state’s highest court dealt a potentially crippling blow on Thursday to the owners of the sprawling Stuyvesant Town and Peter Cooper Village complexes in Manhattan when it ruled that they improperly began charging market rents on thousands of apartments.
The ruling by the Court of Appeals may leave the current owner, a partnership of Tishman Speyer Properties and BlackRock Realty, and the former owner, Metropolitan Life, liable for an estimated $200 million in rent overcharges and damages owed to tenants of about 4,000 apartments.
In a 4-to-2 decision, the court said the owners improperly raised rents beyond certain set levels at the complexes while receiving tax breaks from the city for major renovations.
…
The ruling could affect landlords of as many as 80,000 apartments across the city who may also have improperly raised rents and deregulated apartments while receiving special tax breaks.
But as the NY Times highlighted,
the immediate and most devastating impact was on the Tishman Speyer partnership, which was already facing extreme financial difficulties after paying a record $5.4 billion in 2006 for the properties near the East River. The owners are running out of cash to pay building loans, and analysts have said it is highly likely the partnership will default by December. If the owners are forced to reimburse tenants, analysts say it would only hasten the path to default.
In September, FT Alphaville examined the numerous woes facing Tishman Speyer, the uber-developer which was part of the infamous Archstone-Smith deal that helped to sink Lehman.
As we put it at the time:
Archstone-Smith presaged the fall of Lehman. What fresh hell does Stuyvesant Town portend?
As Frank Innuarto, president of credit rating agency Realpoint told the NY Times, the ruling on the apartment complexes was the “last shoe to drop” for the Tishman/BlackRock partnership.
Moody’s opined that the decision “could be the straw that may break the already sagging back of the largest loan ever on a single US property”.
Judge Susan Read, who entered a dissenting opinion, argued thus:
In the absence of meaningful legislative action, uncertainty will reign in an industry already rocked by the bursting of the great residential real estate bubble
Tishman, for its part, released a statement which said simply:
While we respect the Court’s decision, we view this as 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.Something of an understatement, given the circumstances. Joseph Strasburg, president of the Rent Stabilization Association, had a more aggressive take, saying the ruling had the “potential to force some buildings into bankruptcy or foreclosure if they’re required to roll back rents.”
The decision would also have a direct impact on the city budget, Mr Strasburg said - an unwelcome development for a metropolis already dealing with a collapse in revenues from taxes on bankers’ bonuses.
Related links:
Capmark Financial files for bankruptcy - Times
Speyers Dealt Tremendous Hit as Court Rules for Tenants at Stuy Town - New York Observer
The Fed’s enigmatic CMBS portfolio, an update - FT Alphaville
