The owners of the massive Stuyvesant Town and Peter Cooper Village apartments, which occupy 80 prime acres in Manhattan, have suffered a major blow with the transfer of the property’s $3 billion loan to a special servicer.

The loan transfer and request for relief by Tishman Speyer Properties, headquartered at Rockefeller Plaza in New York, and BlackRock Realty, also based in New York, was expected after cash flow generated by the property became insufficient to service the debt, according to Fitch Ratings.

Tishman Speyer and BlackRock bought the apartments in 2006 for $5.4 billion, and the multifamily properties’ costs have placed an increasing burden on the companies.

“They have officially gone to a special servicer,” says Fitch Ratings spokesman Sandro Scenga. Fitch anticipates that the borrowers’ debt service reserves will be depleted by the end of December. However, the agency does not expect to take any negative rating actions after the transfer of the loan to special servicing on Friday.

Earlier, on Aug. 28 and Oct. 30 Fitch Ratings downgraded U.S. commercial mortgage backed securities (CMBS) transactions that included parts of the Stuyvesant Town and Peter Cooper Village loan in view of the expected loan default and Fitch's revised estimate of value.

“Fitch believes there will be many factors involved in the workout and ultimate recovery of the loan, including a possible modification, potential legislative changes to rent stabilization laws, commitment of the loan sponsors, the remaining seven-year term of the loan, and the low loan per unit ($267,213),” the agency said in a statement on Friday.

Court rules market conversion illegal

Fitch, which is based in New York, plans to monitor the loan workout and adjust its loss estimates as new information warrants. Parts of the $3 billion loan are securitized. Besides the $3 billion securitized balance, there is an additional $1.5 billion of mezzanine debt held outside the trust.

Tishman Speyer and BlackRock Realty bought the apartment complexes, which include 11,227 units, with the plan to convert rent-stabilized units to market rents as tenants vacated the property.

But New York State’s highest court, the Court of Appeals, dealt the owners a major setback on Oct. 22 when it ruled that the conversion was illegal.

“Defendants predict dire financial consequences from our
ruling, for themselves and the New York City real estate industry generally,” the court noted. Dissent to the ruling predicted “years of litigation” to deal with fallout from the decision.

As a result of the court’s ruling, Tishman Speyer Properties and BlackRock Realty may face required payment of $200 million in rent overcharges and damages to tenants of more than a quarter of the apartments.

According to Tishman Speyer, Stuyvesant Town is Manhattan’s largest apartment community — “an entire neighborhood unto itself set on over 61 landscaped acres.” The apartments range in size from one-bedroom to five-bedroom units, totaling 7.5 million sq. ft. They feature such amenities as a putting green, seven playgrounds, tennis and bocce ball courts, winding paths for strolling, and free Wi-Fi.

Nearby Peter Cooper Village also provides basketball and volleyball courts, gardens, and social activities such as winter ski trips.