How Can Fortress Finance its $4.7B Stuy Town Buy?
Daniel Edward Rosen May 16, 2014, 11:50 a.m.
On the heels of a report that Fortress Investment Group is close to buying Stuyvesant Town-Peter Cooper Village for about $4.7 billion, commercial real estate finance specialists are wondering how the suitor can finance the deal. After all, the last time the behemoth housing complex was sold, things didn’t go so well.
Fortress is reportedly looking to bring in equity partners in the planned purchase, which Bloomberg News first reported on Wednesday. Stuyvesant Town, which occupies 80 acres and holds 11,231 apartments in 110 buildings, is the largest rental complex in Manhattan.
To foot the $4.7 billion bill, equity partners alone may not be enough, sources told Mortgage Observer Weekly. One possibility is for Fortress to use a combination of equity, senior debt and mezzanine debt, plus any credit it receives for holding existing debt, which can be converted to equity in the event of a sale, said Ben Thypin, the director of market analysis at Real Capital Analytics.
“The senior debt could either be funded by a group of insurance companies or similar institutions like pension funds or, more likely, by conduit lenders who then packaged the senior debt into CMBS, probably as a single- asset CMBS deal,” said Mr. Thypin.
But there are complications with these options, said Matt Galligan, president of CIT Real Estate Finance.
The CMBS market, would see “too high of a concentration in a particular financing,” in such a circumstance, Mr. Galligan said. One alternative avenue is the pension market, which could target mezzanine debt.
“It has a lot of cash to put into play, they are very savvy in real estate markets, and they would put very large dollars to work,” Mr. Galligan said of the pension market.
Situated on the border of the East Village and Gramercy neighborhoods, Stuyvesant Town-Peter Cooper Village is an understandably appealing asset but has turned out to be a massive headache to operate.
Tishman Speyer and BlackRock bought Stuyvesant Town for $5.4 billion in 2006 from MetLife with an eye toward raising rents to market rates by doing major capital improvements. A senior loan worth $3 billion that was used to finance the deal was divided up and bundled into commercial-mortgage bonds that also had debt tied to hotels and commercial properties.
That ownership group ended up spending $6.3 billion on the deal—$4.4 billion in loans and $1.9 billion from investors. The debt caught up with them, and Tishman Speyer and BlackRock were in default by 2010, putting it in Fortress-owned special servicer CWCapital Asset Management’s control. The pension funds that took part in the $1.9 billion investment “lost everything,” according to The New York Times.
As Fortress Investment Group searches for financing, Stuyvesant Town’s very name is “problematic” because of its difficult history in the past eight years, said Mr. Galligan.
Fortress has not said whether it would seek to convert apartments in Stuyvesant Town from rent regulated to market rate. Representatives from Fortress and CWCapital Asset Management did not return calls requesting comment.
“One wild card is whether the city or the [Stuyvesant Town-Peter Cooper Village Tenants Association] or both cause trouble in some way, which I think is possible but unlikely,” said Mr. Thypin. “If any con- cessions need to be made to the city and/or tenants, that would certainly make the deal more complex to finance.”
Despite the difficulties, the asset’s value has risen precipitously, like that of many Manhattan buildings recently. Barclays Plc appraised Stuyvesant Town at $3.4 billion in September 2013, up from $2.8 billion when CWCapital Asset Management took over the property. If the deal closed for the $4.7 billion sum that has been floated, the bondholders would break even, according to published reports.
Controversy aside, those investors best suited to take on the risk may be a syndicate of commercial banks like New York Community Bank and the Bank of China, which would give Fortress more flexibility, said Mr. Galligan.
The deal could pencil out if the syndicate can contribute 40 to 50 percent of the senior debt, with pension funds coming in “for a ton of money” after that, he said.
“The problem here is the size of the financing,” he added. “It’s just gargantuan.”