Savoy Park purportedly sold at no loss

Bloomberg reported (sorry no link) that a fund jointly started by Citigroup and L&M Development Partners bought the loan for "more than $210 million, the outstanding balance on the senior mortgage, satisfying the loan", but no additional details. The senior is in CSMC 2007-C1 and constitutes 7.08% of the collateral. Unlike some rent-control flips (i.e. PCV/ST), this is actually paying towards the A1A tranche, which is probably held by Freddie (although that is a complete guess).

The A2 is the current pay for the rest of the pool, and a small piece was on a BWIC yesterday. 13mm+ of the A3 was being offered at a 103 handle last week.


This was one of the rent control "let's kick out the rent control tenants and replace them with market-payers" projects that failed miserably. Vantage and Area Property Partners were the sellers.

We've previously discussed Savoy Park (fka Delano Village) here.

Fitch explores the 'contradictions' of U.S. multifamily CMBS

I haven't read the Fitch report, Reuters reported that there is one out there asking the tough questions about why multifamily has the biggest loan performance problems despite improved property performance and gives NY as an example:

A notable example is New York City. Despite being the second-best performing city in the Case-Shiller index, the city has four big problems in multifamily CMBS; Stuyvesant Town/Peter Cooper, The Belnord, The Savoy and Riverton, the underperforming loans of which total $3.6 billion.

I'm going to take a stab at the answer for at least these four. The business plans were almost comical in their overconfidence in their ability to kick out rent control tenants and replace them with market tenants, they were highly overleveraged and underwritten to future revenues that never materialized, and they were breaking the law and evading taxes.

Improvements in Multifamily sector driven by NYC MSA

Herschmeyer at Co-Star notes:

Removing these loans [see list below] reduces the multifamily Fitch Loan Delinquency Index from 14.4% to 9.3% at the end of 2011. This moves multifamily from the worst performing of the five asset classes to the middle of the range with office (6.8%) and retail (6.9%) being the best performers and hotel (12.0%) and industrial (10.25%) being the worst.

In 2006 and 2007, issuers underwrote fixed-rate multifamily loans with stabilization plans, whereby rent stabilized units were converted to market. These loans, Stuyvesant Town/Peter Cooper Village ($2.8 billion), The Belnord ($375 million), Riverton ($225 million), and Savoy Park ($210 million) for a total of $3.6 billion did not see their stabilization plans pan out.

I might add to that last paragraph, "because each of the aforementioned projects were blatantly attempting to evade taxes, break NY state law, and all had ludicrous plans based on the expectation that they could simply kick out the rent control tenants and replace them with market rents - a strategy that has parted fools with their money for nearly a century". But I wasn't consulted, so I'll keep my thoughts to myself.

Stuyvesant Town/Peter Cooper Village Tenants win a judgment...

Two years after we noted that PCV/ST lost their appeal and the win was affirmed by the NY Court of Appeals on the J-51 rent control violation, the tenants have finally won their judgment of $215mm - almost a year's worth of revenues at the troubled property.

Deutsche Bank produced a summary of potential interest shortfalls making it apparent that they need to add a professional "formatter" to their team, but interesting nonetheless. In their worst-case scenario where all of the judgment is paid out of the CMBS trusts, shortfalls shake out as such:

Highest Class hit with a shortfall:
CWCI 2007-C2 G
MLCFC 2007-5 B
MLCFC 2007-6 D
WBCMT 2007-C30 F
WBCMT 2007-C31 G

Comings and Goings

Three new issues in one week:DBUBS 2011-LC2, GSMS 2011-ROCK, LSTAR 2011-1.

Beacon Capital is purportedly selling the 2mm sq. ft. 1211 Avenue of the Americas (aka 6th Ave) at $900+/sq. ft. or better.
New rent regulations in NYC being debated with landlords and lawmakers offering trades for tax caps and breaks in exchange for changes in rent regs on stabilized units.


Calendar:

Savoy Park (CSMC 2007-C1) $210mm Seeks Refi

Another deal brought to you by a jv between Apollo (AREA) and Vantage Partners... Anyway, this is another rent control story in NY. Bought it for $175mm, leveraged it up to $367.5mm with $210mm in CSMC 2007-C1, and the $157.5 remainder in B-notes and mezz.

Without even looking, you can guess that this loan is with the special, but just so you know, it's not covering with a 0.49x DSCR (NCF; senior debt) at 97% occupancy. There is a healthy reserve, but even the Realpoint spokesperson quoted in the story in yesterday's WSJ notes that it should last "about another two months".

It's due 1/11/2014

The Golub Program

Cuomo has loaded his 50cal and has the sights squarely aimed at Vantage Properties for the whole kick out the pesky rent control tenants and replace them with market-paying tenants strategy.

Vantage & Apollo (aka AREA) Multifamily + CMBS Loan deals:
Esquire Portfolio (1.49%; CSMC 2007-C4)
Broadway Portfolio (2.13%, CSMC 2007-C2)
Savoy Park (6.25%, CSMC 2007-C1) (fka Delano Village)

"Vantage's business plans refer to this strategy of removing tenants from rent-regulated apartments to convert them to market rate apartments as the company's 'Golub program,'" the New York Attorney General's letter states. "Vantage's business plans highlight its Golub program as a means of generating tenant turnover. As reflected in Vantage's annual reports to investors and business plans, Vantage's business goals are to "generate unit turnover through active management of the Golub program and other legal efforts."

"The investigation revealed that Vantage often failed to exercise due diligence prior to serving tenants with Golub notices or other legal termination notices," the letter continued. "Vantage often commenced Housing Court proceedings seeking to evict tenants from homes in which they had lived for decades based on little more than database reports, which were often incorrect, or contradicted by other evidence in Vantage's possession."
..."Any experienced commercial real estate operator in New York would know better than to engage in the practices alleged in the AG's letter," said Charles Cecil, partner and CEO of Opin Partners, a CMBS and real estate investment advisor and investment management firm in New York.

The "Golub Program" is not a new movie in the Bourne series, but I liked it as a headline. It is just what Vantage termed it's strategy in reference to the "Golub Notice" that is required to be delivered to the tenant 90-150 days prior to eviction/removal from stabilized rent.

I'll update these as I discover more. Cuomo also took out a GBU-24 Paveway III and aimed it Ken Lewis and BOA this morning, and took off his white glove and smacked Moynihan across the face several times and challenged him to a pissing contest. Very busy over at the AG office today.

Peter Cooper Village Stuyvesant Town Loses

They lost their appeal today

The ruling by the Court of Appeals may mean that the current owner, a partnership of Tishman Speyer Properties and BlackRock Realty, and the former owner, Metropolitan Life, may have to pay an estimated $200 million in rent overcharges and damages to tenants of about 4,000 apartments.

Recall that Bloomberg enacted new legislation in either early 2008 or early 2009 that allows for tenants to be awarded up to three times damages - not sure if that is included in the $200mm number or not! They're total revenue last year was $289mm.

How can you find out what other NYC landlords have used J-51? I bet a lot of the rent control flips did...

The decision could also 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.

Click the table below to see it better - it lists some of the bigger rent control flips that didn't look like they would last another year (PCV/ST still had 1+ years of reserves at the time), but it is a little dated from an late 2008 BOA report. Their report had half a dozen pages of other ones as well...

Irony - Peter Cooper Village Stuyvesant Town Suit

Frankly I hadn't read the actual suit, and really just hadn't thought about it much more detail than the WSJ provided initially. The sponsors of PCV/ST were sued for $200 mm (a bit shy of a single year's entire revenue) because they were taking advantage of a tax break for rent-controlled units, but actively deregulating the units. They lost, and a the case is currently in appellate court - it doesn't look good for the sponsors though.

However, the real irony is pointed out by the New York Observer's Eliot Brown - the winners of the suit are not the rent-regulated tenants at all! In fact, the winners will be the market-paying renters who replaced the recently kicked-out regulated renters - they will get paid back for any rent they have paid over the regulated level (we're talking $2k per month on most of these units)!

Hat Tip Deal Junkie.

Note: there are 11,227 units in the complex, not 13,000 as the linked story implies.

Sunny Day Real Estate - ProForma Underwriting

Sunny Day Real Estate was the original emo band of the '90s - The cover art is of the "Bronze Angel" in Vancouver, which I've always suspected was actually a Valkyrie, rather than an Angel, which scoop up the deserving and bravest heroes off the battlefield.

Proforma loans were less pervasive than the media would have you believe, but they are going to cause significant pain in the CMBS universe. There were about a dozen deals where more than a quarter of the loans were underwritten with some form of proforma underwriting. This came in two primary flavors:

• Cash flow proformas - Property lease rolls indicated that new lease rates would be significantly higher. This was common in NYC Office where old $30 psf leases rolling over the next few years were underwritten using $100+ psf leases - most of these are more likely to be in the $60-70 psf area assuming things don't get much worse than they already are. Also common in NYC Multifamily where the landlords devised the strategy of kicking out rent control tenants and replacing them with market payers. The loans typically required a significant debt service reserve account to be set up in advance to cover the planned shortfalls in mortgage debt service - a lot of these accounts will dry up in the next 12 months (a few have already: Meyberry, Riverton, etc.; but bigger ones are coming: PCV/ST, 666 5th Ave, etc.)
  
• LTV proformas - These were typical of loans that were, say, partially completed and leased out with a portion of the collateral under construction. No names jump to mind, but you can easily envision the Phase I shopping center that is leased with a Phase II under construction that is underwritten to a higher LTV. You can also picture the office tower with unsold condos and penthouses as collateral.

Trepp has identified about $38 billion of proforma loans (less than 5% of the market), but that doesn't seem to quite capture the issue. They looked at all conduit deals issued since 2005, and also included a few older deals and some non-conduit deals. The methodology was not disclosed to my knowledge.

Using data from Trepp and Intex, I backed into a number for cash flow proformas that is closer to 8% of the loans issued during 2006 & 2007. The dozen deals that Trepp identified as having more than a quarter of their collateral being proforma matched up with my results. It deserves some more attention, and I'll come back to the subject and post methodology and results at some point in the near future.

Mortgage Holder on the hook for collateral condi

Crain's reported last week that officials are up in arms over a Manhattan rent-regulated apartment building that has over 1,000 code violations because the mortgage holder (Citi) is not keeping the building up-to-code. Citi has not foreclosed on the building, mind you, a slum lord owns the building and owes Citi a mortgage, but advocates are going after Citi for the code violations. Apparently, Citi had made some empty gestures that they would ensure their collateral would not fall into disrepair.

Wonder what will happen when the advocates go after CMBS Trusts whose collateral has fallen into disrepair?

PCV/ST loses another case - $200 million on the line

Deal Junkie brought our attention to the fact that PCV/ST just lost a case in appellate court that could cost them $200 million that would go to roughly 3,000 tenants who received illegal rent increases.

The case revolves around the fact that PCV/ST received a tax break through the J-51 tax program, which allows breaks for renovations on rent-regulated apartments and encourages capital improvements by tenants as well. The NYTimes implies that the outlook is bleak for the owners.

Rent Control Regulation Proposals

NY is proposing to make changes to rent regulations that would make it vastly more complicated to execute the deregulation strategies that are being undertaken by several private equity groups. The most notable includes the Tishman/Blackrock Peter Cooper Village/Stuyvesant Town (PCV/ST) and Stellar Management's Riverton, but the list doesn't end there.

Deal Junkie and Bloomberg did a fine job summarizing the changes. The largest new hurdle seems to be the increase in the destabilization threshhold from $2,000 to $2,700. Further, one year ago in March 2007, NY put into place legislation that made it demonstrably easier to sue your landlord if he repeatedly, and unsucessfully, attempted to deregulate your apartment based on false accusations.

Can't say that it is easy to feel sorry for the PE groups though. Some others include.

Savoy Park ($210mm, CSMC 2007-C1) sponsored by Vantage and Apollo
Meyberry House ($72.4mm, CSMC 2007-C4) sponsored by J.Goldberg and A.Cohen.
New York City Apt. Port. ($195mm, MSC 2007-IQ14) - sponsored by Insureprofit, which filed for bankrupcty last year.
Broadway Portfolio ($70mm, CSMC 2007-C2) - Vantage and Apollo
Esquire Portfolio ($31mm, CSMC 2007-C4) - Vantage and Apollo
Villas Parkmed ($300mm, CD 2006-CD2 - Stellar and Rockpoint are the same sponsors athat are involved in Riverton; This property is located in California, but is the same type of story.
The Axton ($21mm, MSC 2007-HQ12)