Riverton owner hopes its share won’t make it to auction

TRD New York /
Dec.December 03, 2008 11:57 AM

Stellar Management plans to continue managing Harlem’s troubled Riverton Houses rental complex for the foreseeable future, a spokesperson for the company said, despite its financial woes and CBRE Realty Finance’s announcement of plans to sell Stellar’s partnership interest in the property.

CBRE, which holds a $25 million mezzanine loan on Riverton, has filed a notice of intent to auction off Stellar’s partnership interest in the apartment complex, which spans from 135th to 138th streets and Fifth Avenue to Harlem River Drive, according to Stellar Management spokesperson Kathleen Cudahy. CBRE did not return calls for comment.

Stellar and its equity partner, Rockpoint Group, announced in August that they were in danger of defaulting on the monthly payments on Riverton’s $225 million mortgage after failing to renovate units in the rent-regulated complex as quickly as they had predicted. Stellar has been negotiating for more favorable terms since then, Cudahy said. Stellar President Larry Gluck told The Real Deal this month that he and the primary lenders have since come to a preliminary agreement.

Cudahy said Stellar is optimistic that the situation will be resolved before February, when CBRE has said it plans to sell the company’s stake in the property at auction.

“Hopefully this will all be resolved before that,” Cudahy said. “I don’t expect that [the auction] is going to happen.”

As the mezzanine lender, CBRE has the option of taking over management of Riverton from Stellar in an attempt to make the property profitable, explained Harold Shultz, a senior fellow at the Citizens Housing and Planning Council, a non-profit research organization. The sale of the partnership interest would allow another entity to come in and manage Riverton, he said.

“What CBRE is saying is, this property is so deeply underwater, we’re going to send it off to someone who is willing to bet they’ll be willing to make it work,” he said.

Because the property is now valued at somewhere between $100 million and $170 million, real estate experts estimate — far less than its loans — the partnership interest is unlikely to be an attractive purchase.

“If they get $100,000 for [the partnership interest], they’ll be lucky,” Shultz said. “They’re basically giving it away.”

In fact, it’s likely that Gluck would simply buy the partnership interest, though he would need to do so under the auspices of a separate business entity than Stellar Management, Shultz said.

When Riverton was refinanced in 2006, Stellar took out $72 million in cash, enough to pay off the original loan and make a large profit, though some of that went to closing costs and other expenses, Stellar’s Cudahy said. Like many deals made at the time, Riverton’s mortgage was bundled with other loans by the lender, Deutsche Bank subsidiary German American Capital Corp., and placed in a commercial mortgage trust.

Cudahy said Stellar has put a substantial portion of those profits back into improvements at Riverton, such as fixing up the lobby, building a new security fence and renovating units at the massive complex, which spans 135th Street to 138th Between Fifth Avenue And The Harlem River Drive. When the Riverton loan was refinanced, sponsors provided $29.3 million in reserves for building and unit renovations, according to SEC filings.

Stellar has “invested a lot of money in this,” Cudahy said, and is not interested in selling or ceding management of the property to someone else. “They do not flip their buildings. They hold on to them for a very long time.”
Shultz was skeptical of claims that Stellar had used all the profits to renovate Riverton. Nearly 93 percent of the units in the complex were rent-stabilized when the project was refinanced in 2006.  When Stellar warned of the default, it said only 10 percent of the units had been converted to fair-market. Tenants say the figure is likely closer to 7 percent. Either figure is far less than the 53 percent Stellar intended to deregulate by 2011, according to SEC filings.

Tenants say conditions in Riverton have gotten better, not worse, since Stellar took over.

Cynthia Allen, president of the Riverton Tenants Association, said there have been changes to the building — including a new security fence and renovations to the lobby — since Stellar took over, but that “the quality is very cheap and the upkeep is poor.”

Right now, though, the tenants are mostly concerned about the building’s future.

“If he does default, what does that mean for us?” Allen said. “If this guy does go into default, if it goes back to the bank, maintenance will be the first thing to go.”

Stellar’s Cudahy said Riverton’s financial woes should have no impact on its tenants, since landlords are required by law to provide services for renters.

“The tenants worry that their lights are going to be turned off,” she said. “Nothing could be further from the truth.”

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