Fitch downgrades CMBS deals backed by Stuy Town

Fitch Ratings today downgraded three CMBS deals backed by Stuyvesant Town and Peter Cooper Village following the Court of Appeals ruling earlier this month that the owners illegally converted rent-stabilized apartments to market-rate units and must refund more than $200 million to current and former tenants.

In a landmark 4-2 decision, the court upheld a lower court ruling that rent-stabilized tenants could not be forced to pay market rates in buildings receiving so-called J-51 tax incentives from the city.

Tishman and its investment partner, BlackRock Realty, were dependent on that additional income to finance their massive $5.4 billion acquisition of Stuy Town and Peter Cooper Village in 2006. The property had already been in serious financial trouble due to the commercial credit crisis and national recession, and this ruling could deliver a major blow to the sponsors.

The apartment complex, Stuy Town and Peter Cooper Village, comprises a total of 11,227 units. Fitch estimates that as of July 2009, about 60 percent of the units were rent-stabilized, with the rest at market rate. The building had a vacancy rate of about 4 percent.

Fitch said that cash flow from the property is significantly lower than what is needed to cover the debt, adding that the landlord is using debt service reserves to cover its operating shortfall. Fitch said the balance of that reserve was $24.4 million as of this month, but warned that the money will last only through December.

Fitch warned that once the reserves run out, the lender will likely call in a default and the loan will be transferred to a special servicer.

Based on current cash flow, Fitch estimates a 40 percent loss on the $3 billion note, which is the main mortgage loan. Fitch added that despite the prospect of a near-term default, there will likely be a long workout period and the full extent of the loss may not be realized until the loan matures in 2016.