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http://www.wsj.com/articles/stuyvesant-town-how-one-firm-is-reaping-a-windfall-where-investors-lost-billions-1446546780
REAL ESTATE
Stuyvesant Town: How One Firm Is
Reaping a Windfall Where Investors
Lost Billions
CWCapital is set to rake in hundreds of millions of dollars linked to soured loans as property
values soar
The Stuyvesant Town-Peter Cooper Village apartment complex, with One World Trade Center and the Manhattan
skyline behind. One company stands to reap a windfall in fees tied to its management of the property. PHOTO:
BLOOMBERG NEWS
By ELIOT BROWN
Updated Nov. 3, 2015 10:29 a.m. ET
Investors have suffered billions in losses over the past decade on New York’s
Stuyvesant Town and Peter Cooper Village apartment complex. But one
little-known company controlled by Fortress Investment Group is poised to
reap a massive payday.
The company, CWCapital Asset Management, has been managing the Manhattan
apartment complexes on behalf of creditors since 2010, after the owners
defaulted on their $3 billion mortgage and surrendered the property.
Amid a red-hot market for apartments, Blackstone Group LP last month
announced it was purchasing the sprawling development, known collectively as
Stuyvesant Town, from the creditors for $5.3 billion.
With the sale, CWCapital is poised to rake in as much as $615 million, according
to an estimate by Barclays PLC.
The sum is surprising for what is essentially a service provider that contracts
with investors to restructure loans and manage foreclosed properties, said
Edward Shugrue, chief executive of Talmage LLC, a bond manager who invests in
commercial-property debt but doesn’t own bonds tied to Stuyvesant Town.
“It’s the mother lode,” Mr. Shugrue said. “Comb through structured finance
—there’s nothing like this….That’s a pretty flippin’ crazy amount of money.”
Companies such as CWCapital, known as special servicers, typically collect a fee
of 0.25% of the total debt annually plus a fee when the property sells, a structure
critics have said gives servicers an incentive to take a long time to resolve
troubled properties.
But because Stuyvesant Town’s value jumped so far above the $3 billion
mortgage, CWCapital has said its contract entitles it to 3% of the property’s debt.
That is because of a common—but very rarely employed—quirk of the contract
that kicks in only after creditors are paid back any missed interest payments.
In all, CWCapital stands to take in $45 million from the standard servicing fees,
plus about $555 million out of the added proceeds above $3 billion, Barclays
estimates. It also is entitled to receive a $15 million liquidation fee, the bank
says.
RELATED COVERAGE
Blackstone Leads Deal to Buy Stuyvesant Town Housing Complex (http://www.wsj.com/articles/blackstonenears-deal-to-buy-stuyvesant-town-housing-complex-1445293748) (Oct. 19, 2015)
Stuytown Is Going on the Market (http://www.wsj.com/articles/stuytown-is-going-on-the-market1445214626) (Oct. 18, 2015)
Tishman Venture Gives Up Stuyvesant Project (http://www.wsj.com/articles
/SB10001424052748703415804575023483097973538) (Jan. 25, 2010)
A CWCapital spokesman said the company helped raise income at the property,
improving value for the creditors. “We are proud of our work in achieving such a
positive financial outcome for the bondholders we represent,” the spokesman
said.
The windfall would be a coup for Fortress, too. A fund owned by the New York
investment firm paid only about $300 million for CWCapital in 2010.
For Fortress, Stuyvesant Town represents another winner in a year of both home
runs and strikeouts. The firm’s majority stake in subprime lender Springleaf
Holdings Inc. has emerged as one of the best private-equity investments in
recent history. The stake has ballooned in value to over $3.5 billion, putting the
firm’s gain at more than 27 times Fortress’s original investment of $124 million
in 2010.
But Fortress recently announced that it would return money from its flagship
hedge fund to investors and that principal Michael Novogratz would retire on
the heels of steep losses connected in part to a bet on Brazilian investments, and
steady client withdrawals.
For now, the exact amount being paid to CWCapital isn’t clear. Actions by special
servicers are frequently challenged in court by creditors, and analysts said fee
payments could prove fertile ground for further litigation. In addition, the
servicer recently settled a lawsuit with a creditor seeking hundreds of millions
of dollars, the terms of which weren’t disclosed.
Still, should the amount be anywhere close to the $615 million estimated by
Barclays, it would mark an extreme example of how companies dealing with
troubled property investments can profit handsomely when the real-estate
market bounces back.
CWCapital also could gain from any bondholdings tied to Stuyvesant Town,
though special servicers traditionally have only a sliver of investments in
properties they manage, typically through a slice of high-risk bonds tied to
properties’ debt. The CWCapital spokesman declined to comment on the size of
its holdings.
Stuyvesant Town, an 80-acre chunk of land on the east side of Manhattan with
11,200 apartments, became a poster child of the property boom-turned-bust. An
investor group led by Tishman Speyer Properties bought the complex in 2006 in
a $6.3 billion deal, which included $900 million for costs such as improvements,
and reserves to pay interest. But the buyer surrendered the property to creditors
in 2010 after a plan to raise rents and deregulate rent-controlled apartments fell
far short of expectations and the group couldn’t pay its mortgage.
Blackstone Group last month announced it was purchasing the Stuyvesant Town complex, seen here, for $5.3
billion. PHOTO: BLOOMBERG NEWS
Because bondholders can’t speak with one voice, the management of such
properties falls to the special servicer, in this case CWCapital. Its charge was to
make day-to-day decisions about the property on behalf of bondholders.
As CWCapital was gearing up to take over the complex, Fortress saw opportunity
in the sector, given the tens of billions of dollars’ worth of similar properties that
were soon to need special servicers. A Fortress fund bought CWCapital for about
$300 million from Canadian pension manager Caisse de Dépôt et Placement du
Québec, people familiar with the deal said.
Stuyvesant Town was by far the largest property in CWCapital’s portfolio. After
it took over in 2010, it sorted through a lengthy lawsuit with tenants and
gradually increased income at the property to more than $200 million, from
around $120 million in 2010, according to loan research firm Trepp LLC.
The income boost came in part because more rent-regulated apartments were
converted to luxury apartments at higher rents. That, along with a recovery of
the real-estate market, helped bring the creditors a sale price well above the $3
billion mortgage in which they invested.
The provision giving CWCapital the sizable proceeds if the property sells for
more than what is owed “is designed as an incentive to the special servicer,” said
Aaron Haan, an analyst at Barclays. While the sum seems large, he said, “That’s
just the way the contracts are written up.”
The CWCapital spokesman said the company had to work through “significant
obstacles,” including numerous complex lawsuits and repairs related to
superstorm Sandy in 2012.
Write to Eliot Brown at [email protected]
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