CMBS Meltdown

On the heels of yesterday’s post about CMBS comes news today of the meltdown of Stuyvesant Town. Stuysevant Town is a massive apartment complex in New York City which overlooks the East River. It was built by Metropolitan Life more than 50 years ago. It has long been a highly coveted piece of Manhattan real estate.

It was purchased in 2006 by a partnerhip of Tishman Speyer Properties and BlackRock for $5.4 billion. There is a $3 billion first mortgage which includes a loan by Freddie Mac and Fannie Mae in the amount of $1.5 billion. There is “mezzanine” debt in the amount of at least $300 million.

What happened? First, the Tishman group bought the property at the top of the market. Second, the rents for the apartment unit have been stabilized at a level far below market for a number of years. Tishman thought that  they would be able to raise the rents to market level but have been largely unsuccessful in doing so.

Why didn’t Tishman just put the property in bankruptcy? It appears as though that was a real possibility. I cannot be sure as to why Tishman did not go the bankruptcy route but I would assume that the filing of bankruptcy might have triggered a springing guarantee which would have subjected other assets of the Tishman partners vunerable to collection. As it probably stands, Tishman can hand the keys back to the lenders”without recourse.”

This meltdown is going to be interesting to watch because it is the granddaddy of CMBS offerings. And it is the tip of the iceberg.

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