Blackstone seeks mortgage for Manhattan complex

[NEW YORK] Blackstone Group hopes to secure at least US$2bn in first mortgage debt from Freddie Mac or Fannie Mae to help finance its purchase of an iconic Manhattan apartment complex, a person familiar with the matter told IFR.

Blackstone and Canada's Ivanhoe Cambridge have already agreed to fund half of their US$5.3bn purchase of the 110-building Stuyvesant Town-Peter Cooper Village with equity.

And while the duo are not ruling out CMBS debt from bank lenders as a back-up financing option, they prefer securing a lower-leverage loan on the 70-year-old property through one of the housing giants, the person said.

Freddie and Fannie have much stricter caps on how much debt can be attached to a property compared with the conduit CMBS market.

The CMBS market financed US$3bn of the total US$4.4bn debt package piled onto the enclave by Tishman Speyer and BlackRock to acquire the property in 2007.

Bonds backing the deal flew off the shelves, but came back to bite just three years later when the trade became the biggest CMBS default in history.

CMBS investors who bought Stuyvesant Town-backed bonds were told to expect the property's value to rise to US$6.9bn in four years, according to loan documents.

But the borrowers' intentions to hike rates, cover their monthly CMBS mortgage payments and turn a profit backfired.

Tenants sued and in 2012 won a US$147m settlement to end claims that thousands of renters were being overcharged by their landlord at the hulking brick buildings.

Special servicer CW Capital Asset Management had by then been overseeing the property for two years.

During that time its appraised value recovered to US$3.2bn from a rock-bottom valuation of US$2.8bn, or finally enough to repay the CMBS mortgage in full.

With so much money at stake, CW Capital's decision to keep the property off the open market beyond that point has been contentious. "The big talk on Stuyvesant Town has been what kind of fees CW Capital will take from the sale," one investor said. "They have been dragging their heels on selling." Even CW's sudden completion of a quiet sale process put some in the bond market in line for losses. Senior bonds early last week had been quoted at 103-105 prices, but will probably now fetch par. "If you were modeling for a late 2016 repayment, this would be problematic," said Richard Hill, a CMBS analyst at Morgan Stanley.

Stuyvesant Town was built in 1945 with tax subsidies as affordable housing for New Yorkers. And Blackstone and Ivanhoe have been careful to get city officials and the tenants' union on board with the latest sale.

In exchange for agreeing to keep 5,000 units as below-market units for at least 20 years, the city's Housing Development Corporation lent the group up to US$144m toward the financing.

The loan agreement included language stating that its purpose was to "secure the affordability and protect (Stuyvesant Town's) legacy as a mixed income community that anchors the city's middle class", according to terms viewed by IFR.

The two government-backed housing giants also told IFR that their participation in any financing would hinge on affordability. "We would consider participating in any refinancing of (the property) that has the support of the city and the tenants and that preserves affordability at the property," a Freddie spokesperson said.

Blackstone's head of real estate Jonathan Gray said that the aim was to close the transaction by the end of 2015.

IFR