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Stuyvesant Town: How One Firm Is Reaping a Windfall Where Investors Lost Billions


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.

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.ENLARGE
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.