Calls made to CWCapital were not returned. BlackRock deferred comments to Tishman, which would not comment beyond its Jan. 25 joint statement announcing its intention to transfer control of the complex to its creditors.

Observers generally concur that the Stuyvesant Town/Peter Cooper Village predicament is a result of market conditions at the peak of the cycle and a "perfect storm" of assumptions going awry. And while its sheer size and the players involved give it a degree of notoriety, this transaction really isn't any different than hundreds of others that took place during that period.

The hyper-liquid credit market was much of what fueled investor appetite for the deal, asserts Woody Heller, executive managing director and head of the capital transactions group at Studley. He notes that the players involved shouldn't be vilified for what transpired. "If there was one group that bid $5.4 billion and everyone else bid $3 billion—yes, then they'd be at fault. But you had about 20 groups clamoring for this asset and were furious when they weren't the ones that were selected," he says. "Everyone was prepared to make the same mistake, and desperate to make the same mistake."

In the Jan. 25 statement, the partnership indicated that transferring control was the "only viable alternative to bankruptcy." A property transfer also tends to be a lot easier and cost-effective than a time-intensive foreclosure for all parties involved.

Only that didn't happen. On Feb. 16, the lenders on the $3-billion first mortgage sought court approval to foreclose on the property and have it sold.

According to sources, the property transfer likely hit a snag when the question arose over who would be responsible for nearly $100 million in real estate transfer taxes. A foreclosure would avoid the transfer tax and from the filing, it seems that the plaintiffs are hoping the proceeds of the sale would cover the legal costs involved with the proceeding, along with the other expenses.

The tax issues that have emerged in the Stuy-Town transaction are not unique to this deal; in fact, it's among the first of many more we will likely see, and will lead to changes in the way we approach this business for years to come.

"These are issues that no one has necessarily dealt with in the past 15 to 20 years," says Edward A. Mermelstein, co-founder of Edward A. Mermelstein & Associates. "We're seeing a lot of proposed legislation to address this because it's going to become increasingly prevalent. With all of these underwater assets, we're going to have debt forgiveness issues popping up on a regular basis."

A Complicated Pie
The Stuy-Town deal could serve as a poster child to the hundreds of large, complicated structured financings that were put together in the past several years. The deal includes a $3-billion first mortgage that was then securitized and $1.4 billion in mezzanine financing from several sources, as well as equity stakes by a variety of investors. With the property valued at a fraction of its purchase price, it's obvious that quite a few players will have lost money. The question is, who will have taken the greatest hit when this all shakes out?

Tishman and BlackRock, with their investors, each kicked about $112 million in equity into the deal. Other equity investors—including the California Public Employees' Retirement System, the Florida State Board of Administration, the California State Teachers' Retirement System and the Church of England—have accepted their losses, for the most part, and written their stakes down to zero.

Meanwhile, the first mortgage debt was split into five notes and pooled into larger transactions. CWCapital services the CMBS deals with the three largest pieces. When the loan was transferred into special servicing in November, Fitch calculated the losses at about 40%, and the loan-to-value at 189.2%.

And then there are the mezzanine lenders, which provided a total of $1.4 billion. In the $300-million senior tranche are Hartford Life Insurance Co. ($100 million), Deutsche Genossenschafts-Hypothekenbank ($100 million), Allied Irish Bank ($50 million) and Wachovia ($50 million). The junior tranche houses GIC Real Estate/the Government of Singapore ($575 million), Winthrop Realty Trust ($300 million), Gramercy Capital Corp./SL Green ($200 million) and Fortress Investment Group ($125 million).

A foreclosure typically takes anywhere from 12 to 18 months, but by all accounts, the mezzanine lenders really dictate how long and strenuous the road to an eventual sale could be. While the borrowers and the investors in the first mortgage may cooperate, there may be remedies available to the mezz lenders to block or contest the foreclosure proceedings. They may, for instance, be able to step up and take over the senior mortgage at a discount.

That's because they stand to lose everything if the foreclosure sale doesn't garner more than the first mortgage balance. "The mezz lenders have to look themselves in the mirror and say, 'Is this property worth more than the first mortgage?' " says Eric M. Anton, an executive managing director with Eastern Consolidated. "If they come to the conclusion that it isn't, they'll probably walk away and lose their money. If they think the value is or could be higher than the first mortgage, they'll come in and make the first mortgage payments." They could also bring in a good, strong partner that could manage the asset, he adds.

That's an unlikely scenario, though, since the deal is so far underwater. "In many situations, mezz lenders are finding the value of their holding is zero," explains George Smith Partners principal and senior director Steve Bram, who handles deals like this, although on a much smaller scale. "So for them to put more money in to take control of an asset in an effort to recover some of that is an odd thing to do."

Mezz lenders aside, there are still control issues within the CMBS stack. "With these CMBS deals, it's becoming increasingly difficult to determine who's got control, even if you go beyond the mezz and you get into the first mortgage," says Bram. "If the CMBS first takes control, questions are going to be raised as to who runs the first."

At the same time, there have been reports that some real estate investors are looking into buying certain investment-grade tranches of the Wachovia 2007-C30, the controlling piece of the CMBS debt stack. The one holding the controlling piece usually has a say in the special servicer's actions and gets priority in bidding on the asset when it goes on the block.

But for this strategy to work, "would-be buyers will have to pick accurately which of the multiple classes in the massive $7.9-billion deal will become the fulcrum," according to a report from Debtwire. "Historically, controlling classes have always been unrated junior tranches at the bottom of the structure but the massive losses caused by the collapse of the Stuyvesant deal pushed the fulcrum up."

The original controlling class in the CMBS deal was an affiliate of CWCapital. The new controlling class, if any, will be determined once the property—and, subsequently, the loan—is reappraised, likely at some point this year.

The most senior CMBS tranche, meanwhile, would get paid above all others. In the case of the Stuy Town transaction, that tranche includes Fannie Mae and Freddie Mac, which together hold more than $2 billion in Stuy-Town securities. Their senior debt position gives them little to no say in what's done to the asset. But an ultimate sale may increase the GSEs' stake in the property, since it's likely that the buyer in the deal will obtain agency financing.

That aside, a number of entities, most of them major names in the industry, have been circling the Stuy-Town deal since signs of trouble started emerging several months ago. Even after the foreclosure filing, the most visible parties—billionaire investor Wilbur Ross and the Lefrak Organization's Richard Lefrak—told the New York Post that they are still interested in buying the complex. A group comprised of Stuy-Town tenants—which placed a losing bid in the 2006 sale—also indicated their interest in acquiring the property.

One in a Line of Many
There are observers who believe what happens in the Stuy-Town deal is a large-scale illustration of what's occurring on deals all over the country, since this obviously isn't the only big transaction that was split up and put into several CMBS pools. It was, after all, the CMBS market that fueled the frenzied credit and investment conditions of the investment arena.

Securitized or not, a whopping $14.4 billion in properties fell into default in December alone, and just a few weeks into January, another $4.6 billion in assets defaulted, reports RCA. As of Feb. 3, the level of distressed commercial real estate reached $184.1 billion.

Many of those deals took place during the height of the market, from 2005 to 2007. Some of the biggest trades that took place during that period are now considered "in trouble" by RCA analysts.

• The Renaissance Mayflower, a 660-unit hotel in Washington, DC, entered special servicing in January after the owner, Rockwood Capital, asked servicer Midland Loan Services to rework the terms of the $200-million CMBS first mortgage.
• Trilogy, a 1,095-unit multifamily property in Wyncote, PA, was picked up by Fairfield Residential in 2007 for $154 million. The $137.5-million CMBS first mortgage matures this July, but the borrower is currently delinquent or in default on the loan.
• The former Robinsons-May Department Store, a 329,749-square-foot vacant mall in Beverly Hills, CA, is to go on the auction block after United Kingdom-based CPC Group defaulted on its loan. Lender Credit Suisse had sold the $356.5-million loan to many banks, and Banco Inbursa holds the highest stake. It refused to foreclose on the property, demanding that CPC pay $22.6 million as well as legal fees for breaching its "carrying costs agreement." Now in foreclosure and to be sold in auction, the asset is now in the hands of Chicago Title Co.

Of the $1.45 trillion in outstanding commercial and multifamily debt tracked by the MBA, $183.9 billion will reach maturity this year and $99.8 billion will mature in 2011. Those, along with billions more in 2012 through 2017, will need to be refinanced. Given the tighter conditions of the debt market, there's a good possibility that many borrowers won't find new sources of capital.

On top of that, there are billions of dollars worth of deals that have been extended or worked out; that is, transactions that would likely have defaulted or gone delinquent if the lender hadn't worked out a short-term solution with the borrower. RCA notes that $27.5 billion of the total current distress in the market has been restructured or modified. There's still a chance those loans will turn sour in another few years.

Until recently, many lenders have been open to restructuring or extending loans because they were wary of taking the losses.

But now that banks are somewhat healthier and they have a better understanding of the market, it's likely we'll see more distressed offerings. "There's a tidal wave of debt that's coming due, and no one knows how these owners are going to dig themselves out," says Anton. "The assumptions that were used to finance real estate two to four years ago are now proving to be all wrong. Those chickens are coming home to roost."