One of the biggest loans in multifamily history is on the verge of default.

When Tishman Speyer and BlackRock Realty purchased Stuyvesant Town/Peter Cooper Village for $5.4 billion in 2006, it represented the largest single multifamily transaction in the country’s history. But now, the owners are running out of money to pay off the property’s $3 billion in securitized debt and an additional $1.5 billion mezzanine loan.

The deal has become a poster child for the excesses of 2006, when cheap money flowed and underwriting assumptions pushed the envelope. When the 56-building, 11,250-unit complex was sold in 2006, about 80 percent of the units were rent-stabilized. The new owners hoped to convert the bulk of those units to market-rate units with regularity, but the pace of conversions was slower than expected. As of July, the mix was about 60 percent rent-stabilized, 40 percent market rate.

“They had an aggressive assumption,” says Adam Fox, senior director for Fitch Ratings. “Up until the end of 2008, they were converting just over 6 percent of the stabilized units to market [per year], but their initial expectation was a much higher number.”

The biggest issue: Litigation brought on by residents of the project, who allege that a number of units have been wrongfully deregulated. In March, the New York State Supreme Court denied the owners’ request to dismiss the claims. A week later, a court of appeals sided with the tenants, saying that the owners cannot deregulate the units while receiving city tax abatements.

Therefore, the owners are in limbo, unable to deregulate any additional units until the litigation is settled, which could take years. During the legal process, the owners are required to deposit the difference between the stabilized rents and market-rate rents on the converted units, an escrow account totaling $10 million.

Meanwhile, the debt reserves are dwindling. As of July, the deal’s debt service reserve balance was $56.5 million, down from $400 million at issuance.