The $3 billion mortgage for the troubled Peter Cooper Village/Stuyvesant Town apartment complex in New York was transferred into special servicing with Needham, Mass.-based CWCapital last week. The property's owners, a joint venture between Tishman Speyer and BlackRock, had only $24 million left last month in reserve funds to pay off the debt.

“The borrowers request for relief and subsequent transfer to special servicing were not a surprise given the declining balance of the debt service reserve and the insufficient cash flow of the property to service the debt,” says Adam Fox, a spokesperson for New York-based Fitch Ratings, which does not expect to take any negative rating action following the move. Fitch downgraded CMBS transactions containing portions of the property’s loan on August 28 and then October 30 after the New York State Court of Appeals ruled that rent-stabilized apartments at Stuy Town were illegally decontrolled.

Although a default at the behemoth property could send the entire multifamily market into turmoil, Fitch expects the borrower and special servicer to begin negotiating a workout of the loan to avoid that scenario. “Given the remaining term of the loan and the uncertainty surrounding the conversion of stabilized units to market it is likely the loan will be modified in some form,” Fox says. “We also expect any potential sale of the property to be difficult given the uncertainty surrounding the conversion of stabilized units to market.”

Factors involved in the workout and ultimate recovery of the loan include potential legislative changes to rent stabilization laws, commitment of the loan sponsors, the remaining seven-year term of the loan, and the "low" loan-per-unit value of $267,213.

Tishman Speyer and BlackRock Realty paid $5.4 billion for the 56-building complex in November 2006—marking the biggest deal in New York residential history—with the intent of converting the rent-stabilized units to market rents as residents vacated. In addition to the $3 billion securitized balance, there is an additional $1.5 billion of mezzanine debt held outside the trust.