The fact that the mammoth Peter Cooper Village/Stuyvesant Town apartment complex in Manhattan is heading back to its lenders is no surprise. But who ultimately ends up with the asset after the tug of war for control will be a great source of intrigue for the industry over the next year.

Tishman Speyer Properties and BlackRock, bloodied after years of fighting with their tenants over rent raises that the firms had counted on when they bought the property for a record $5.4 billion in 2006, finally handed the complex back to its lenders earlier this week. The creditors with a claim on the property include Fannie Mae and Freddie Mac, and mezzanine debt holders include a Winthrop Realty Trust affiliate and Gramercy Capital Corp. The Government of Singapore Investment Corp., the Florida State Board of Administration, the California Public Employees’ Retirement System, and the Church of England all were major investors in the deal.

Winthrop Realty Trust, which holds about $300 million in senior mezzanine, has said it could pursue a foreclosure sale. “Ultimately the controlling class of bondholders will choose what they want to do with that property and that will affect all other classes of bondholders,” says Nicholas Michael Ingle, director of capital markets for Hendricks & Partners, a Phoenix-based national multifamily research and advisory firm. “Everyone’s debt interests will be decided by the default resolution instructions of the controlling classes.”

Queens, N.Y.-based LeFrak Organization wants to pursue management of the complex and may also invest in the property with other partners, according to Bloomberg. Regardless of whether LeFrak ends up with the deal or not, Ben Thypin, senior market analyst for New York-based Real Capital Analytics, thinks this will be the recipe for success. “Any big money will have to team with a manager or be an experienced multifamily manager themselves,” he says. “The ability to manage this thing is absolutely important.”

Possible Buyers
Bloomberg reported that Freddie Mac may provide financing for the property. Even then, a deal won’t be easy. “Even at a lower valuation, you’re still talking about a $1.8 billion dollar apartment complex,” says Ryan Severino, an economist with New York-based Reis. “There are relatively few investors with enough clout to cobble together that kind of money.”

Peter Von Der Ahe, vice president of investments and director for Encino, Calif.-based Marcus and Millichap’s National Multi Housing Group, predicts that a number of larger operators will chase the deal. “I think everyone interested in 2006 will be interested in 2010,” he says.

Thypin disagrees, saying institutional investment interest may be more tepid this time around. He ultimately expects private equity to win out. “Given the way that institutional investors got burned on this, I think they wouldn’t be too eager to get involved,” he says.

Ingle also thinks the pool of potential buyers has shrunk from what it once was. “If we were having this conversation 24 months ago, we would be looking at The Abu Dhabi Investment Authority or Dubai World,” Ingle says. “But I don’t know if they’ll be involved. You could be looking at a syndicate—several parties taking it together in a joint venture.”

Most deal guys don’t expect to see REITs involved. Either do the analysts. “It’s too big and too much of a political hot potato for REITs to get involved unless the price is extremely attractive,” says Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O'Neill + Partners.

The tenants association, which made a bid last time and has grown even more emboldened through the rent control fights of the past couple of years, could also be a contender. “It couldn’t be tenants then, but I don’t see why it couldn’t be now,” Thypin says.

Regardless of who eventually makes the purchase, Von Der Ahe is optimistic that eventual resolution of the troubled property’s loans could ultimately signal to the market that stability is on the way. “We’ve been waiting for a sign that the deleveraging process is beginning,” he says. “This has some symbolism in the market because this is the highest profile deleveraging in the nation. It’s a painful thing to go through, but it lets you know you’re one step closer to the other side which is stabilization and growth.”