Sunday, January 25, 2009

CRE: When the Reserve Runs Dry

by Calculated Risk on 1/25/2009 10:30:00 AM

Bloomberg has an update on Manhattan’s largest apartment complex: Tishman’s Stuyvesant Town Fund May Run Dry This Year (hat tip Brian)

Tishman Speyer Properties LP and BlackRock Realty ... are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report. ... The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established.
This property was purchased in 2006 and has obviously not met income projections. When the reserve fund runs dry, the owner will need to put in more cash or possibly default on the loan.

This is a common problem for office, retail and apartment properties that were purchased in 2005 or 2006, at prices that were based on overly optimistic pro forma income projections. A reserve fund was used to pay interest until the rents increased, a scenario that is now unlikely with a recession and declining rents. Many of these deals will blow up when the interest reserve is depleted - probably this year or in 2010.