Deutsche Shops Troubled NY Apartment Debt

Deutsche Bank is offering $150 million of distressed subordinate debt on a massive apartment complex in the Tribeca section of Manhattan.

The offering is likely to draw heavy interest from investors interested in taking control of the 1,328-unit property, called Independence Plaza. Bids are expected to weigh in at 20-30 cents on the dollar, or $30 million to $45 million. Eastdil Secured is the broker.

In 2006, a Stellar Management partnership lined up $575 million of floating-rate debt as part of a plan to convert the property's rent-stabilized apartments to market rates. At the time, the complex was appraised at $754 million. But the conversion got bogged down in legal battles, and the market downturn also took a toll. One player familiar with the offering pegged the complex's current value at perhaps $450 million.

The interest-only financing package, arranged by Deutsche, consisted of a senior $265 million securitized mortgage, three B-notes totaling $160 million and four mezzanine tranches totaling $150 million.

Deutsche is offering a $35 million B-note and the three senior mezzanine tranches, totaling $115 million. The $35 million junior mezzanine tranche isn't being offered.

While the debt is performing, it matures in September and can't be fully refinanced, based on the complex's estimated value. As a result, a buyer of the debt could be in a position to foreclose.

The complex, which overlooks the Hudson River, was built in the mid-1970s by developer Jerry Belson. A few years later, it entered New York State's Mitchell-Lama program, under which property owners offer below-market rents to middle-income tenants in return for tax breaks and other incentives.

The Stellar partnership bought the property in 2003 as its participation in the program was expiring. At the time, 81% of the units were subject to rent restrictions. The partnership's game plan was to transition the affordable-housing units to market rents.

However, tenants filed lawsuits asserting that the owner improperly continued to receive tax breaks from 2004 to 2006, despite having exited the Mitchell-Lama program. The tenants won a victory last summer that potentially entitled them to rent rollbacks. An appeal is still pending. Two market players said the uncertainty surrounding the litigation will drag down bids on the debt.

The complex is nearly fully leased, and a buyer would likely face legal challenges in bringing more units up to market rates. The current mix of rent-stabilized and market-rent units is unclear. The current asking rate for a one-bedroom unit is $3,550 per month.

Independence Plaza encompasses three 39-story towers, which include some 18,600 square feet of school space, 54,500 sf of retail space and 550 parking spaces. The complex is bounded by Greenwich Street, North Moore Street and Washington Market Park. The west side of the property faces the Hudson River. Some $53 million of renovations were recently made to the lobby, some units and other parts of the complex.

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