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NEW YORK CITY-Fitch Ratings says that debt service reserves for New York City’s Stuyvesant Town/Peter Cooper Village loan are likely to run out by the end of this year. The ratings agency says in a release, that in this scenario, a default on the loan is likely if an equity infusion or recapitalization does not take place. Loan sponsors are Tishman Speyer Properties, LP and Black Rock Realty. Tishman had no official response.

However, a source familiar with the deal says the reserve will last longer, but not by much. “The joint venture is confident the reserve will last into 2010, so the ranges are between January and March,” says the source.

Stuyvesant Town/Peter Cooper Village is an 80-acre, 56-building red bricked complex that extends from 14th Street to 23rd Street on Manhattan’s east side. Original owner, MetLife agreed to sell the complex in 2006 to Tishman Speyer and Black Rock for $5.6 billion.

Fitch says it reviewed Q1, 2009 financials, debt service draws and it’s reviewed the most recent unit conversion statistics for the Stuyvesant Town/ Peter Cooper village loan and found cash flow from the property remained “significantly below what is needed to service the current outstanding debt.” The ratings agency says the borrower continues to use debt service reserves to cover operating shortfalls.

A piece of the $3-billion pari passu Stuy-Town loan are securitized, according to the agency, in the following transactions: WBCMT 2007-C30; COBALT 2007-C2; ML-CFC 2007-5; ML-CFC 2007-6.

Because of the Stuy-Town/Peter Cooper Village loan’s ‘underperformance’, Fitch downgraded those four CMBS transactions on Friday. They said the outcome of ongoing Stuyvesant Town litigation could have future ratings implications for the four transactions.

In July, Fitch is incorporating prospective stresses in forecasting losses, assuming 15% property income declines and 35% peak to trough property value declines. “Continued macroeconomic deterioration will result in further loan performance declines, though we will not see the full effect immediately,” said managing director Mary MacNeill in a statement that month.

Back on the ground, this past March, an appeals court ruled that Stuy-Town and Peter Cooper’s landlord raised rents and deregulated apartments after getting special tax breaks. News reports speculated that a decision against them could cost landlord Tishman Speyer as well as former landlord Metropolitan Life more than $200 million in restitution.

The court had also imposed a “moratorium on conversion” which has reduced capital expenditures. However, the use of debt service reserves has increased because the court also requires the borrower to seperately escrow the difference between stabilized and market rents on former stabilized units.

Fitch said it believes the ultimate value of the properties will be, in large part, determined by the lawsuit’s resolution.

Senior director Adam Fox says in a statement that “based on current performance and uncertainty surrounding ongoing litigation, we do not expect property performance to improve sufficiently to service the securitized portion of the $4.5-billion debt before reserves are depleted.”

According to Fitch, in addition to securitized debt, there’s $1.5 billion of mezzanine debt held outside the trust. For the year ended 2008 ,the servicer reported debt service coverage ratio on the mortgage was 0.69 times as compared to the year ended 2007 DSCR of 0.55x.

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