Challenge over reported $566M in fees
By Sabina Mollot
On the heels of news that CWCapital, Stuyvesant Town’s controlling entity since 2010, could walk away with over a half a billion dollars in fees from the recent sale and other services, investors have filed suit to try to prevent that from happening.
Investor groups with a trust that’s a lead lender of the property’s senior debt filed the legal action last Thursday. This was after, they said, CWCapital “deflected or ignored” their questions about how the company intended to disperse the reportedly massive windfall. The plaintiffs, affiliated with hedge fund Appaloosa Management, are: Appaloosa Investment, L.P.I, Palomino Fund Ltd., Thoroughbred Fund L.P., and Thoroughbred Master Ltd.
The investors said CW has reportedly claimed it is entitled to about $566 million in default interest, based on a three percent rate on the senior loan calculated from 2010 and the fact that the property was sold for more than the senior debt. However, the plaintiffs argued, that money is not supposed to go to CWCapital, but instead to senior lenders.
Wells Fargo, the paying agent of the trust, has also been named as a defendant in the suit. The bank, the investors said, is responsible for establishing a reserve account for the gains from the sale to be deposited in and then distributed to investors to offset losses on other properties held by the trust.
The suit cited figures from industry analysts that said the sale of Stuyvesant Town to Blackstone Group for $5.3 billion will result in gain on sale proceeds on the senior loan in excess of $1.1 billion.
“The recovery of these amounts is critical to the Stuy Town CMBS (commercial mortgage backed securities) trusts,” said the investors. They argued that CW would still be compensated for its services by a “special servicing fee” of $7.5 million per year for the nearly six years the company has controlled the property, and a $15 million “liquidation fee” for the sale.
“If CWC is permitted to collect and retain this default interest, it will constitute a significant and unprecedented windfall to CWC,” the suit said, while the investors “are left suffering hundreds of millions of dollars in losses.”
Additionally, the investors argued that such massive fees aren’t supposed to go to the servicer when the sale of the mortgages property results in a gain.
The suit borrowed a quote from a recent Wall Street Journal article detailing CW’s expected, and unprecedented, payout, from an expert who called the sum “a pretty flippin’ crazy amount of money.”
The investors also blasted the special servicer’s math, saying interest stopped accruing in June, 2010, which would make the amount the company could claim it’s owed closer to $38.2 million.
They were also concerned CWCapital would pass on the claimed fees to its investors, leaving the plaintiffs to fight a claim against a company worth just $300 million. That’s the amount CWCapital’s parent company, Fortress, reportedly paid to acquire CW.
Because CW hasn’t announced its intentions regarding the money, “plaintiffs therefore bring this action seeking a declaration of defendants’ obligations under the governing agreements,” the suit stated.
The action also seeks to stop CW from “absconding with the more than one-half billion dollars in purported default interest from the proceeds of the sale of Stuyvesant Town.” Otherwise, the investors claimed, they will be “irreparably harmed.” They recommended that the claimed default interest be put into escrow.
Shortly prior to the sale to Blackstone, CWCapital settled a separate lawsuit filed by junior lenders over CW’s decision to take title of Stuy Town through a deed rather than holding a foreclosure sale.
Brian Moriarty, a spokesperson for CWCapital, declined to comment on the lawsuit. A spokesperson for Wells Fargo, Jen Hibbard, declined to comment, citing the pending litigation. David Tepper, founder of Appaloosa Management, did not respond to a request for comment.
Christine Anderson, a spokesperson for Blackstone, said the litigation isn’t expected to slow down the sale, which the company has said is supposed to close by the end of the year.