NEW YORK - The joint venture that borrowed heavily to buy Stuyvesant Town and Peter Cooper Village in 2006 could be among the first to take advantage of changes in U.S. tax law that let borrowers seek payment relief, when it said last week that it could not keep paying interest on a $3 billion loan.

On Friday, the $3 billion senior mortgage was transferred to the special servicer CWCapital after the borrower -- real estate private equity firm Tishman Speyer and BlackRock Realty Advisors, the real estate arm of money manager BlackRock Inc (BLK.N) -- asked for relief from paying the debt service on the $3 billion mortgage.

We requested it now so we can begin to negotiate a restructuring before it goes into default, a spokesman for Tishman Speyer said.

The $3 billion senior mortgage was securitized into five commercial mortgage-backed security (CMBS) deals. Special servicers are the only ones who can modify troubled loans underlying CMBS.

Many commercial real estate experts don't believe that the special servicer will foreclose on the property, which would be costly to the bondholders and would require more cash for the property.

Instead, they expect Tishman and its partners to work out some type of deal that may allow them to manage the property, collecting lucrative fees that could be roughly 2 percent of all the rent on the 11,227 units.

The borrower on the Stuyvesant Town loan is the joint venture Tishman and BlackRock formed to buy this bastion of middle-class housing on 80 Manhattan acres for $5.4 billion three years ago, near the top of the commercial real estate market.

It is also a reminder of pain still to come from the demise of the U.S. commercial real estate boom of 2004 through early 2007, which was created by over-borrowing and aggressive underwriting of future rents and income. U.S. commercial real estate values are off 40 percent on average. Real estate research firm Property & Portfolio Research Inc. said it does not expect values to hit bottom until early next year.

There's a lot of losses being taken in commercial real estate by lending institutions and holders of securitizations, but this is fairly large, said Daniel Alpert, founding managing director of investment bank Westwood Capital LLC, in New York. This will move the needle of the banking level.

AVOIDING DEFAULT

It was a long but quick fall from the ambitious plan that Tishman Speyer and BlackRock envisioned for the Manhattan complex of 56 high-rise apartment buildings originally constructed to house returning World War II veterans. The plan was to bring most of the units up to market rent and eventually sell them as condominiums.

Although the loan is still current, the money borrowed to pay the interest is running out and is expected to be fully depleted by the end of the year. Moving to special servicing was no surprise to many real estate professionals or Fitch Ratings, which downgraded the bonds last month.

They obviously knew this was coming, said Lawrence Longua, director of New York University's Schack Institute of Real Estate. We all did. They have some plan or else they wouldn't have requested going to special servicing.

Tishman and BlackRock are one of the first high-profile sponsors to take advantage of changes the U.S. Treasury Department made in September that allow sponsors to negotiate with special servicers before a default or imminent default on a loan.

The new rules could harm efforts to revive the moribund CMBS market because it will encourage even current borrowers to seek to restructure their loans, and bondholders will have less clarity about their investments, Longua said.

That really creates muddy water, Longua said. Prior to this, the special servicer said, 'No, I can't do anything.' Now when they have the latitude, the borrower is going to say: 'You can do things, and you should do things, and if you can't, I'm going to sue you.'

LONG ROAD TO RESOLUTION

Efforts to revive the CMBS markets to fuel a recovery could be fruitless simply because so many good-quality assets have too much leverage on them already.

There's so much more coming that there's no likelihood of seeing any meaningful CMBS, pretty much because all assets that are meaningful collateral are over-levered, Alpert said.

Last week, Fitch downgraded many of the CMBS bonds associated with Stuyvesant Town/Peter Cooper Village, saying the project was worth about $1.7 billion. If that's true, many bondholders could join the equity investors and mezzanine loan investors and see their investment wiped out.

Although foreclosure is a long way off and may never happen, the complex's ownership faces a very long path to resolution, experts said. In addition to protracted fights among investors concerning the property's value and their role in preserving their interest, the project's future also is contingent on a recent ruling by the New York State Court of Appeals.

The issues will take years to resolve, given the nature of the court system and the complexity of the issues, said Scott Mollen, real estate litigation partner in the law firm Herrick Feinstein, in New York.

Last month, the state's highest court ruled that the project's former owner, MetLife Inc (MET.N) and the present owners illegally converted rent-stabilized units to market-rent apartments. The Court of Appeals threw the case back to the lower courts to decide key issues such as damages to tenants, whether the ruling could be retroactive, class-action status, and payment and repayment of the tax breaks allowed to landlords of similar rent-stabilized apartments. Those decisions by the lower courts also are likely to be appealed, Mollen said.

Such a labyrinth of legal challenges is likely to put off any potential sale for years.

I don't' see any third-party owner coming into this mess, especially with litigation having gone the way it has gone, Longua said.

This is not just an apartment complex. It's a political can of worms. (Reporting by Ilaina Jonas; Editing by Jan Paschal)

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