NY Apartment B-Note Sells at 33% Discount

An Angelo, Gordon & Co. partnership has acquired a $34 million participation interest in a Manhattan apartment loan from Morgan Stanley for about 67 cents on the dollar.

The debt is part of a $55 million senior fixed-rate loan that Morgan Stanley originated in 2007 on The Axton, an overleveraged Upper West Side building owned by Starrett Corp. of New York.

Morgan Stanley securitized the companion $21 million interest, but got stuck with the larger piece when the commercial MBS market seized up. The securitized portion was transferred to special servicer LNR Partners on Nov. 4 because of a threat of default "due to cash flow problems," according to a servicer report.

The loan on the 229-unit Axton, at 733 Amsterdam Avenue, was underwritten aggressively, as was common when the real estate market was peaking. About 80% of the units were rent-stabilized, and Starrett expected to convert some apartments to market rents. Morgan Stanley projected that the net operating income, which totaled $1.2 million in 2007, would triple within a few years. However, net income this year is on track to total only $1.4 million, according to a servicer report. That's barely enough to cover the $1.3 million of annual debt service.

Market players said that Angelo Gordon and its partner, Belvedere Capital Real Estate Partners, blame the aggressiveness of the loan, not Starrett's management, for the property's cash crunch.

The Axton, which is between West 95th and West 96th Streets, was appraised at $82 million in mid-2007, but its value clearly has fallen because of the market slump. The interest-only senior mortgage, which has a 6% coupon, is scheduled to mature in 2012. There is no subordinate debt on the building, which is 79% occupied.

Angelo Gordon and Belvedere, both of New York, paid about $23 million in cash for the participation interest about two weeks ago. The partnership and LNR could negotiate a loan restructuring with Starrett. Or the Angelo Gordon team could seek to buy LNR's portion of the loan and negotiate directly with Starrett. "This is going to turn into a conversation with Starrett," predicted one market player.

The purchase also positions Angelo Gordon and Belvedere to take control of the property if Starrett is unable to keep up with its loan payments. According to the servicer report, the property has $4.3 million of reserves, down from $10.5 million when the securitization occurred, but loan covenants limit how much of the reserve can be used to make up debt-service shortfalls.

Angelo Gordon acted via AG Core Plus Realty Fund 2, an $800 million core-plus vehicle that it launched in 2007. Belvedere invests its own capital and often teams up with funds on acquisitions. The firm, founded in 1994, is led by principals Adam Miller, Glenn Siegel and David Weinstein.

The property, which is managed by Starrett affiliate Grenadier Realty, includes a 185-space parking garage and 11,700 square feet of retail space, anchored by an HSBC bank branch.

The smaller portion of the Axton's mortgage was securitized via a $2 billion pooled offering (Morgan Stanley Capital 1 Trust, 2007-HQ12).

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