A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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The Deal of a Lifetime
Tishman Speyers debt-financed purchase of Stuyvesant Town looked perfect in 2006, but history intervened.
31 May 2013
Other Peoples Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever Made, by Charles V. Bagli (Dutton, 416 pp., $28.95)
Every unhappy business deal is unhappy in its own way. Charles Baglis Other Peoples Money recounts the doomed 2006 sale of Stuyvesant TownPeter Cooper Village, a massive and unique housing complex in Manhattan. As was the case with other deals brokered during those wild days, the assets were worth as much as the banks were willing to lend. But Stuyvesant Town was no Sunbelt subdivision or overleveraged investment bank; rent regulation, to which most of its units were subject, and its status as a landmark New York property set it apart. How these singular factors contributed to the deals collapse forms the core of Baglis story.
Stuyvesant TownPeter Cooper Villages 11,200 units host a middle-income community of 25,000 residents, making it by far the largest apartment complex in Manhattan. Metropolitan Life built the complex in 1947 with assistance from the La Guardia administration, as part of its push for more middle-class housing in the city. In exchange for eminent-domain takings and multi-decade tax breaks, Metropolitan Life agreed to make rent increases subject to city approval.
Many objected to the rich subsidies offered Metropolitan Life, then the largest private corporation in the nation, as well as the firms refusal to rent to minorities. Others criticized the complexs design and layout. Metropolitan Life wouldnt allow schools, churches, libraries, or other public facilities within the projects boundaries out of concern that they might attract undesirable elements. Urbanist Lewis Mumford discerned the architecture of the Police State in Stuyvesant Towns dozens of featureless redbrick buildings, arrayed in rows across 80 acres.
But demand surged. Waiting lists stretched out for over a decade. Metropolitan Life was, by all accounts, an exemplary landlord, and rents remained affordable because of the tax deal. Naturally, Metropolitan Life was less thrilled than tenants were about the rent regulations, and the company began threatening to sell the property as early as 1973. City government parried the threats with more subsidies, but eventually a sale became inevitable. Going public in 2000 made MetLife (the company changed its name officially in 1990) more focused on its short-term profit margins. Windfalls beckoned in the mid-2000s real-estate market. Securitization and other new financing techniques facilitated deals in which buyers put up barely a sliver of their own equity, increasing their tolerance for risk. Landmark New York properties changed hands at ever-escalating prices. Experienced investors knew a market correction would come, but properties like Stuyvesant Town—a full 18 blocks of prime Manhattan real estate—go into play once in a lifetime. Even if some creative financing was required, the opportunity was impossible to pass up.
The other factor that sent valuations soaring was rent regulation. Under New York law, when a rent-regulated apartment becomes vacant, a landlord can convert it to market rate under certain conditions—by enacting capital improvements, for example, and then passing on the cost to future tenants. When a units legal rent passes a certain threshold, it is deregulated. Around 2000, MetLife began a campaign to increase vacancies by evicting illegal tenants, such as out-of-town businessmen using units as pied-à-terres or residents subletting units for a profit. Almost 30 percent of all units had been converted to market rate by the time Stuyvesant Town went up for sale in 2006. But during the bidding war, rumors flew that MetLife had not gone nearly far enough in rooting out illegal tenants.
Assumptions about what aggressive management could accomplish with deregulation, combined with the belief that the dowdy complex held untapped gentrification potential, pushed the price tag to $5.4 billion, or $6.3 billion including all fees and other costs. A team led by the prestigious New York City developer Tishman Speyer claimed the prize. Over 80 percent of Tishmans bid was debt, and, from the first day, income from the property covered only 40 percent of the debt service.
The collapse came swiftly. Rents on market-rate units wouldnt budge, as $22 million spent on elaborate landscaping, new signage, and other gentrification touches proved no match for the 200809 recessions impact on demand. Despite millions spent on private investigators and litigation, Tishman failed to increase significantly the number of market-rate units. The coup de grâce arrived when a judge ruled that certain tax subsidies dating back to the MetLife era prohibited an owner from converting any rent-regulated units to market rates. Thus tax breaks originally intended to benefit the owner now denied him the ability to profit from the property. Tishman Speyer turned over control of Stuyvesant Town to lenders in early 2010.
Among the equity investors, the big losers included the Government of Singapore, the Church of England, and CalPERS, Californias massive public-pension fund. (Tishman and the other principals had courted CalPERS as a flypaper investor—desirable not only for its capital, but because CalPERSs participation in any deal apparently imparts credibility in the eyes of prospective investors.) But Tishman itself emerged mostly unscathed: the developer invested only $56 million, less than 1 percent of the total bill, most of which it recouped through various management fees racked up during its 47-month ownership of Stuyvesant Town. Therein lies the advantage of spending other peoples money.