Normally I don’t discuss the fate of individual transactions, but the Stuyvesant Town acquisition was such a colossally stupid deal that it merits comment.
The acquisition of the 11,000 apartment complex known as Peter Cooper Village and Stuyvesant town was a classic example of peak of cycle excess. The $5.4 billion price was the most ever paid for a residential property. The valuation, in what I am told was unprecedented for an institutional commercial real estate transaction (remember, the owner is a commercial landlord) was based on projected rentals rather than actual (and I believe actual can include step-ups in signed leases).
The really bizarre part of this deal was the aggressive increases in rentals that the buyers projected. These apartments are all in Manhattan, which has tenant-friendly housing regulations. Moreover, many of these apartments were rent-regulated, and apartments can be “decontrolled” (which also applies to rent stabilized apartments, in which rental increases are permitted, but only to the extent approved by the rent stabilization board, with the intent of letting landlords recoup increases in operating costs) only under certain circumstances. The percentage of apartments the new owners said they’d be able to bring to market rentals was wildly implausible. And then the downturn hit, and the “market” rents they anticipated didn’t pan out either.
The property has $4.4 billion of debt outstanding. The Wall Street Journal says that some experts peg the value of the property at a mere $1.8 billion.
From the Journal:
The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save….Of the $5.4 billion price tag on the Stuyvesant property, Tishman invested only $112 million of its own money, with about $56 million from Jerry Speyer and Rob Speyer, co-chief executives of the New York-based company.
Tishman has earned more than $10 million in property-management fees since the Stuyvesant Town acquisition, according to analysts at Deutsche Bank AG. Tishman decided to waive certain fees last year and managed the property for a loss….
The Tishman venture’s acquisition of Stuyvesant Town was controversial in New York. The Stuyvesant Town complex was developed by MetLife for returning World War II veterans and remained a middle-class haven even as rents in other parts of the city soared. Tishman’s plans were to raise the rents for hundreds of the units to market rates….
The Stuyvesant Town collapse comes amid mounting woes in the market for retail stores, hotels, apartments and other commercial property. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy-court protection last year, and more commercial-property projects could fail amid an inability to repay debt because of dwindling rent rolls and still-scarce financing for all but large real-estate investment trusts.
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Another strategic default among the royals? Good.
Now let’s hear more from the mercenaries who criticize individual homeowners walking away from their underwater mortgages.
As for this cabal’s vague idea that they were going to drive out rent-controlled tenants, I suppose that given how truly vicious governments are becoming in America, that wasn’t such a far-fetched speculation. Who knows what New York might have been willing to do if the bubble hadn’t burst.
This deal was an archetypal combination of greed, folly and vicious-son-of-a-bitch-capitalism at its worst. It was entirely predicated on forcing out long-term, rent-regulated tenants and replacing them with high-income transients, a demographic that has already changed Manhattan into a lumpen-bourgeois monoculture.
The only positive irony of the situation is that the tenants, who originally tried to purchase the complex at its ridiculously inflated price, were blocked by Mayor Bloomberg. His heavy-handedness in turning the deal over to his pals saved the tenants from themselves.
YOu are so right about the Manhattan mono culture. It’s truly putrid. I remember when East 10th and B was wild and wonderful — even before the crackhead era — with strange cafes where eastern European taxi drivers would come and read their poetry in the cigarette smoke spotlight and streetlamp rubble and the black dudes from the hood would stand in the back listening, rapt with understanding and they’d say “yo!” and “Yeah!” at the words in the pauses when everyone else was quiet and thoughtful. Money paved over that, and everything rough and human and endless, into a giant shopping mall where they sell sanitized and tidy death branded and packaged in the shiny boxes of the nothingness of the Big Money dream, the death dream of the immortal pyramid Pharoah and they lay inside their pyramids with designer granite kitchens and decorate their minds with the domination of their servants. Thus saith Delerious.
I’m glad you posted about this because it is a good object lesson (writ large) about the sorts of decisions (really odd decisions) that are made at times by the Masters of the Universe (those who so clearly deserve a very large portion of the nation’s wealth and income).
To just add a little bit of color, I’ve been involved in hundreds of CRE deals over the last decade (apartments, hotels, condos, retail centers), and whether it was a sale or a refi, the deals really didn’t feel much different than the Stuy deal. Sure, while my largest deal was still shy of half of billion and thus much less than Stuy, no pro forma I studied contained much more reality than what was seen in the projections for Stuy. For instance, almost every hotel deal I did, whether it was a sale or ground up construction, held assumptions about RevPAR growth that really could only have made sense if one assumed hyperinflation in the dollar or continual annual GDP growth above 6% (unless of course you convinced yourself that you were so much better at design, selecting locations and/or being a hotelier that you would destroy your competition…yes, funny in hindsight). There is not a hotel deal I worked on 2005-2007 that is worth today more than 60% of its sale or refi value (I spend my days now recapitalizing these deals through foreclosure or otherwise). And this cannot be explained as just a cap rate issue, especially with record low long term Treasury rates. I mean, it is a cap rate issue, and it is an NOI issue, but both of those were affected by the reality that hotel rates (and ancillary F&B and spa revenue) cannot go up forever unattached to the value of the currency and/or the wealth of potential customers (i.e., risk had to be factored back into the cap rate equation).
True, your post may be pointing out that residential rental usually has harder numbers with in-place rents and thus the pro forma here with the Stuy deal was an outlier vis-a-vis other apartment deals, but all residential rental eventually turns over, albeit at a slower pace. You have to make *some* assumptions. The “cursed” auction winners just made assumptions that were more aggressive than those they outbid. I saw a lot of 50-unit apartment buildings turn over at what I considered absurd prices. The rental lobby in NYC makes this more egregious here, but still…
I’m not trying to say in this comment that I’m so much smarter than the buyers in the boom (or that I was immune to the delusions in this area). I am not (and I was not). It is easy to fool yourself into believing what you want to believe, what you want to happen in the future.
At the same time, I killed (or tried to kill) a lot more deals than I didn’t. In hindsight, it made me think a lot more about how markets worked, especially with relatively illiquid assets and especially when considered over the fourth dimension of time. In the long run-up of prices, those who ignored risk made more money than those who were slightly more wary of the risk. Those who ignored the little voice inside that said “Does this really make sense?” inevitably out-competed those who paid that voice a little bit of attention. Those not attuned to risk made much more money; they attracted much more capital; they encouraged all of us to start to think about the market *their* way. This is how some markets work, especially when considered over time. When people think of markets, they often think of highly liquid, commodified areas like selling a half-gallon of milk. Well, obviously, that kind of market is much different than the market for CRE. It makes much more sense to at least consider having some sort of circuit breaker in a market like CRE, which seems so obviously doomed to a boom-and-bust cycle because of the natural positive feedback loop of rewarding risk until the blow up finally happens. One such circuit breaker could be stricter regulation on the provision of credit to these deals (not that this proposed solution doesn’t also have problems and drawbacks…it’s just a decision between two imperfect alternatives). I’m sure there are other alternatives, including disincentivizing the decision-makers (both principals and agents) by requiring more skin in the game or making the consequences of too much optimism a little more dire.
Anyway, thanks for the post.
I was shocked to read that CalPERS put up 26% of the Tishman financing. Then I was amazed to see I can still be shocked.
http://latimesblogs.latimes.com/money_co/2010/01/money-cocalpers-loses-500-million-on-new-york-apartment-deal.html
That’s hilarious: first the banks hand the Fed the Mortgage Backed Securities, now the developers hand over the respective property and next the US govt. will ask Gorbatchev to tell them how to set up a GosPlan Central Planning Office …
What’s wrong with Economics?
I think it’s pretty obvious how letting someone who puts up $112 million in equity drive a $5.4 billion dollar deal built on a lot of assumptions has a high chance of leading to failure. I don’t question why TS put up $112 million – when you can borrow that much of other people’s money and you’re already set for life, you might as well take a run at a big property and a big highly-leveraged payoff. But how did so many equity investors convince so many idiots to put up so much cheap debt financing. That’s the part of the bubble I really don’t understand. I get trying to flip houses if you think you can make profits with no or minimal equity – but why were so many willing to take massive risks for 5-10% returns with no upside participation?