September 10, 2009
By CHARLES V. BAGLI, New York Times
Three years ago, the sale of the 110 red-brick apartment buildings at Stuyvesant Town and Peter Cooper Village in Manhattan represented the most expensive American real estate deal in history.
Now the buyers are running out of time and money. Jerry I. and Rob Speyer and their partner, BlackRock Realty, who paid $5.4 billion for the quiet middle-class redoubt near the East River, have seen the property lose more than half of its value, and the income from rent — down 25 percent from its peak — covers less than half of their debt payments.
Real estate analysts say they expect that by December, the partnership will run out of an additional $890 million set aside for apartment renovations, landscaping and interest payments, and that the owners are at “high risk” of default on $4.4 billion in loans. Two real estate executives who have been briefed on the finances insist the owners can hold out, but only until February.
On Thursday, the partnership will go before the Court of Appeals in Albany to try to overturn a lower court decision that could force them to pay hundreds of millions of dollars in rent rebates to thousands of tenants.
Regardless of that outcome, Stuyvesant Town and Peter Cooper Village are in trouble. City officials have been monitoring the looming crisis and how it might affect a complex that has served as an oasis of affordability in Manhattan for middle-class New Yorkers. Some 6,875 of the 11,227 apartments at the complexes are rent regulated.
“We are absolutely keeping an eye on it,” said Rafael E. Cestero, the city’s housing commissioner. “It’s an iconic complex.”
Referring to the people who were part of the original real estate transaction, he went on, “Those folks are going to take their lumps. We are looking at how we can ensure that the rent-stabilized units and the families that live there and families that could live there in the future could be insulated from the unwinding of this deal.”
Even with the partnership’s financial problems pointing to a possible default, tenants would not be likely to face high rent increases or eviction, but they may face a period of deferred maintenance and disinvestment.
Rob Speyer, who is co-chief executive of Tishman Speyer Properties with his father, Jerry, acknowledged the problems went beyond the need for a cash infusion from the partners and their investors, which include Calpers, the giant California pension fund that is the nation’s largest.
“The asset is going to require a restructuring,” he said. “Once the court case is resolved, we’ll speak to our debt holders as well as our fellow equity investors.”
Tishman Speyer and BlackRock spent $6.3 billion — the $5.4 billion purchase price and the creation of four reserve funds totaling $890 million — to buy Stuyvesant Town and Peter Cooper Village from the original owner, Metropolitan Life.
The deal has become a “poster child” for all that was wrong with that era of easy credit, highly speculative deals and greed, said Ben Thypin, an analyst at Real Capital Analytics, a research firm.
It remains to be seen if its recent troubles will affect the Tishman Speyer image and the willingness of investors to risk their money with the company.
A recent report from Realpoint, a credit rating agency, estimates the property has a value today of $2.13 billion — less than half of what the partnership borrowed to buy it.
“The lender has to determine its own interests, as does the equity,” Rob Speyer said. “When the time comes we will be fair and reasonable and hope to get a new deal done.”
Like other developers, Tishman Speyer has been hurt by the collapse of the real estate and credit markets. A partnership led by the Speyers defaulted recently on debt payments for its $2.8 billion acquisition of CarrAmerica, a collection of 28 prime office buildings in Washington.
That partnership’s $22 billion purchase of Archstone-Smith Trust, a collection of 400 apartment complexes, has also fared poorly. Earlier this year, the banks that financed the deal were asked to pour in an additional $500 million to give Archstone more time to sell properties and reduce its debt. Tishman Speyer, whose investment fund invested $250 million in the deal expecting to get 13 percent of the profits, declined to participate in further financing. Its 1 percent stake was reduced substantially.
Rob Speyer said that in both cases the properties have “a lot of long-term value.” But the bad deals represent only a fraction of the $35 billion in real estate assets that it owns or manages around the world. At the market’s height, he said the company sold $10 billion worth of property over six months in 2007, including the former New York Times Building in Manhattan, which went for $525 million, three times what it paid less than three years earlier.
The Speyers insist their company is still providing investors with “20 percent returns” and has $2 billion to invest in new deals. “You show me anybody who measured up to that standard,” Jerry Speyer said.
Still, the purchase of Stuyvesant Town and Peter Cooper Village was one of the more scrutinized of its deals in recent years. The winning bid presumed the partnership could increase profits by renovating and deregulating apartments, but the owners have been unable to quickly convert apartments to market rates.
Daniel R. Garodnick, a city councilman who lives in Peter Cooper Village, said Tishman Speyer had problems of “its own making.”
“Residents are increasingly concerned that the maintenance of the buildings is slipping, even as they are getting hit with a flurry of potential charges for major capital improvements,” he said.
In March, the Appellate Division of the State Supreme Court ruled unanimously that the Tishman Speyer partnership and the prior owner, Met Life, had wrongfully deregulated about 4,350 apartments and raised rents beyond certain set levels, while receiving tax breaks from the city.
Tishman Speyer, Met Life and much of the real estate industry in New York appealed to the state’s highest court If the Appellate Court is upheld, the market-rate tenants could seek treble damages, which could cost the partnership more than $200 million. Even if it the ruling is overturned, the partnership still must renegotiate its loans or face foreclosure.
At Stuyvesant Town, there is a $3 billion first mortgage, or commercial mortgage-backed security, and a $1.4 billion second loan held by SL Green and others.
Finally, there is $1.9 billion in equity put up by Tishman Speyer, BlackRock and their investors. Tishman Speyer, which generally earns development and management fees from the properties, has about $56 million of its money in the deal.
“I’d say their equity has been wiped out,” said Craig Leupold, president of Green Street Advisors, “given the decline in apartment values.”