The Stuyvesant Town debacle
February 3, 2010Jon Brooks Comments Off
Yesterday, we posted about what’s happening in New York City’s Stuyvesant Town: The companies that bought the apartment complex for $5.4 billion three years ago have defaulted on loan payments and walked away from the property, turning it over to creditors. That’s the equivalent of a homeowner stopping mortgage payments and mailing his house keys to the bank (see today’s New York Times article for a report on that phenomenon), except that in this walkaway, 25,000 tenants have been left in limbo.
An interesting post last week on the Manhattan real estate blog UrbanDigs.com explains just how wrong-headed the economics of the deal were in the first place, and why, as one observer said to the Times, the transaction is the “poster child for the entire housing bubble.”
Stuy Town – Not The AOL/Time Warner of Real Estate – Worse!
“At the time, it looked like a sound investment.”
-Clark McKinley, a spokesman for Calpers.
Some of us are still wondering whether mass hallucinations were at work during the bubble years, allowing so many to act so thoughtlessly on such a grand scale…
I keep being plagued by the idea, that after a period of reckless profligacy, lessons must be learned, prudence must be rediscovered and tough choices made and vigorously executed to heal the prior transgressions. Yet our society seems unable to actually tolerate even the most preliminary steps in this process, including fessing up to prior bonehead maneuvers.
Example number one being the statement made above by Calpers regarding its investment in the Stuyvesant Town/Peter Cooper Village buyout by Tishman Speyer. I hate to disagree with the world renowned stewards of capital at Calpers, but in my humble opinion this deal was patently absurd from the day it was first proposed. If I had a fedora I would pledge to eat it if Tishman Speyer was actually unaware of how ludicrous the deal was when they first proposed it. But alas despite the sponsor having precious little skin in the game, a fantastical deal price and an incredibly pompous assumption that the seller had no clue as to the upside still embedded in the property, a bunch of Stuy Town losers stepped up to fund this deal which will go down in history as one of the biggest and stupidest real estate deals of all time.
I know, I know, you can’t believe it. Why would Tishman Speyer, heretofore an organization of sterling reputation, knowingly invest its hard earned dollars in a deal that was more than likely to fail from day one?
According to news reports the complex of 11,232 apartments was purchased for $5.4B, or $480,000 per unit. As a rule of thumb, savvy (meaning long-term profitable and surviving) investors in New York City rent-regulated buildings like to pay under $100,000 per unit. Granted deals at those prices are very hard to find and this rule of thumb applies more to Brooklyn, Queens, the Bronx or Morningside Heights, than to prime Manhattan locales south of 95th St. On the Island of Manhattan many would probably consider $200,000 a unit to be workable long-term, though not a “value investment” as you would need to eventually turn over all the apartments and do a condo conversion to really make out big. But these kinds of deals have been done pretty frequently.
Now the Stuy Town/Peter Cooper complex includes 80 acres of downtown property, an asset with long-term value for sure. But how likely is it that a massive block of airspace largely dedicated to rent controlled buildings would be upzoned in our lifetime…even in a Bloomberg administration…..not much.
The post then goes into specific reasons the numbers never added up, and ends with this analysis, which to my eyes reads like calling the deal pretty much a scam in which the smaller investors — like the Califonia retirees’ fund, the government of Singapore, and the Church of England — were the ones left holding the bag.
For the record, Tishman Speyer was not the first or the only deal sponsor to look at the ridiculous financing parameters available in the market with no recourse to the borrower and say damn the pricing…let’s do the deal. If it works out….. great!, if it doesn’t we get most if not all of our money back and then some (through various fund management, property management and in some cases financing fees) and we just hand the keys back to the bank. The well publicized Riverton Apartments fiasco enjoyed many similar features of the Stuy Town deal.
So for all of those fiduciaries supposed to be investing money for teachers, firemen, the people of Singapore and God, shame on you. This was never a good deal for anyone but Tishman Speyer. The sponsor should have realized, however, that although the debt holders may have no monetary claim on them there is always recourse to your reputation in a deal as high profile as this one was.
