Three years ago, the sale of the 110 red brick apartment buildings at Stuyvesant Town and Peter Cooper Village in Manhattan amounted to the biggest 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 together paid $5.4 billion for the quiet middle-class redoubt near the East River, have nearly exhausted an additional $890 million set aside for apartment renovations, landscaping and interest payments. Rents are down 25 percent from their peak.
Real estate analysts say that the partnership’s money will run out as soon as December 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 that 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 the outcome at the Court of Appeals, Stuyvesant Town and Peter Cooper Village are in trouble. City officials have been monitoring the looming crisis, worried that the financial problems could eventually lead to default, deferred maintenance and disinvestment at 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 two adjoining 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.”
“We’re not doing this to bail out anybody who was part of the original transaction,” he added. “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.”
Rob Speyer, who is co-chief executive of Tishman Speyer Properties with his father, Jerry, acknowledged the problem, saying that it 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, as well as other pension funds.
“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.”
But between the $5.4 billion purchase price and four “reserve funds” with $890 million, Tishman Speyer and BlackRock spent $6.3 billion acquiring 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.
A recent report from Realpoint, a credit rating agency, estimates that the property has a value today of only $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.”
The Stuyvesant Town travail has put a dent in the armor of Tishman Speyer, a real estate company that zealously protects its image as the preferred caretaker for the city’s crown jewels: Rockefeller Center, the Chrysler Building and the Met Life Building on Park Avenue. Indeed, Mayor Michael R. Bloomberg said as much in response to criticism when they bought Stuyvesant Town that the city should have supported a rival $4 billion bid from tenants.
Like other developers and real estate managers, Tishman Speyer has been left holding a couple of sour deals now that the real estate and credit markets have collapsed. 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.
Its $22 billion purchase of Archstone-Smith Trust, a vast collection of 400 apartment complexes, has also fared poorly. Earlier this year, the banks that financed the deal were forced to pour in another $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. 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 also represent only a fraction of the $35 billion in real estate assets that it owns or manages in the United States, India, China and Brazil. At the top of the market, he said the company also 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.
Despite several bad deals, 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 most publicized and controversial of its deals in recent years. The winning bid presumed the partnership could increase profits by replacing rent-stabilized residents with much higher-paying tenants after renovating and deregulating apartments.
But the existing rents covered less than half of the annual debt service on the loans. And they have been unable to convert apartments to market rates as quickly as they had imagined. At the same time, rents, which had escalated for years, suddenly fell sharply as the economy slowed and layoffs prevailed.
Daniel R. Garodnick, a city councilman who lives in Peter Cooper Village, said Tishman Speyer had problems of “its own making.”
“Tishman Speyer is in trouble, and tenants are already seeing the effects,” he said. “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.”
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, arguing that the court was attempting to overturn “15 years of real estate industry practice that has been endorsed by two government agencies.”
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 will still run out of cash and it must renegotiate its loans or face foreclosure. A similar project with a similar business plan, the Riverton in Harlem, is already in foreclosure.
At Stuyvesant Town, there is a $3 billion first mortgage, or commercial mortgage-backed security, and a $1.4 billion second loan, known as “mezzanine debt” held by SL Green, the government of Singapore 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 own 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.”
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