At US$5.4 billion, it was – and remains – the most expensive single property sale of all time.
What it bought in 2006 was Stuyvesant Town and Peter Cooper Village,twin housing projects that sprawl across 32ha on the East Side of Manhattan in New York City, home to some 25,000 tenants.
Built by US insurance giant MetLife in the 1940s, the projects comprise 56 blocks of boxy apartments – not unlike Singapore’s own HDBflats.
The developments, targeted at New York’s hard-working middle- income earners, have been described as one of the most iconic and successful of post-war private housing communities.
But according to the latest issue of The Atlantic magazine, they are‘entirely barren of inviting corners or eye-catching detail’. American writer and historian Lewis Mumford dubbed them ‘the architecture of the police state’.
MetLife spruced up the World War II-era developments and put them on the market in 2006. Real estate moguls, heads of pension funds and international investment banks, and investors from Dubai jetted in for the sale.
A joint venture put together by established real estate developer Tishman Speyer and private equity giant Black Rock were the winning bidders through their willingness to pay a whopping premium to unlock what they saw as the deal’s huge potential profits.
Three years on, those profits are still locked within the property’s 11,232 apartments, many of which remained rent-controlled despite strenuous efforts to convert them to upscale market-rate rentals.
The deal is now on the verge of becoming the biggest real-estate default ever.
On Jan 8, Tishman Speyer and Black Rock announced they would miss a US$16 million (S$22 million) debt payment due that day as their reserves to pay off the debt on their highly leveraged deal had run dry.
The companies had financed their huge purchase with loans totalling more than 80 per cent of the price. In all, there is US$3 billion in debt financed through the sale of bonds. But based on current rents being paid by the tenants, the property is worth just US$1.8 billion,says credit rating company Fitch.
An official notice of default is expected, and the special servicer,CW Capital, will sort through the numerous investors who hold the debt on the property – including the Government of Singapore Investment Corporation (GIC).
The GIC reportedly holds US$575 million in mezzanine debt backed by the property and a further US$100 million in equity. Last Monday, the state investment company said it had ‘recognised the losses’ on its investment last year. It is also believed to have written down the value of the loan.
Some of the bondholders are reportedly demanding payment within this week from the owners, in what would be the first step towards a foreclosure.
How did this deal go so far wrong?
The missed payment was just the beginning of an end of three years of pain for the owners, who bet big at the market’s peak that rents could only keep going up, said The Atlantic magazine.
They also gambled that they could remove rent-regulated tenants at a faster rate than they already had been doing, converting the apartments to market rates that could pay twice as much rent.
Then came the recession: rents flattened and then fell; the rate of conversions slowed. With net income well under projections, the partnership started spending down its US$900 million in reserves, said the magazine.
Worse was to come: In October last year, a New York court ruled that the partnership had improperly decontrolled the rent for thousands of apartments, and would have to return them to their original status.
The problems began when New York City Council member Daniel Garodnick, a lifelong resident of Peter Cooper Village, organised a tenants group to make a buyout offer to MetLife for the projects back in 2006. Its bid fell short of the winner’s.
Galvanised, ‘Stuy Town’ and Peter Cooper residents filed a class action lawsuit against MetLife and Tishman Speyer claiming that they were improperly charging tenants market-rate rents while at the same time receiving real estate tax benefits for rent-controlled apartments.
Tishman Speyer was also hit with a lawsuit for unlawfully attempting to evict residents from the historically affordable development.
Now analysts are predicting default in a matter of months unless the partnership’s huge debt can be restructured – a shaky prospect, given that the owners may owe some tenants as much as US$200 million in rent overcharges and damages, The Atlantic reported.
What happens next is unclear, and will depend what road the special servicer and bondholders decide to go down, said the magazine. The property could be sold, though there is uncertainty over the price given outstanding litigation following the court decision on rent controls, it added.
The travails of Tishman Speyer and Black Rock are duplicated across the US commercial real estate market where prices have fallen 43 percent since late 2007.
But while the US housing market’s boom and bust is often depicted as a tale of unsophisticated home buyers led astray by greedy bankers, the commercial sector’s landlords had all the expertise they should have needed to put a fair price on properties.
Take Tishman Speyer which has been in the real estate business for decades; the investors who trusted the firm with their money were blue-chip institutions like the Hartford Financial Services Group and the California Public Employees’ Retirement System.
Yet, according to The Wall Street Journal, when Stuyvesant Town was sold, lenders were projecting that the Tishman Speyer-Black Rock partnership would be able to triple its net income in five years through building upgrades and rent decontrol.
But The Atlantic argued that even before the financial crisis sapped demand in the rental market, this plan was questionable.
‘The buildings simply were not built as deluxe rentals – the mosaic tile in the public areas has been replaced by marble, but in the cramped vestibules and narrow hallways, the effect isn’t luxurious; the buildings just look like they’re dressed up for Halloween,’ said the magazine.
‘With mostly tiny kitchens, and no room in the lobbies for a doorman, these apartments were never going to command the kind of rents that would justify the partnership’s bid,’ it added.
Besides, said the magazine, rent-controlled tenants like to sue, and everyone but a tourist would know New York’s housing law is notoriously tenant-friendly.
Even if the new owners had found tenants willing to pay top dollar,there was a good chance they would never have been allowed to charge it.
The magazine concludes that the best explanation for the calamity ‘may simply be that cheap money makes us all stupid’.
Cash-rich investors poured money into the US – and global – loan markets, driving interest rates lower and fuelling the property bubble in both the commercial and housing sectors. Until the bubble burst.
Source : Sunday Times – 17 Jan 2010
