A Fresh Take on CRE

Tishman Speyer and Blackrock Hand Over the Keys to Stuyvesant Town and Peter Cooper Village

By now you've probably heard that after defaulting on loan payments Tishman Speyer and Blackrock are handing over the keys to Peter Cooper Village and Stuyvesant Town (If you haven't, click here). While TSP and Blackrock could instead have tried to put the project into bankruptcy, it looks like they'd prefer to try to put this whole ordeal behind them; and an ordeal it has been.

To sum up the history, Tishman Speyer (TSP) and its backers purchased Peter Cooper Village and Stuy Town from MetLife at the top of the market for the highest price ever paid for a single real estate project about 5 and a half billion dollars. As was typical of the time, they highly leveraged the purchase with not just a mortgage, but also over a billion dollars of mezzanine debt (in a future post I'll finally get around to explaining how the capital stack works and doesn't work, and why lots of landlords are going bust, and will continue to go bust!). In order for the purchase to make any sense (i.e. make a profit on it), TSP had to be able to destabilize many of the apartments. Simply by cracking down on tenants already in violation of the rent stabilization laws, and making renovations to apartments that were vacated TSP was pretty sure they could do this. Many other landlords had done it successfully before, and TSP checked on the law and it looked good for them. Once TSP destabilized these apartments, by virtue of the work they did to them and the upgrades to the complex, they expected they could charge top dollar.

So to be clear, there were two things that needed to happen to stop this project from going bust:

1) Destabilize a lot of apartments
2) Charge a lot of money for the apartments once they're destabilized

If you read this blog or have been following the news, then you will have learned, that as a result of the J-51 ruling, Tishman Speyer's attempts to destabilize the apartments have failed. This isn't due to a lack of precedent or sound planning on TSP's account. This is because the judges decided to ignore precedent, reinterpret law, and wipe out the investment of many companies and individuals. For my take on this whole thing see: "'By Virtue Of' or Stuyvesant Town, Peter Cooper Village & J-51 - What it all means . . ." I also reported on the ultimate ruling here.

Given what TSP paid for the complex, it is possible, but unlikely that they could have survived the court decision on the J-51 matter, but then the second hammer fell - the economy. For the apartments that TSP was able to destabilize legally, or which already were destabilized, they can't charge nearly what they wanted to. The market simply isn't there to support it . . . and that's the beauty of a FREE MARKET. For why the rent regulation in New York City is a sham,see this post.

At the end of the day, the double whammy of the J-51 ruling and declining free market rents forced TSP to hand back the keys. Even if TSP could refinance, it simply wouldn't make any sense, the deal is far too lopsided. Lucky for Jerry and Rob Speyer, they didn't have too much of their personal money in the deal.

For your reference, below is the letter that residents of Peter Cooper Village and Stuyvesant Town received today.