Biggest Real Estate Deal in History Goes Belly-Up

On Monday, Tishman Speyer Properties announced its decision to give up ownership of Manhattan's massive Peter Cooper Village (PCV) and Stuyvesant Town housing complexes. As this project, the biggest single-property real estate deal in history, imploded, it became a symbol of an overloaded real estate market bloated on a glut of hype, money and boundless optimism.In 2006, it sounded like a great deal: Met Life's decision to sell Stuyvesant Town and Peter Cooper Village, put a massive amount of highly-valuable property on the table. Two sprawling complexes covering 80 acres of prime real estate on the banks of the East River, "Stuy Town" and PCV contained 110 buildings and more than 11,000 apartments, making them one of the country's largest housing developments. Perhaps more importantly, thousands of the units were rent-stabilized apartments that were going for an average price of $1,241, far below the market price of $2,767. If these cheaper units could be brought up to market price, the property would be worth an even larger fortune.

"If" can be a pretty big word, but in the hyperbolic Manhattan real estate market of the mid-2000s, Peter Cooper Village and Stuy Town were too good to pass up, and experts estimated that, with renovations and higher-paying tenants, the new owner would be able to triple the property's value within five years. The world's biggest real estate players lined up to take their shot at the deal, but the ultimate winner was Tishman Speyer Properties, one of New York's leading real estate companies. Together with BlackRock, an investment management firm, Tishman Speyer bidded the price up to $5.4 billion, the highest price ever paid for a single property. Touted as the biggest real estate deal in history, the PCV/Stuy Town deal was widely seen as bold but shrewd, and 37-year-old Rob Speyer, heir apparent of the company, emerged as one of New York's most promising real estate magnates.

Clear 'Em Out

Now that they had their hands on the property, Tishman Speyer's next move was clearing out the thousands of tenants who were paying below-market rates. Starting in December 2006, the company employed three law firms and a private detective to find residents that could be legally denied lease renewals. Under the requirements of Stuy Town and PCV, tenants paying stabilized rents have to list the property as their primary residents. If Tishman Speyer could find residents who were living elsewhere, it could clear out the apartments and rent them for higher rates.

And that's where the master plan hit a brick wall: in New York's overblown market, rent-stabilized apartments are the Holy Grail, and tenants don't given them up without a fight. By the middle of 2008, Tishman Speyer's master plan was already showing a few cracks: although it had identified 800 questionable tenants, its attempts to refuse leases had led to a major backlash. While 30% of the residents in question quietly left, more than 40% of the cases were dropped after the residents began fighting back.

Meanwhile, the company's decision to replace door keys with key cards led to complaints that Tishman Speyer was illegally tracking its residents' movements or was using the key cards to harass residents who had lived in the building for years. Also, the company was soon fielding complaints from orthodox Jewish tenants, who were effectively locked out of their homes because of religious strictures against using electronic technology during the Sabbath.

The Tenants Strike Back

In 2007, the tenant pushback spread to the complex's market rate renters, who filed a class-action lawsuit against Tishman Speyer and Met Life. According to these higher-rent tenants, the landlords were receiving market rents on 4,000 apartments while taking advantage of a city program that gave tax cuts to owners of rent-stabilized properties. In other words, Tishman Speyer and Met Life were reaping benefits for offering rent-stabilized apartments, while simultaneously raising rents to the market rate. In October 2009, the New York State Court of Appeals determined that Tishman Speyer, Black Rock and Metropolitan Life owed $200 million in rent overcharges and damages. It ultimately became the final coffin nail in the deal of the century. Tishman Speyer's decision to walk away from the deal means that ownership of the complex will revert to the company's creditors, including the California Public Employee's Retirement System and the Church of England.

While the PCV/Stuy Town debacle has some elements that are unique to New York City, the basic mechanics of the deal should seem familiar to anyone who has watched the real estate tumble of the last few years: An optimistic buyer gets over-leveraged while picking up a property that seems undervalued. Despite renovations and an attempt to pull in new tenants, the deal ultimately collapses under its own weight. In the case of Tishman Speyer, tenant problems ultimately brought the deal crashing down, but the basic flaw in the plan -- the trust that the bubble could go on forever, without ever popping -- is all too familiar.
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