Huge Real Estate Failure in NYC

[Luv2play]

The real estate firm Tishman Speyer announced over the weekend that it was turning over its ownership of 110 buildings which contain 11,227 apartments on the East Side of Manhattan to their creditors in lieu of bankruptcy. The move ends a four year effort to transform the last bastion of middle-class housing in Manhattan to up-market clients and is a stunning reversal of fortune in real estate equal to the failure of Lehman Brothers in the financial sphere.

 

That this collapse would come a couple of years after the financial meltdown on Wall Street is not surprising since real estate moves at a more measured pace than financial markets by its very nature of how transactions are conducted. It was clear from the day that Wall Street collapsed that New York real estate was imperilled. The obvious victims were the deals done at the top of the market from 2005 to early 2007. This deal was one of them, actually the largest ever engineered in new York's history.

 

When the history books are written of this turbulant period in the economy, I believe this case will stand out as prominently as Lehman Bros failure. What it illustrated was that the real estate and financial industry became intertwined in doing deals that were aimed at enriching themselves at the expense of the public good.

 

The Stuyvesant Town and Peter Cooper Village, as the massive collection of apartments were known, were built for the middle class after WWII by the MET Life Assurance Company with generous tax concessions and other advantages from governments. As prices in Manhattan real estate marched ever upward, this was one place where middle class folks like teachers and artists could live. The Tishman deal sought to replace them through various means with more affluent tenants. This effort has now failed spectacularly.

 

I don't think this means the end of ever more expensive housing in NYC as the economy improves. It might mean that as conditions are restored to more normal levels, perhaps some of the more outlandish proposals will never make if off the drawing board in future, at least as long as these hard lessons are remembered.

[KMEM]

L2P-

 

I hope you don't think I am picking on you but good luck on remembering "hard lessons". The only constant is change; therefore WE will NOT remember any hard lessons. We haven't before, so why should we now?

 

Best regards,

KMEM

[Guest Merlin]

Would these apartments have been "rent controlled". Not being from NY, I have heard of it without knowing how extensive it is.

[+ g56whiz]

Very, very few. To be "rent Controlled", they would have to have been in continuous occupancy since 1971 by the same tenant or his legal descendants. More likely, most were rent stabilized, a related program which controls rents but makes them more closely resemble free market rates. Many tenants have lived in these highly desirable apartments for decades and TS apparently was betting that demographics would empty enough of them so that they could go in and gut rehab them, apartment by apartment. If they spent enough on the rehab, the rules allowed them to pull the apartment from the rent regulation rolls. Turn overs appear to have not met expectations and the free market premium shrank. Taken together, the deal seems to have tanked.

[MsGuy]

It was more than just a turnover problem. The New York Appellate Court demolished Tishman's business plan. But g56whiz is right, the whole deal was grossly over valued from the git go, so much so that one suspects that it was structured by Tishman as a heads I win, tails you lose proposition from the beginning.

 

http://www.observer.com/2009/real-estate/speyers-dealt-tremendous-hit-court-rules-tenants-stuy-town

[foxy]

Despite the bad economy I see more and more new buildings going up in NYC as I walk around town.

Recently I took a stroll through my old neighborhood in the East Village. The street I used to live on, East 5th Street sports a new hotel, the Cooper Square Hotel which is a very expensive place to stay and the addition of the Thom Mayne building at Cooper Union is impressive despite some mixed reviews.

[Luv2play]

I have listened to the news tonight on NPR and they carried the story of my subject thread. A few more details came to light, including the fact that the real estate firm Tishman invested $112 million of their own money in the deal, about 2%, and borrowed the rest, including from the public employees union of California. All these folks are taking a much bigger bath than Tishman.

 

Then I started thinking that this story is no different than the millions of stories playing out across America in individual households where they have found themselves "underwater" on their mortgages, meaning the value of their house is less than what they owe.

 

Pundits have been wringing their hands over whether these people are going to walk away from their houses and leave the lenders holding the bag. We even had a thread on the sanctity of mortgages on this forum recently started I believe by our august poster Lucky. What Tishman and their hedge fund partner BlackRock have done is precisely the same, albeit on a grand scale. They have walked on their mortgage!

 

So we will hear nothing from Wall Street about this mess, the greatest financial loss on a real estate deal in US history (I learned this on NPR, I thought it was just a New York City record). With President Obama threatening legislation to curb rampant speculation by Wall Street, this is a classic example.

 

While we can say it was wrong that individual households were able to speculate the same way on their homes because of lax oversight and loose regulations, there is a distinction to be made betwen relatively unsophisticated homeowners of modest means and investers like Tishman, Speyer, BlackRock and their meriad investors like the California pension people, who are paid big bucks for their so-called sophistiication and expertise.

 

What a crock!

[Guest Merlin]

Why would you call this "speculation"? How do you define speculation to distinguish it from investment. Is Obama going to curb rampant investment?

[Luv2play]

I call it speculation because when I make investments, I am required to make more than a 2 percent downpayment of my own money. I put my own skin in the game, so even if I am "speculating" a little about the outcome, because one can't know everything about what one is investing in, at least I am making a substantial personal commitment and if things go wrong, I will feel the pain.

 

To a firm like Tishman or BlackRock, they put so little in that they can walk away with few regrets. They probably made up in fees and commissions what they lost on their downpayment. Not so for the millions of small home investors who have lost their shirts.

 

Wall Street has become a casino, if Merlin didn't notice (he would be the only one not to), and much of the real estate business in New York in the last decade has become one too. These are not people building for the future, they are quick rip-off artists, hoping to make outlandish profits on the backs of the less well connected and powerful. It is nice to see them face their comeupance.

[+ Charlie]

But as you have noted, they are not getting much of a comeupance.

[Luv2play]

Well, their big inflated profits have at least disappeared.

[jackcali]

I don't know much about this particular deal, but I know a little about how deals like these are put together. I would bet that Tishman and BlackRock received big fees at the closing of the transaction, so Tishman 'invested' $112 million but got a lot of money back in fees. I'm not suggesting they did anything illegal, receiving fees in this case is pretty customary, I'm just pointing out that I think they took even less of a soaking on this investment than it appears. (Oh, Tishman almost certainly received fees for managing the property while they owned it, so they took even more money off the table.)

[RM]

And no doubt someone made millions of dollars in "placement fees" so that CALPERS could lose lots of pension money.

[Luv2play]

Why would you call this "speculation"? How do you define speculation to distinguish it from investment. Is Obama going to curb rampant investment?

 

Thinking about what these questions imply a little more, it would seem Merlin2 is all for leveraging so-called "investments" at 50:1, which is what Tishman did in this case. Even the banks are not allowed to do this and they have been scaled back since the crisis by regulatory reform.

 

If by "rampant investment", Merlin2 means crap shoots of 50:1, then yes, Obama should curb these wretched excesses which have brought financial ruin to many and harm to millions of ordinary Americans whose pension money has gone up in smoke.

[+ g56whiz]

I just was wondering how many sub-prime mortgages you would have to make to equal this super-duper sub-prime financing? Some people say the that sub-prime borrowers are morally guilty of theft. I wonder if they think the same of the hyper educated investment bankers who put this deal together?

 

M2, this for once is not a political posturing but a request for ideas.