Florida Lost $250 Million on New York’s Stuyvesant Apartments

There's nothing wrong with a public pension investing in mortgage debt, residential or commercial. The dollar amount is not outsized. I agree too. The failure wasn't in the asset allocation, just in the thought process behind the initial investment.

LIC, i had read who was involved in the PE deal. and it wasn't florida. but maybe they were just not listed.

and i'm glad you've found a friend.

not long ago i was having lunch with a ib md. lamenting the lack of safe investing options. he said, there's always corporate debt, some really good options there.

yes, perhaps. until one day it's not.

sidelinesitter, i apologize. i should have read the full article first.

Well, aboutready, if LICC agrees with sidelinesitter, you MUST be wrong.

LMAO.

how much of that $4.5 billion do you think the taxpayers now "own"

hold to maturity. rock on.

actually, i may be wrong. they haven't started the cmbs purchasing frenzy yet have they?

they'll probably purchase them next month. right before the whole f'ng thing collapses.

(NB this was dinner table discussion during my entire childhood; as young as 7 years old I was going out with my dad looking at properties as he was an Assessor for NYC for like 30 years; eventually getting to be top Assessor in NYC given a special district not based on geography like every other one, but a district made up of basically all the most expensive office buildings in Manhattan. Brother was also NYC Assessor until his recent shift to Nassau County6 Assessor. My grand uncle was one of the first Dept of Finance Tax Commissioners, who got my dad the job in the first place, etc, etc,etc).

Mr. 30years your family is obviously qualified, but uh, have you ever worked as a mechanic?

Mr. Trotter, have you determined that the tires that made the marks and the tires on the car were I . . .DENTICAL . . .

steve, why don't you come up with some other completely nonsensical statement so you can lose another argument . . .

I am so naive. I wonder if the tenants have any idea of the potential ramifications.

"I wonder if the tenants have any idea of the potential ramifications." I'm not sure there is necessarily a lot of drama for tenants here, other than the obvious entertainment value of reading this in the press. Ramifications for investors? Yes, already have been, quite obviously. But does investors losing a lot of money really change anything for the tenants? I don't know.

i disagree. i think not allowing asset price deflation has a great impact on tenants future potential rents.

and i think this complex has a much greater chance of becoming the first cmbs reinflation effort if the tenants lose their lawsuit.

Hi, I'm late here I know, but what is the tenant's lawsuit in Stuytown?

accupedaler:
1. ST/PCV was mostly rent-stabilized apartments
2. Since 1997, those individual units can be permanently removed from rent-stabilization if the rent and the household income exceed certain standards ... or if the apartment turns over, and the rent is or (through a capital-improvement allowance formula) can be brought over a certain dollar amount.
3. The then-owner of the development, MetLife, received massive tax breaks under a program that (a court judgement later determined) mandates that apartments be kept under rent-stabilization
4. Suit is brought by former tenants who were displaced, and by subsequent tenants who claim overcharge, because market-rents were not permitted but were collected nonetheless. Ordinarily, treble-damages apply here, I believe. Plus of course resumption of rent-stabilization restrictions on rents and renewals.

By the way, this is Peter Cooper: http://en.wikipedia.org/wiki/File:Peter_Cooper_1900.jpg

And this is Pieter "Pegleg" Stuyvesant: http://en.wikipedia.org/wiki/File:Peter_Stuyvesant.jpg (everyone hated him, and legend has it that the residents of Manhattan gladly handed the colony to the invading British in 1664 just to be rid of Pegleg)

"i think not allowing asset price deflation has a great impact on tenants future potential rents.

and i think this complex has a much greater chance of becoming the first cmbs reinflation effort if the tenants lose their lawsuit."

So the theory is that rents are set by what landlords want/need to charge, not by what the market will bear? Aren't we now living a test of that theory? I think we can agree that TS badly wants and needs to raise rents to keep the ship from sinking, but they are reportedly reducing asking rents and vacancy is rising, so what does that say about the theory?

i'm not talking about 2009. i'm talking about longer-term implications.

So am I. I am talking about the long-term mechanism by which rents will be set - either the landlord-wants-and-needs method or the market method. Since in this case we have the opportunity, rare in economics, to observe an actual experiment (sponsored by TS and company using their investors' money - thanks guys), I am proposed that the results of the experiment be taken as evidence of how rents are set. It's admittedly only one data point, but it seems to support the market, rather than the landlord ask, approach. Not that the theory that a market is a market should need a lot of support in the first place.

"not long ago i was having lunch with a ib md. lamenting the lack of safe investing options. he said, there's always corporate debt, some really good options there.

yes, perhaps. until one day it's not."

Did he used to work for Drexel Burnham Lambert? ;)

alanhart, do you have a wiki entry for LICComment?

The wikimafia deleted it after too many vandaledits.

the vacancies are very high in this complex cant they deregulate the regulated apts if it goes over 5 percent? Is that the goal?

"the vacancies are very high in this complex cant they deregulate the regulated apts if it goes over 5 percent? "

Where are you getting this from?

You sure you're not confusing it with part of the RS code regarding vacancies city wide?

30 I did not realize it had to be cit ywide. How does that work? Has it ever been done? I think we are going over 5 percent

of course it's never been done... we still have RS don't we? lol. My guess is that it will never happen because if it did, there would be WAY to much of a ruckus over it. It was put in because the legislation was called the "Emergency Tenant Protection Act", and to seem reasonable, they had to have an out when the "emergency" was over. I think they figured it would NEVER go over 5%, so they picked that number. I can't imagine (even though there have already been significant inroads to erode RS) that RS would get washed away in one fell swoop by anything, even if it's written into the existing code - too many constituents would have too many politicians heads on too many pikes over it.

Although re:"I think we are going over 5 percent" there has been a reasonable amount of chatter amongst tenants groups about all the new construction and the possibility of going over 5% that they are thinking and worrying about it.

There are a couple of comments here that keep getting repeated that I think are worth addressing. First, it seems apparent from the article that Florida is an LP equity investor in a fund that is an investor in ST. There is a very good reason why many people didn't know that Florida was such an investor. It is because the list of LP's of private equity funds are typically keep confidential. The GP or sponsor of the fund is usually the only one we hear about, except for certain funds that just have one LP or one 800 pound gorilla LP (which is sometimes how CALPERS, CALSTERS, etc invest and based on the name of the fund alone it is obvious who the LP is). There are probably numerous other investors in the same fund that few, if any, of us on this board will even know are investors. This is typical for most private equity deals. For example, when KKR announces that it has bought another company, the newspapers never report who the LP's are that actually put in the lion's share of the $ to fund the equity for the acquisition.

Second, why wouldn't Florida be permitted to make a $250MM equity investment in this? In fact, for all we know, Florida could have a capital commitment of $1bn in the fund that invested in ST and Florida had it's other $750MM called for other investments. Florida may or may not have even had the discretion that its $250MM went into ST. That is often how private equity funds work. I do agree, however, that Florida certainly must have some investment guidelines that would prohibit certain investments and concentration limits, but $250MM in one investment doesn't seem high for a fund the size of Florida's.

The New York City Housing and Vacancy Survey is only done every 3 years, last one was in 2008 and showed a 2.9% vacancy rate. Next one will be done in 2011, so even if vacancies go over 5% before then, it doesn't matter.

modern 5 percent by 2011 seems on the table. thanks for the info

Apparently I was wrong to think the Peter Cooper loss was acceptable. The process of investment selection was apparently compromised. Good background piece..

http://www.tampabay.com/news/politics/state-pension-funds-266-million-investment-disappeared-in-2-years/1034097

State elected leaders with potential influence over the pension funds' investments received campaign contributions from some of those same corporate giants. And state pension managers in the real estate unit got performance bonuses.

The big loser was the State Board of Administration, which invests more than $105 billion for 1 million current and future retirees. On the Manhattan real estate deal, its $266 million is now worth a grand total of $0.00.

********************************************

Due diligence?

Spook evaluated the Peter Cooper Village deal for the SBA. The analysis relied heavily on the owners' statements.

• The report stressed the apartment complex's "excellent physical condition'' and "competitive advantages.'' But some prospective renters were turned off by the plain brick buildings that looked like a low-income public housing project.

• The report spoke of the "favorable fundamentals'' in the Manhattan apartment market. But some experts were predicting a weakening market.

• The report noted the owners' "extensive experience'' in managing rent-regulated apartments. Tishman Speyer had limited experience managing multi-family rental properties. Its expertise was in office towers like Rockefeller Center in New York City.

Spook's report also highlighted "issues'' with the investment, including possible cash flow problems, contaminated soil beneath the property and concerns about "liquidity,'' meaning Florida could have trouble unloading the investment if it declined in value.

Spook also noted a "lack of full Townsend due diligence.'' Townsend is the Townsend Group, a firm that Florida paid $200,000 a year for real estate advice.

SBA spokesman Dennis MacKee said that Townsend doesn't normally do due diligence. He said the SBA thoroughly vetted the investment.

On March 12, 2007, Spook recommended investing $250 million. Two weeks later, Doug Bennett concurred. In a three-paragraph memo, Bennett acknowledged that the deal could be a "risky proposition'' but said Florida would benefit from increasing its New York City exposure.

Kevin SigRist concurred with Bennett, and then-executive director Coleman Stipanovich approved the deal.

There is a summary of the capital structure for the ST/PCV acquisition at the very bottom of this article. Equity was $1.9bn and TS only put up $56mm (~3%), so $1.9bn - $56mm - whatever equity BlackRock put in = amount of other people's money, including Florida's, that got flushed. And that's just the equity. If the estimate in the article of $2.1bn current value is even close to right then the $1.4bn of mezz is also gone and the senior is impaired. A billion here and a billion there and pretty soon we're talking real money.

Works better when I include the article...
http://www.nytimes.com/2009/09/10/nyregion/10stuy.html?hp=&pagewanted=all

It would be intresting to see what happens if there is a forced sale. what a scandal

They should just go HDFC.

Serious question for aboutready: what would you pay for your apartment if Condo'ing the project was the "bailout" strategy? Assume 80% "market rate" financing is part of the deal.

30yrs, i like your question. is that if i can get my hands on another apartment as well, or just mine?

i've been thinking about this question since TS bought. if i could do more than one unit, and there are three combo possibilities that are not RS, i'd have to really think. so let me ponder, and i'll get back to you with some ideas. it would have to be a low price given the current market and the general source of insiders, but yes i confess i'm interested.

i've always thought that condo'ing was the eventual target, but not this soon.

the reason I bring it up is that it's one way you have to think about valuing the building, no? And a possibler alternative to "fire saling" it because there aren't enough players who can swallow the whole thing. Anotehr thing would be to break it up into buildings and sell them off piecemeal. While "normally" this wouldn't make sense, the sheer number it would take to buy the whole thing may put it out of reach for too many 'good buyers", who could get their hands around smaller chunks.

30 yr, considering the era of gov't , I "believe" if this fails, the buyer may be a gov't entity. I can't see sweet heart deals to renters. Perhaps NYC or NYS come in on some level.....

well, 30yrs, one of the reasons i'm so receptive to your earlier comment is that my building is one that is highly market rate. others, not so much. one of the reasons i chose this building five years ago.

some are, some aren't. i've thought for years that my building might be a good test case for the condo market. we have one rs apartment on our floor. i'd say our building is now about 25ish%. others are still 60 and up%.

http://www.nytimes.com/2009/09/10/nyregion/10stuy.html?ref=business

Even with the partnership’s financial problems pointing to a possible default, tenants would not be likely to face high rent increases or eviction, but they may face a period of deferred maintenance and disinvestment.

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.”

Tishman Speyer and BlackRock spent $6.3 billion — the $5.4 billion purchase price and the creation of four reserve funds totaling $890 million — to buy 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.

It remains to be seen if its recent troubles will affect the Tishman Speyer image and the willingness of investors to risk their money with the company.

A recent report from Realpoint, a credit rating agency, estimates the property has a value today of $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.”

yes we know. we've seen that article three f'ng times today. that's not what we're talking about here.

but good to know you're seeing how free enterprise doesn't always work. even for those who DO know better.

sometimes the music stops and there isn't a free chair (or a greater fool).

AR how many 1 br's and how many 2 br's on each floor? (any natural studios or 3 br's? me recollection is no).

Crunching some numbers, I'm not so sure the current $2.13 billion isn't still high. That is still $190,000 per unit.

Riversider - why do you say this is an example of why the free enterprise system doesn't work - tell that to MetLife. Just because there are winners and losers doesn't mean the system is a failure.

jazzman, not sure if failure of free enterprise is how i'd put it, but....
1) Portfolio mnager in Florida did not do due dilligence
2) Rating agnecy signed off on a deal wkith no debt service cover
3) entire game assumed jacking up rents(violation of rent stabilization?)
list goes on....

Riversider sorry I meant to direct my comment to aboutready who said "but good to know you're seeing how free enterprise doesn't always work" - to which I reply - of course free enterprise doesn't always work but over time it's proven (and the success of the USA has proven) that the free enterprise system is the best system.

but per your list
1) not sure but maybe
2) lots of deals turn out to be home runs that don't have a good debt service coverage ratios on day one.
3) Nowhere in TS's gameplan did they plan to violate the RS laws - sure they are in court over the J51 issue but remember Metlife (who tenant's give near God status to) is the one who started that and TS (and every other landlord in the city) was simply continuing the practice.

This is a simple case of someone paying the top. Someone out there paid $130 for a share of Pets.com too. It doesn't mean that free enterprise doesn't work. In fact, everyone knows that markets cycle so by definition there will always be someone who pays the top. Time will tell, but I find it very hard to believe that TS won't make money on this deal. For them, it almost seems they win no matter the situation.

jazzman, someone will make money off of pcv/st. i don't think it will be TS, but stranger things have happened. they've just blown through almost $900 mil, i don't know how inclined they'll be to throw another however many millions after those if the apartments are reregulated. i agree metlife did quite well, they generally do in their real estate transactions.

30yrs, i don't know the apartment composition in ST. PCV buildings have 15 floors with 8 apartments per floor, 4 two bedrooms and 4 one bedrooms. Purportedly there is one three bedroom unit per building on the first floor. ST has 1, 2, 3 and 5 bedroom apartments, with mostly 1 and 2 bedroom units. The 2 bedroom units in ST, and i believe the 3 bedroom units as well, have 1 bathroom.