Marketplace Scratch Pad

A lose-lose-lose deal

Scott Jagow Jan 25, 2010

This is a story of hubris, speculation and gentrification. It’s a story of over-borrowing, bubble insanity and greed. Today, the largest real estate deal in American history came crashing down.

In late 2006, real estate companies Tishman Speyer and BlackRock Realty paid $5.4 billion for Manhattan’s biggest apartment complex, Stuyvesant Town and Peter Cooper Village. 110 buildings, 11,000 apartments — many of them rent-controlled. It was the last bastion for middle-class housing in Manhattan. But the new owners had every intention of jacking up rents and going upscale. They had to. They borrowed a mountain of money to buy the property.

Not only did the economy wreck those highly speculative plans, but a judge blocked the proposed rent increases. He also ruled that Tishman Speyer had illegally deregulated some apartments, and forced the company to refund rents to those people. By last fall, when
we checked in on Stuy Town, the property’s “value” had plunged from $5.4 billion to less than half that. Commercial real estate expert Chris Cornell described the situation this way:

CHRIS CORNELL: As the old quip goes, if you owe the bank a million dollars, you’re in quite a bit of trouble. But if you owe the bank a billion dollars, the bank is in quite a bit of trouble.

The developers owed $3 billion. You could see how this was going to end. And today, it did. Tishman Speyer has defaulted, and now, it’s the banks’ problem — another commercial real estate mess to clean up. The property has been transferred to the lenders, but it’s not clear who will run the property, something that gives tenants new reason for concern. From the New York Daily News:

“Frankly, we don’t know what will happen to us,” said a six-year Stuyvesant Town resident who gave her name only as Christine. “With all the history of this complex, you don’t want to seen anything bad happen to it.”

Carmen Isturic, 56, a waitress who has lived in Stuy Town for 16 years with her husband, mom, and 20-year-old son, said she is worried.

“I hope this mess doesn’t make things worse. I couldn’t afford to live anywhere else,” she said.

In 2006, the tenants association tried to get seller Met Life to accept a lower bid — it was still more than $4 billion. But Tishman Speyer’s $5.4 billion was too good to turn down.

And as is customary in bubbles, too good actually means that in the end, everybody loses.

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