Tishman’s Stuy Buy Hurting

Even at the peak of the frothy real-estate market, it raised eyebrows.

Savvy developer Jerry Speyer, chairman of Tishman Speyer, locked in a frenzied auction, plunked down $5.4 billion in 2006 for two of Manhattan’s iconic apartment complexes – Peter Cooper Village and Stuyvesant Town.

It was a gutsy deal even if real estate had maintained its red-hot pace. But as any homeowner will tell you – the market has tanked.

“Investors are concerned. They think the loan was too aggressive. They were concerned when it was written that it was an aggressive loan,” said one real estate insider, referring to the bonds that are backed by the mortgage for StuyTown and Peter Cooper Village, which have taken a hit in value since they went to market.

As a result, revenue from rents from the 11,232 apartments fell 4.2 percent during the first year Tishman owned the complexes while legal expenses associated with flipping some of the rent-stabilized units to market rent are higher than expected – putting unexpected pressure on the fund set up to buy the 80.4-acre piece of real estate.

The pressure has, industry insiders say, forced Tishman Speyer to tap its $650 million cash reserve faster than expected and some investors are said to be concerned it mayneed to pony up some more cash.

Holders of the securitized debt that includes the bonds backed by the StuyTown mortgage have watched the value of their investment slip 10 to 15 basis points below similar investments, according to Capital Markets Alert.

It’s the same pressure felt by thousands of homeowners who bought at the peak of the market – only Tishman’s mortgage has a few more zeroes at the end.

While the huge deal is not going as well as Tishman had expected, the global real-estate powerhouse is well situated to ride out the storm.

It has only invested $112.5 million in the deal and has a huge reserve in place to cover shortfalls in revenue or runaway legal bills.

And while the StuyTown deal highlights the vagaries of the real estate market, it is a small part of the $67.4 billion in assets Tishman manages worldwide.

Plus, rent revenue has picked up 7.5 percent since April as Tishman has successfully cut rent-regulated apartments in the complexes to 64 percent from 73 percent, according to a person familiar with the deal, thus getting more rent from higher-priced market rate units.

In addition to the StuyTown deal, Tishman is also dealing with scrutiny over the real-estate investment trust Archstone-Smith, which it purchased together with investment bank Lehman Brothers for $22 billion last year, making it one of the largest assets in the Tishman empire.
The company has been selling some Archstone properties into a down market to pay debt on this highly levered deal. The project has used close to $100 million of the $500 million interest reserves, people say.

Industry insiders say these deals are unlikely to bloody the Tishman empire the way fancy financing hurt Harry Macklowe, forcing him to sell his prized GM Building after the credit crunch hit.

Still, people are watching how quickly Tishman will use up the cash reserves set aside to pay the expenses on these deals.

The worst-case scenario regarding the reserves for the StuyTown deal, accoring to someone familiar with the deal, is that investors would have to pony up an additional $150 million. For Tishman, one of many partners, that means an additional $10 million, or 9 percent over its $112.5 million investment in the deal.



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