Is Stuy Town a Money Loser for Tishman?

Tishman Speyer and BlackRock realty paid $5.4 billion to purchase Stuyvesant Town and Peter Cooper Village on Manhattan’s East Side. The deal was touted as the most expensive real estate deal in American History and two year later it’s looking like a money loser. One reason why – a plan to convert rent regulated apartments into market rate ones isn’t happening fast enough. WNYC’s Cindy Rodriguez reports.

REPORTER: When developer Tishman Speyer led a joint venture to purchase this bastion of middle class housing, some in the real estate world were surprised. Tishman is known for purchasing big name commercial properties such as Rockefeller Center, the Chrysler Building and the Met Life Building. Larry Longua teaches at NYU’s Schack Institute of Real Estate:

LONGUA: Tishman is a global player…. it was unusual for them to wander into a residential property like this…but given the record they have around the globe with office properties they were able to convince investors to come into this very subtle deal it is extraordinarily nuanced….

REPORTER: Longua says the deal is nuanced because it depends on how quickly the owner turns a mostly rent stabilized property into a mostly market rate one. According to the underwriting terms of one its loans Tishman projected it would deregulate close to 3400 apartments in five years. A real estate newsletter by Commercial Mortgage Alert reported that so far 560 have been turned over with another 670 expected to go market-rate by the end of the year. But that’s after an aggressive push to weed out tenants breaking rent regulation rules such as using their apartments as a secondary residence.

REPORTER: Real Point, an analytical services firm in Pennsylvania, has been looking at several loans with similar terms that were used to purchase other large rent stabilized properties. Managing Director Frank Innuarato says at first the Stuyvesant deal looked much better than other real estate deals because the owners had more than $600 million dollars in reserves:

INNAURATO: We were able to confirm today however that those reserve balances have been significantly depleted through July of this year.

REPORTER: Innaurato says the owners have been eating away at reserves at a rate of $22 million per month and could possibly be out of money by June of 2009. The problem:

INNAURATO: The short answer is they have not been able to convert the properties as quickly as possible while also running higher expenses thus the debt service coverage ratio for the property has been below break even for quite some time and they’ve had to use the debt service reserve to makeup for that deficit cash flow.

REPORTER: Innuarato called the terms of the loan very optimistic in nature but not impossible.

REPORTER: The largest part of the loan – $3 billion was pooled with other commercial mortgages to back securities then sold by Wall Street. The rating agencies gave this deal a triple b minus shadow rating – the lowest rating a deal can receive while still maintaining an investment grade. Larry Longua from NYU is cautious about placing the blame on banks for accepting the terms of the loan:

LONGUA ….the fact that most loan originators realized that they were going to be able to securitize the loans they made and move them off their books….perhaps allowed them to be more optimistic.

REPORTER: While Innuarato says risk of default is in the moderate to high range, neither he nor Longua believes a foreclosure is in Tishman’s future. Both men believe the owners have the strength to wait out the down times. Longua says Tishman will support the property somehow either with their money or someone elses. And he predicts the aggressive push to turn over apartments will certainly continue:

LONGUA: I would have every expectation that they are not going to let up. It’s important to them. It’s truly a matter of dollars.

REPORTER: At the property on Manhattan’s East Side, the tenants know first hand the pressure to convert apartments:

GARODNICK: It’s all people talk about when they are sitting around here in the park.

REPORTER: City councilman Daniel Garodnick, was born and raised in Stuytown and Peter Cooper Village and still lives there today:

GARODNICK: The issues are how do you document your tenancy, how do you defend yourself against improper claims and yeah that breeds a lot of hostility towards a new owner.

REPORTER: Perhaps one reason why the apartments are slow to convert is because of the help tenants are getting from outside lawyers. At first Garodnick says free legal clinics were offered once a month and now there’s a hotline where tenants can call if they think they’re at risk of losing their apartments.

REPORTER: It is easy to see why one would want to hold on to an apartment here. Walking through Stuyvesant Town is like walking through a well manicured park. There’s a fountain in the middle of a plaza and not far away toddlers have free reign of a green turf field. The place is serene and an escape from the bustle of the surrounding streets. But lately noise has been coming from the workers who ride around in trucks and golf carts:

GARODNICK: These are changes which uh…well you can hear some of it now… uh have never really happened here because this has been the configuration…these buildings have been essentially the same for 60 years.

REPORTER: Garodnick is pointing to the glass rooms that are being constructed at the ground floor of several buildings. The sleek look contrasts with the public housing style of the complex.

GARODNICK: This is oval lounge right here. Let’s see what it says is the amenities. It says let’s see an elegant bar, pool table, and large flat screen tv and also space available to rent for private events and you have all these dashing young professionals standing by the bar in the image there….it’s rather swanky

REPORTER: A study or “tranquil reading and meeting” room with free wi-fi is also under construction. So is a play room for kids and what’s being billed as Oval Film which promises a private screening room with stadium seating. According to Garodnick, the price to use these amenities is a flat $250.00 plus a monthly fee of about 20 dollars. He says some of the long time tenants are skeptical about the change:

GARODNICK: In part because some of them can’t afford to use these amenities and in part because they think it’s making something out of this community which it was not really intended to be.

REPORTER: The young city councilman who is a market rate tenant hasn’t decided yet whether he will pay to use these amenities. He says he’s keeping an open mind. It’s clear that Tishman is marketing to a young professional crowd. According to Garodnick, maybe too young. He says there are several college students who live in his building and a Bud Light sign recently appeared in a window.

In a written statement Tishman Speyer says the property is a long-term investment and it’s commitment to stick around is reflected in the improvements it’s already made. It points out the more than 200-thousand new plants and trees that were added, plus a state of the art gym, and free outdoor movies and music.

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