Then came Stuyvesant Town and Peter Cooper Village on Manhattan’s East Side.
Now a third complex built by Metropolitan Life in the 1940s for veterans and middle-class families has run into financial distress after being purchased by speculators during the recent real estate boom. The owners of the sprawling Parkmerced apartment complex in San Francisco announced this week that they would default on their $550 million mortgage, which comes due in October.
A partnership of Laurence Gluck of Stellar Management and the Rockpoint Group, which had already lost Riverton Houses in Harlem in March to foreclosure, put out a statement on Wednesday that placed their problems at the 3,221-unit Parkmerced in the context of the current economic downturn.
“The landscape has changed dramatically,” P. J. Johnston, a spokesman for the owners, said in an interview. “The economy has taken a major hit. Many properties are facing default.”
But just like Riverton and Stuyvesant Town, the owners of Parkmerced sought to take advantage of a roaring market to replace rent-regulated residents with tenants able to pay far higher rates.
The owners in all three cases invested substantial sums in upgrading the aging buildings and renovating some apartments. But ultimately they failed to increase revenue enough to cover the debt payments on the properties, which were heavily leveraged. The recession did not help.
“It’s pretty interesting that they have all ended up in the same place,” said Andrew Florio, an analyst at Real Capital Analytics, a research firm. “People assumed they could boost revenues by kicking people out and raising rents.”
Stellar told the more than 6,000 tenants at Parkmerced, which is spread over 115 acres on the south side of San Francisco, that life would go on as usual. They said they were negotiating with lenders, which include Deutsche Bank, to restructure their debt and would continue with their $1.2 billion expansion proposal to nearly triple the number of apartments at Parkmerced.
“Phone calls will be answered and issues addressed, our maintenance team will respond to work orders, and the leasing team will continue to lease new apartments,” Seth Mallen, an executive vice president for Stellar, said in a statement.
But so far, lenders have been reluctant to acknowledge the losses and restructure deals that were struck during the boom. And analysts say it remains difficult for owners to refinance large properties at anywhere near the old terms. As Stellar points out, they are not alone; more than $150 billion in commercial loans like theirs have been transferred to special servicers who handle troubled debts.
There is $550 million in senior debt on Parkmerced and an additional $52 million in secondary loans, according to the owners, but it is not as heavily leveraged as Riverton or Stuyvesant Town and Peter Cooper Village. The default was bad news for the giant California public employees pension fund, Calpers, which invested in all three properties. Calpers has already written off a $500 million investment in Stuyvesant Town.
Stellar and Rockpoint were forced to give up Riverton Houses after defaulting on $250 million in loans. And Stuyvesant Town and Peter Cooper, which had been bought by Tishman Speyer Properties and BlackRock Realty for $5.4 billion in 2006, is in foreclosure.
All three deals had prompted an outcry from tenant advocates who bemoaned the loss of housing affordable to working and middle-class families.
“The Bay Area, like New York City, continues to be one of the least affordable real estate markets in the country,” said Christopher Lund, a spokesman for the East Palo Alto Fair Rent Coalition. “The Parkmerced is the largest multifamily complex in San Francisco and its 3,200 rent-stabilized units are a key part of the Bay Area’s remaining affordable housing stock.”
MetLife built Parkmerced, Stuyvesant Town, Riverton and a handful of other large complexes in the 1940s amid a national housing crisis in a remarkable effort to provide homes for returning veterans. At Stuyvesant Town, for instance, the company received special property tax exemptions in return for agreeing to build the complex, maintaining relatively low rents and limiting its annual profit to 6 percent.
At the start of the real estate boom in 2004, private equity firms began buying these kind of meat-and-potato complexes, which they had long eschewed in favor of luxury buildings.
In 2005, Mr. Gluck and Rockpoint bought Riverton, a middle-class complex where more than 90 percent of the 1,200 apartments were rent-regulated. A year later, Mr. Gluck refinanced his debt with $250 million in loans, allowing him to modernize the lobbies, install new elevators and glass doors, landscape the center courtyard and pocket tens of millions in profit.
Rents covered less than a third of the monthly debt payments. Mr. Gluck had estimated he could raise income substantially by converting half the apartments to market rates by December 2011. But by the time he neared default in August 2008, he had converted only 128. The lenders took back the complex at a foreclosure sale earlier this year.
Tishman Speyer and its partner bought Stuyvesant Town and Peter Cooper Village — 110 buildings with 11,227 apartments on 80 acres — from MetLife in 2006, the largest deal ever for a single property. Their business plan was essentially the same as that of Stellar Management.
And like Stellar, they failed to replace rent-regulated residents with tenants willing to pay higher, market rents as rapidly as projected. The partners exhausted $890 million in reserve funds earlier this year. Lenders are now foreclosing on the property, whose value is estimated at about $1.9 billion.
Stellar and Rockpoint bought Parkmerced the same year they acquired Riverton.
MetLife built the complex between 1944 and 1952. It consists of 11 13-story buildings with 1,683 apartments and 1,538 two-story townhouses. Its original 206 acres are bound by San Francisco State University on the north, San Francisco Golf Club on the south and Lake Merced to the west.
MetLife sold the property to the real estate mogul Harry B. Helmsley for $40 million in 1970, two years after he acquired the Parkchester, another MetLife complex in the Bronx with 12,271 apartments, for $90 million.
Parkmerced entered a period of slow decline as Mr. Helmsley and a subsequent owner deferred maintenance and sold small parcels to San Francisco State, according to tenants and the current owners. Increasing numbers of students from San Francisco State have replaced families at the complex.
Stellar bought the property in 2005 for $700 million and promptly announced a renovation program, spending, it says, $135 million on new elevators and sprinklers, renovating lobbies and upgrading vacant apartments with new kitchen cabinets and countertops. The units on the upper floors of the towers are now called “penthouses” and require special entry keys.
“Stellar Management is probably the best manager we’ve lived under,” said Dorothy Lefkovits, who has lived with her husband Martin at Parkmerced for 15 years. But some residents and tenant activists worry that Parkmerced rents will swell beyond the reach of the people for whom it was originally built.
There are also mixed reviews of Stellar’s proposal, now under review by the city, to demolish the 1,538 townhouses to make way for up to 7,400 new apartments over 20 years. It is part of an plan to create a dense, environmentally sustainable community based on public transportation and wind turbines.
In the meantime, Stellar’s lenders were forced to pay a $6 million tax bill last year when Stellar and its partner could not come up with the money, according to Realpoint, a debt rating agency. And rents in San Francisco have fallen by 8 percent or more, while vacancies are up at Parkmerced.