Tishman Speyer's Stuyvesant Pain Over As Ownership Handed Over to Creditors

Tishman Speyer finally mailed in the keys to creditors of its massive Peter Cooper Village and Stuyvesant Town apartment buildings in Manhattan. In what is likely to be known for some time as both the biggest and dumbest residential deal (until the next bubble,) the drawn-out and painful saga of Stuyvesant Town will be sorely missed by those who have chronicled the tale. First, came the shock and awe when the deal was actually done in 2006 ("they paid how much at what cap rate???), followed by a period of intense speculation over how long it would take for the deal to burn through its interest reserve, followed by the lawsuits from furious tenants who did not want their below-market rents to rise, followed by the collapse of the economy, and the actual depletion of the interest rate reserve. Now, in what is largely a ceremonial move, Tishman will cede ownership to creditors. No doubt the folks at Tishman won't be shedding a tear as they put in only $112 million into the deal, leaving a trail of other equity investors holding the bag. The creditors will not be left unscathed either, as the properties are currently valued at $1.8 billion, with roughly $4.4 billion in debt piled on top. Who will take the reigns next? Stay tuned for Stuyvesant the Sequel.

Housing Starts, More on Fannie and Freddie

Housing starts fell 10.6% in October to a seasonally adjusted 529,000 annual rate. Building permits also declined. Those ever-accurate economists were forecasting a 1.7% increase in starts so this number was disappointing to say the least. It seems as if builders are reluctant to break ground on new projects with inventories and vacancies on existing properties sitting at record highs. With both the expiration of the housing tax credits and the end of Fed's aggressive purchases of MBS looming on the horizon, it's not surprising that builders are hesitant. It seems like their time and money is better spent coming up with new programs to lobby the government for, rather than building houses.

Good article in the WSJ about Fannie and Freddie's involvement in the apartment market. If you thought that Fannie and Freddie were just doing their civic duty to prop up the residential mortgage market, you're wrong. The housing behemoths are also huge lenders to multifamily projects. How huge? They did 84% of all multifamily lending in 2008. The 2008 numbers don't scare me quite so much since at least underwriting was tightened up a bit by then and nobody else was lending. What does scare me is the 43% of market share the combined companies had in 2007 and 34% in 2006, back when banks like Lehman brothers were still around doing moronic deals. For example, Fannie and Freddie helped finance the massive and overpriced Archstone Smith apartment LBO by lending $9 billion to the deal. Or my vote for the dumbest real estate transaction of the bubble, Tishman's $5.4 billion purchase of Stuyvesant Town, where Fannie and Freddie purchased $1.5 billion in CMBS from that deal. I'm not sure I understand exactly how financing bloated leveraged buyouts became part of their mission statement, but it was a bubble and fortunately taxpayers are here to clean up the mess. The good news is that Fannie and Freddie's apartment building loans only add up to around $300 billion, which is a mere drop in the bucket compared to the $5 trillion of single-family loans that they back. It always helps to put these things in perspective, doesn't it?

Clock Ticking For Manhattan Apartment Complex

My vote for most preposterous real estate transaction of the bubble, Tishman Speyer's $5.4 billion purchase of Stuyvesant Town in 2006, is two months away from defaulting on its massive debt load. The problem? When the deal was put together, lenders were projecting that the complex's net operating income would triple to $336 million in 2011 from $112 million in 2006. Since net income is projected to be around $139 million this year, it's a bit of an understatement to say that rents are lagging. Meanwhile, that nifty $400 million interest reserve that was supposed to service the debt while rents skyrocketed to the moon was down to its last $33.7 million at the end of September. With a $16 million monthly burn rate, I'll let you do the math. A special servicer is taking over the handling of the CMBS, which is very necessary considering what a debacle this default will become once the various lenders begin to argue over who gets what when so little is left. A recent valuation of $2.1 billion on the properties would wipe out all the equity, mezzanine and some of the senior debt. The geniuses at Tishman, who put this deal together, don't seem to have too much on the line financially, as they left the honor of holding the bag to the folks like the retirees of California (via Calpers' $500 million investment), the Florida State Board ($250 million), GIC (the people in Singapore who probably don't know their government invested over $575 million in a crappy NY real estate deal) and the God-fearing folks at the Church of England (only $70 million but locusts and general pestilence might ensue at Tishman's headquarters.) Fannie and Freddie own $1.5 billion in senior debt. But at least it's senior, so the US government should recover significantly more than the aforementioned losers in this giant turkey of an investment.

Tishman Speyer's Commercial Real Estate Debacles

The WSJ Property Report has an interesting piece on Tishman Speyer this morning. For those who haven't heard the name, Tishman is a venerable real estate property developer that holds an approximately $35 billion portfolio of properties from all over the world. Tishman, the cream of the cream of the commercial real estate crop, finds itself in the unfortunate position of being in default on debt tied to one of the largest office portfolios in the Washington area. Back during the Great Bubble Pandemic of 2006, Tishman Speyer paid $2.8 billion for what was known as the CarrAmerica portfolio, a collection of 28 buildings leased to law firms, lobbyists and other hoity toity tenants. Naturally, Tishman borrowed from the piles of easy money lying around at the time, levered up, and paid way too much for the properties based on unrealistic cash flow assumptions. Cash flows have since declined so much that they barely cover the debt service. The company is in violation of its covenants and must find a way to refinance the debt due in 2011. By the way, who were the lenders? Lehman was involved, of course, and also happened to put equity into the deal too. Because every good investor knows that the best hedge against a debt investment is a side-by-side equity investment. The seller of the CarrAmerica portfolio to Tishman was Blackstone, who proved to be the winner in the 2006 commercial real estate hot potato tournament by flipping the portfolio for an enormous profit months after buying it.

But fear not, Tishman Speyer itself isn't threatened by the problems with the CarrAmerica portfolio, according to the WSJ. No, Tishman is probably more threatened by other bigger, dumber deals like the monster $20 billion LBO of Archstone- Smith, which closed after the credit crisis was in full swing, and the brilliant $5.4 billion acquisition of Peter Cooper Village and Stuyvesant Town that paid a fabulous 2.5% cap rate. The Archstone deal was also done with debt and equity investments from Lehman, (seriously, did that firm even have a risk management department?) which recently received bankruptcy court approval to put $230 million more into Archstone, hoping the apartments will regain their value on the other end of the recession (you can take a few minutes to laugh, I did.) Tishman pointed out that it has been very profitable over the years and it has $2 billion in liquidity for new deals. Seems like it should focus on cleaning up the old deals first before they throw any money into new deals. After all, Bear Stearns had $17 billion in cash and Lehman was most definitely NOT HAVING ANY LIQUIDITY PROBLEMS days before they went bankrupt.

Souring Stuyvesant Property Investment Portends More CMBS Pain Ahead

Back in late 2006, when commercial property investors liked to swing it around, Tishman Speyer, in cahoots with Blackrock and Calpers, paid $5.4 billion for a huge block of apartment buildings in Manhattan.  Known as Peter Cooper Village and Stuyvesant Town, the complex of 11,200 apartments was originally built for veterans returning from World War II.  It was rumored to have turned into a great place to take advantage of rent-stabilization in Manhattan if your grandparents happened to keep their apartment after moving on to a nicer house.  Tishman Speyer's plan was to force out those who were illegally paying below-market rents, renovate, refurbish and rent out the properties at much higher prices.  Metlife, who sold the properties in 2006 was probably just looking to lighten its real estate load in what it perceived as an inflated Manhattan property market.  The insurer dumped its own monikered Metlife Building in 2005, also to the overeager Tishman Speyer.  When the Stuyvesant deal was originally announced, many commercial real estate investors marveled at the price, which implied a 2.5% cap rate (i.e. crazy).  I speculate that the shrewd negotiations between Tishman and Metlife may have gone like this:

Metlife: We have another property to show you.  How do you feel about Stuyvesant Town?

Tishman:  Love it!  How about $4.5 billion?

Metlife:  Seriously???

Tishman: Ok.  We'll pay $5 billion.

Metlife:  Now stop that!

Tishman:  $5.4 billion, but that's our final offer.

Metlife: Ok!  Ok!  You're done.  Just stop raising your bid for the love of God!

The Wall Street Journal reports today that the apartment complex is running behind its financial plan and will run out of money to pay its $3 billion mortgage in six months, according to a report released by Fitch Ratings.  As of January 15th, the project's interest reserve was $127.7 million down from $400 million when the property was purchased.  A separate general reserve fund used to renovate apartments is "completely depleted."  The private company has said in the past that it expected to fund more capital as needed.  But Tishman declined to comment.  Admittedly, it seems hard to imagine that Tishman, Blackrock, and Calpers would choose to allow the partnership to default and let the lenders seize the buildings.  But times are tight so it is a risk.  Injecting further money into this venture would be politically difficult for Calpers in particular, as its investment fund is suffering from major losses and it faces the near certainty of having to hike rates for California public employees.  Imagine having to pay more into your retirement fund because the boobs managing the money happened to invest in a bunch of illiquid land deals, soured private equity funds, and a HUGE apartment building in Manhattan? 

In any event, the situation is coming to a head within the next few months.  For the market's sake, I certainly hope that we're not looking at a foreclosure auction of 11,200 Manhattan apartments.  Frankly, I'm not sure who on earth would be interested in bidding on this beast of a property and where they would find financing in this market.  Maybe give Ben Bernanke a call?