For the last 60 years—even when all of New York City seemed broke—the forbidding brick towers and pretty gardens of Stuyvesant Town and Peter Cooper Village have stood as the goalposts of middle-class aspiration in Manhattan.
But in a single day, in the midst of a booming market, the titans of New York real estate were all vying for a piece of the dream.
On Oct. 17, the 80-acre parcel sold for a record-breaking $5.4 billion when the real-estate company Tishman Speyer, along with three investment partners, beat out intense competition from every name in New York real estate’s little black book.
And overnight, the transaction became a referendum on what kind of place Manhattan is becoming.
On the night of Monday, Oct. 16, Rob Speyer and a team of Tishman Speyer executives stayed up all night straightening out the details with the seller, MetLife, and, in the process, knocking out bids that were so high that no single investor could afford to go it alone.
Tishman Speyer’s partner in the deal was BlackRock Realty, an arm of Laurence Fink’s famed Black Rock group, which partnered with CalPERS, the California Public Employees’ Retirement System, to buy 30 Park Avenue, a 20-story rental building, last year for $97 million. BlackRock merged with Merrill Lynch Investment Managers this month and has more than $1 trillion under management. It brought substantial equity to the table—enough to drive decisions about the bottom line and how affordable to keep the complexes. The parties would not detail the ownership arrangement.
In addition, Wachovia Securities and Merrill Lynch served as lenders and advisors on the deal.
Previous history between the principal players in the deal greased the final outcome, according to a source. Last year, the insurance company sold its headquarters at 200 Park Avenue for $1.7 billion to Tishman Speyer.
Meanwhile, the same brokers who repped MetLife this time around—Darcy Stacom and William Shanahan of CB Richard Ellis—also helped sell the insurance company’s marquee building at 1 Madison Avenue in 2000. Ms. Stacom and Mr. Shanahan also repped Tishman Speyer on its partial sale of the Lipstick Building at 885 Third Avenue.
The winning bid came out to $482,000 a unit—a good value if the partnership could easily flip them as condominiums, but on the very low end of what rental properties are expected to yield annually. Right now, rent-regulated one-bedrooms at the complex go for about $1,100, while the market-rate ones rent at an average of $2,400. MetLife, according to a New York Times report based on the sale’s offering materials, predicted that the complex would yield $167 million in income next year—which would come out to about a 3 percent yield on the winning partnership’s investment.
In order to do better than that, the new owners are expected to aggressively move to deregulate the 73 percent of apartments that remain under rent regulation. The big question is just how aggressively.
“This is a responsible group of investors who will abide by regulations, but they will want to recoup their investment,” said Seth Weinstein, a principal at Hannah Real Estate Investors, which has $350 million in residential, commercial and mixed-use projects in the metro region under development. “You can’t have all working people living in the outer boroughs. This used to be an enclave.”
A source close to Tishman Speyer, a 28-year-old company that came out of the original Tishman family real-estate dynasty, said that the partnership wasn’t planning to convert the complex into condominiums.
“It’s not like in two weeks, you are going to see an application to condo-ize it,” the source said. “The rental business is a good business to be in, to boot.”
But the words did not entirely assuage critics of MetLife’s sale, who said they wanted additional assurances. Meanwhile, other observers pointed out that investigations of potential environmental problems clouded the final bidding round.
“We will want to know precisely how Tishman Speyer intends to preserve the long-term affordability of this community, and we expect to see concrete plans,” City Councilman Dan Garodnick, himself a market-rate tenant in Peter Cooper, said at a news conference at City Hall. “We will want to know that Tishman Speyer will be an owner whose benevolence will extend beyond the mere obligations of the law.”
Mr. Garodnick’s bid was handily outdone. Backed by the AFL-CIO and a number of top-flight banks, it came in “north of $4.5 billion,” by his estimation, and would have let occupants of 20 percent of the units buy their own apartments, while keeping another 20 percent of the units as affordable rentals for the middle class. Tishman Speyer also outbid the other leading contender, a partnership led by Apollo Real Estate Advisors.
Kushner Companies was also a bidder; Jared Kushner, publisher of The New York Observer, is the son of Charles Kushner, a principal in Kushner Companies.
Early Tuesday morning, Tishman Speyer jumped on the phone to offer reassurances before its victory became public. Mr. Garodnick got a call; so did Mayor Michael Bloomberg and Public Advocate Betsy Gotbaum.
“We are committed to working closely with residents, elected officials and community leaders to help ensure a dynamic and vibrant future for this New York community,” Jerry Speyer, the chairman and C.E.O. of the company, said in a statement later in the day. (His son Rob, senior managing director, was point man on the deal.) “The thousands of tenants in rent-stabilized apartments are completely protected by the existing system. No one should be concerned about a sudden or dramatic shift in this neighborhood’s makeup, character or charm.”
The state rent-stabilization system, which applies to all large multi-family buildings erected before 1972, permits landlords to increase the rent only by a certain percentage, usually around 3 or 4 percent, each year.
But owners can increase it by as much as 20 percent when tenants turn over, and can also charge a percentage of capital improvements made to the building.
An apartment becomes deregulated when its rent exceeds $2,000 and either the unit changes hands or the present tenants have earned more than $175,000 for two years running.
MetLife told potential bidders that about 5 percent of all apartments would turn over each year, opening up deregulation opportunities. But some real-estate investors doubted those claims.
“That’s an actuarial calculation,” said Richard LeFrak, president and chief executive of the LeFrak Organization, which manages about 20,000 apartments in the New York area. “Everybody evaluating the property is making their own judgment about that, but a person with a $1,200 apartment in Manhattan doesn’t give it up. Generally, with turnover, you have a sticky bottom.
“It’s not 5 percent a year or whatever number that is put out there. It is a decreasing percentage of the population with each year. The way the arithmetic works is, people have normal lifestyle changes. They change jobs. They change family structure. They get divorced. That’s normal demographic activity, but at the end of the day, they are going to do everything they can to hold onto that apartment.”
Besides rent stabilization, some buyers may have had to factor in environmental conditions—especially groundwater contamination at the site.
A spokeswoman for the state Department of Environmental Conservation, Lori O’Connell, confirmed that Stuyvesant Town was the subject of a state investigation for possible contaminations.
The neighborhood, bounded by 14th and 23rd streets, First Avenue and the East River, contained many gashouses that were bulldozed in the late 1940’s to make room for inexpensive apartments for returning World War II veterans.
MetLife was cajoled by the city with tax breaks and guilt to build the housing and prove itself as a good corporate citizen.
“It’s a long-term bet,” said one New York industry expert. “I’m not sure, in this case, if the end winner is going to look so smart. Every move they make will be under tremendous scrutiny, and they have tremendous environmental problems.
“It may be manageable, but when people are running around in white suits cleaning up the groundwater, it will be hard to bring [the complex] to market rent.”
The cleanup would be paid for by Consolidated Edison, the successor company to the owners of the three manufactured gas stations on the site, which may have left behind tar and oil deposits that could harm people through direct contact or contamination of the air, according to a state Department of Health briefing on the investigation. The report on the findings is due at the end of the year.
–Additional reporting by Azi Paybarah and John Koblin