It was the most expensive real estate deal in U.S. history. Now it's poised to become one of the biggest flops.
At the height of the real estate bubble in 2006, an investment group led by New York City real estate firm Tishman Speyer Properties and BlackRock Realty Advisors paid $5.4 billion for a pair of gigantic Manhattan apartment complexes known as Stuyvesant Town and Peter Cooper Village.
The price seemed outrageous to many, but the company believed it had a winning strategy: It would aggressively convert thousands of rent-regulated apartments occupied by middle-class families into luxury units that would fetch top dollar.
Three years later, to the glee of many New York renters, the tactic has been a bust.
Tenants fought back, conversions happened much slower than expected and a state court ruled Thursday that about $200 million in the company's new rent increases were improper.
Real estate analysts say the ownership group is now just two to three months away from a likely default on the $3 billion mortgage it used, along with a $1.4 billion secondary loan, to buy the property.
Foreclosure looms as a strong possibility.
Even before the state Court of Appeals ruling on a lawsuit filed by the apartment complex tenants, ratings firms had estimated that the value of the 80-acre property, home to 25,000 people, had fallen to as little as $2 billion — far less than the outstanding loan balance.
Given the math involved, "I wouldn't be surprised if they just want to walk on it," said Steve Kiritz, a senior vice president at the credit ratings agency Realpoint LLC
"The whole master plan with this project had been for Tishman to come in and ramp up the number of units that were paying market rent," he said.
Regular folks — especially those who have had home financing problems of their own — might laugh at the folly until they realize that some of their own money might be tied up in the deal.
Some of the biggest equity investors in the deal are public pension funds that manage retirement system benefits for millions of government employees.
Florida's State Board of Administration had put $250 million into the project. It has already written off the entire investment as a loss.
California's two largest government pension funds, the California Public Employees' Retirement System and the California State Teachers Retirement System, invested a combined $600 million. CalSTRS has also already written off its $100 million stake.
Tishman, by comparison, stands to lose much less. Its share was $112 million, less than 2 percent of the purchase price.
A spokesman for the company declined to comment Friday on the project's future.
Tishman Speyer's co-chief executive, Rob Speyer, told The New York Times in a recent interview that win or lose on the court case, "the asset is going to require a restructuring."
"Once the court case is resolved," he said, "we'll speak to our debt holders as well as our fellow equity investors."
Teams of lawyers will likely spend the next few months fighting over who gets control of the complex and which lenders are entitled to get some money back, said Dan Fasulo, a managing director of Real Capital Analytics.
How much they recover, and who is wiped out, may come down to how much appraisers decide the building is really worth, based on more realistic rent projections.
"I had a number, put together last week, that I thought was fair. I don't think that number is fair anymore," Fasulo said. "No one could give you an honest appraisal right now."
Stuyvesant Town isn't the only such project to run into trouble after plans to increase rents went poorly.
An investment group that purchased Riverton Houses, a big development in Harlem built around the same time as Stuyvesant Town, ran into financial problems after its bid to convert hundreds of rent-regulated units to market rates went slower than expected.
One analyst estimated the value of the complex in September at $108 million, about half the value of the $225 million mortgage on the property, which is currently in default.
Any debt restructuring process at Stuyvesant Town is likely to be complicated.
The mortgages that financed the deal were chopped up, repacked and sold as Commercial Mortgage Backed Securities to a variety of investors.
Fasulo said the complexity of the arrangement and the size of the property itself mean that a traditional liquidation still might not happen.
A sale, he said, "would be very disadvantageous at this time," given the state of the real estate market.
"There would be tremendous demand," he said, but at such a depressed price that the lenders might be better off holding on to the troubled property.