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Clash of the Utopias

Rob and Jerry Speyer, co-CEOs of Tishman Speyer Properties, surveying their new acquisition in December 2006.  

With its stolid high-rises and families and fixed-income old people, Stuyvesant Town seemed at first glance an odd addition to the postgrad-playpen vision of the city. But its campuslike scale and greenery were unique—irresistible in their way. And the Speyers planned to spend $150 million on new amenities and upgrades.

The deal was also a sharp detour for the Speyers. Tishman Speyer had very rarely owned or operated residential property in New York, and acquiring a rent-stabilized development as complicated as Stuy Town was an audacious play in a cresting market. Historically, developers had steered away from buying rent-stabilized properties. Making money by converting units to market rate is a painful, drawn-out proposition in a city with a fierce pro-tenant lobby, and with a property as legendary for its stubborn New York values as Stuy Town. But by 2006, the real-estate markets that the Speyers had heretofore focused on was showing signs of peaking. Shrewdly, in the first half of 2007, they unloaded much of their portfolio at historic levels, selling some $10 billion worth of property. For the Speyers, rent-stabilized property looked like an opportunity—the last bargain.

Like so many of the deals completed at the market’s peak, the financial assumptions underlying Tishman Speyer’s bid were aggressive, assuming steadily rising rents. The buildings at Stuy Town and Peter Cooper Village were 73 percent rent stabilized, and making the deal profitable would require the messy public-relations exercise of ferreting out illegal rent-stabilized tenants. The real linchpin of the plan, they say, was to dramatically increase the rents for apartments on the open market. At the time of the purchase, the rents for the properties covered only 58 percent of the debt. The deal assumed that income from the two properties would triple by 2011. The deal also assumed that over the next five years, Stuy Town and Peter Cooper Village would be worth nearly $7 billion—a 23 percent increase over its purchase price. “The assumption was the market would continue to go screaming up,” says Robert White, the president of Real Capital Analytics.

The thinking behind the Stuy Town bid was that Tishman Speyer could actually profit from a downturn. As the condo market suffered, owning a portfolio of multifamily rental buildings would be a hedge against a slowing sales market (people rent when sales decline, the logic goes). “The idea was the condominium market and the housing market were starting to soften, and we thought the multifamily business would be a great countercyclical bet,” Rob explains. (Around the same time, he also invested $250 million in the infamous $22.2 billion Archstone-Smith deal that was partly to blame for Lehman’s demise.)

Some who were involved diagnose a certain grandiosity in the Speyers’ pursuit of Stuyvesant Town. “Rob saw the potential for such glory in making this deal,” a former Tishman Speyer executive says. “It was not our core competence. The question wasn’t asked, ‘Should we do this?’ ”

But many of the most powerful real-estate families—the Lefraks, the Kushners, the Rudins, the Dursts—made similar plays for Stuyvesant Town and were disappointed not to get it. “If he hadn’t been at the company and had the talent,” says Jerry, “I would have done it myself.”

As it turned out, the economy went south far faster than anyone imagined. There is tenant unrest—the New York Post reported that a $40 million class-action lawsuit might be filed shortly—and the Speyers and BlackRock are spending considerably more per month to finance Stuyvesant than they bring in, in rent, and this burn rate has shrunk the reserve fund from $400 million to under $130 million. At this rate, the reserve fund is liable to be gone by the end of the year, meaning that the Speyers and BlackRock will have to raise more money, which will be difficult in this climate, to say the least. For the Speyers, who have been trying to refashion their image from property management to more of a glamorous, private-equity model, the very public foundering of their signature deal would be a significant blow to their ambitions.

The most optimistic predictions of when the deal might be profitable are the middle of the next decade, if not after. But in its assumptions and its current problems, Stuyvesant Town is emblematic of what was happening everywhere in the city at the top of the market—and what is happening after.

A few weeks after the deal closed, Rob called a meeting in his office with Al Doyle, Jim Roth, and Susan Steinberg, the leaders of the Stuyvesant Town–Peter Cooper Village Tenants Association. During the bidding for the property, the tenants submitted a $4.6 billion offer. Rob, a former journalist, knew he had a developing tenant problem, and he wanted to clear the air. “In another year, you guys will be happy how we turned things around,” Rob told the tenant leaders, according to Jim Roth. “We pride ourselves on service.”

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