The Biggest, Baddest Real-Estate Loan

On the evening of October 16, 2006, the day before the board of Metropolitan Life approved the $5.4 billion sale of Stuyvesant Town to Tishman Speyer Properties, Jerry I. Speyer, Tishman Speyer’s CEO, placed a call to Harry Kamen, the former chairman and CEO of MetLife and a member of the MetLife board, at Kamen’s Park Avenue co-op. Jerry’s son Rob Speyer, a former journalist and heir apparent to the Tishman Speyer dynasty, had taken the lead on the Stuy Town deal, and Jerry worked quietly behind the scenes—making calls, visiting the 80-acre complex one night in private—so that his son emerged victorious. “He said he wanted me to know they were bidding on it,” Kamen recalls. “He didn’t want me to do anything, but if a question came up at the meeting, he asked if I could talk about his character and his honesty.” The call was emblematic of Jerry’s preference for the discreet exercise of power and relationship massaging that propelled his firm into the elite tier of real-estate players, and made him a confidante to mayors and governors, financiers and philanthropists—the archetypal New York macher. The next day at the meeting, Kamen disclosed Jerry’s call the previous night to the board. Robert Henrikson, CEO of MetLife, turned to Kamen. “Don’t worry about it, he’s the highest bidder.”

Three years later, that bid will go down as an epic blunder. Sometime in the next several weeks, Tishman Speyer Properties, the global real-estate empire run by father-son duo Jerry and Rob Speyer, along with their investment partner BlackRock, will default on the mortgage at Stuyvesant Town and Peter Cooper Village. And just as the transaction was the biggest real-estate deal in American history, the collapse is liable to be similarly epic.

The problem is not only the deal’s size. Like so many deals of a bubble vintage, Stuy Town’s mortgage was sliced and diced and sold to investors around the world. Debt holders include the government of Singapore, the mammoth California pension fund CALPERS, as well as beleaguered mortgage giants Fannie Mae and Freddie Mac, which collectively hold as much as $2 billion of Stuy Town’s debt. Stuy Town’s investors are looking at staggering losses, and some are furious about it. This fall, CALPERS, which plowed some $500 million into the deal, reportedly threatened to fire BlackRock, their longtime real-estate advisers, for steering them into the Stuy Town investment. “The loan will default and it’ll be a shit show,” one real-estate investment banker says. “The problem is: No one knows who controls the property,” adds Robert White, the president of Real Capital Analytics, a real-estate consultancy. “It’s one big mess with a lot of fingers in it.” The Wall Street Journal reported a list of the major investors that includes the Florida state pension system ($250 million), real-estate firm SL/Green ($200 million), and remarkably, the Church of England ($70 million). Much, if not all, of these investments could be vaporized. Industry analysts estimate Stuy Town is currently worth around $2 billion—a 65 percent loss from the purchase price. This fall, when the New York State Court of Appeals upheld a ruling that Tishman Speyer had improperly deregulated thousands of rent-stabilized apartments and forced more than 4,000 apartments back under rent stabilization, it killed any chances to raise rents and turn a profit.

Complicating matters is that millions of debt has been snatched up on the cheap by hedge funds playing a vulture’s game, but since their investments are done in secret, there are likely dozens of firms with competing interests and stakes in an outcome. In the early nineties, during the city’s last major real-estate crash, resolving failed deals basically involved getting a half-dozen guys around a table to hash out a solution. The new globalized nature of securitization makes that impossible.

In November, Tishman Speyer transferred control of a $3 billion chunk of debt to CW Capital, a financial firm called a “special servicer” that is tasked with sorting through the interests of the bondholders, though no one is quite sure what this might entail. CW Capital could decide to foreclose on the property, which would send the deal into a Chapter 11 bankruptcy process. If Stuy Town went into Chapter 11, the bankruptcy court would gain control of key decisions, including whether Tishman Speyer would stay on in their role as property managers. “I don’t see any way they avoid a Chapter 11 filing,” one prominent real-estate lawyer says. Another (more unlikely) scenario would include the tenants making a bid to buy the property back.

Earlier this month, that concept was floated at the Tenants Association meeting. “We’d like to get control of the property,” Al Doyle, the president of the Tenants Association, told me. One real-estate source said the Speyers could stay involved in the deal if new investors stepped forward to inject more cash into the deal, but in this climate, that seems far-fetched at best. “I’m not sure any third-party investor would want to touch it with the tenant issues,” White says.

The Speyers are not going to lose their shirts over Stuytown—they invested a comparative pittance. The buzz in the real-estate business is that the Speyers personally contributed as little as $12 million to the deal, and that Tishman Speyer as a company is only on the hook for some $56 million. The problem is that the firm’s business model depends on convincing investors to put millions into their deals. “They have a business that’s built on a reputation—this is not good for them,” the investment banker said. Historically, an investment with Tishman Speyer gained you access to Jerry Speyer’s Rolodex of financiers and politicians. As a confidante to mayors and governors, that kind of access could translate into dollars: Tishman Speyer’s annual returns have been roughly 20 percent.

Rival real-estate executives point out that much of Jerry Speyer’s empire was built on Other People’s Money and the Speyers famously put little of their own equity on the line, and oftentimes, made significant amounts of money in management fees operating properties (so that no matter how a deal fares, they earn back their initial investment). Rivals snipe that it’s a Heads-I-Win-Tails-You-Lose proposition. There’s a palpable sense of Schadenfreude among some in the business at the Speyers’ current woes. “They put in five or ten million into Stuy Town, that’s a total joke,” one executive said. “All that’s happened, they made back in management fees 100 percent in what their group put up.” Steven Rubenstein, a Tishman Speyer spokesperson, said: “Since the founding of the company in 1978, Tishman Speyer is proud to have over those 30 years produced average annual returns to investors of over 20 percent, even after the value of the Stuyvesant Town/Peter Cooper acquisition is written down to zero.” Losing this amount of money will almost certainly make raising future dollars from investors a tougher sell. Investors could demand that the Speyers put more of their own equity into deals, forcing them to take on more personal risk. Of course, like Goldman Sachs, Tishman Speyer, being at the top of the game for so long, is used to being a target of industry envy.

But protecting their legacy is clearly a reality that needs to be managed going forward. This fall, as press accounts of the Stuy Town collapse increased, Jerry sent an e-mail to a circle of his top investors stressing that problems at Stuy Town wouldn’t impact their other holdings.

For the city, the looming Stuy Town default could be a trigger that finally awakens the market to continued problems in commercial real estate.

Over the next two years, more than $1 trillion of commercial real-estate debt nationwide will mature, and many of these deals, completed during the middle of the last decade, are far underwater. “All of this debt is coming due,” a top real-estate lawyer explained. “And these are the bubble loans, and now cash flow is half of where it was two years ago.” This season’s hangover may take quite a long while to dissipate.

The Biggest, Baddest Real-Estate Loan