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Stuy Town Blues
A giant real estate company. A storied apartment complex in rent regulated New York City. An unprecedented economic crisis. It’s a recipe for trouble.
By
It was one of those crisp October days that New Yorkers cherish. Robin’s-egg blue sky, clear, warm enough for shirtsleeves. The trees in the large courtyard at Stuyvesant Town apartments had begun to change color and their leaves, now scattered around the grassy expanse of the central courtyard, crunched under the feet of tenants on their way to a meeting at nearby Simon Baruch junior high school. Most of the two hundred or so people who flowed into the auditorium and filled the seats were older, and they were there to fight for the middle-class existence many of them had known for decades at Stuyvesant and its sister development, Peter Cooper Village.
Arrayed along a table on the stage in the auditorium were national, state, and local politicians, promising to pass stricter laws that would protect these tenants. Conspicuously absent were any representatives of Tishman Speyer, the new owner of the complex. The Manhattan real estate company had bought both developments in 2006 for $5.4 billion — the single largest real estate transaction in U.S. history. In the two years since, Tishman had made a lot of changes to the buildings, and the tenants were none too happy about it. One by one, they stepped up to the microphones positioned at strategic points in the auditorium and voiced their concerns about the way the complexes were being run. The new front-loading washing machines in the laundry room no longer worked. Some of the newly landscaped plants had already died. “I didn’t ask for any of these so-called improvements,” says one elderly woman, wearing an oversized snowflake-print sweater, loose corduroy pants, and black tennis shoes. “Why do I have to put up with all the hassle?”
But the real, unspoken fear that permeated the meeting was of losing their homes. With the change in ownership, the tenants suddenly found themselves caught up in the worldwide financial crisis without even knowing quite how they got there. The real estate bubble, New York’s arcane rent regulation laws, and the credit crunch had created a perfect storm that threatened to snatch their homes away. And it wasn’t clear how to stop it. “Everyone is extremely nervous when leases come due, even when there’s no reason to be,” says Al Doyle, who has lived in Stuyvesant Town for more than 40 years.
Since 1943, New York’s rental market has operated under complex rent-control and rent-stabilization laws that mandate how much landlords can charge tenants. According to advocates for affordable housing, these laws were the only way to insure decent housing for middle and lower income New Yorkers and keep them in the city. On the other hand, landlords see them as a powerful disincentive to build, buy, or manage rental buildings, which keeps the number of housing units artificially low. But recent changes in the law gave landlords more leeway in managing these properties and raised the real possibility that rent regulations would soon be a thing of the past. It also opened the door for large real estate companies like Tishman to cast an acquisitive eye on the city’s stock of 800,000 rent regulated apartments (out of 3 million total). In a city where land is at a premium (it’s an island after all), and rents reach stratospheric levels, housing is and always will be a valuable investment, as long as landlords can charge what the market will bear. The key to making the business model work was converting the regulated rents to market rates. Without the conversion, these apartment buildings held little appeal. Two years ago, Tishman wagered that the time was ripe to invest in the city’s regulated buildings. Along with its partners, BlackRock Realty and pension fund company Calpers, Tishman put up $1 billion in cash and borrowed $4.4 billion — a $3 billion mortgage and $1.4 billion of junior, or “mezzanine,” debt – to buy Peter Cooper Stuyvesant Town, structuring the borrowed amount around the premise that many of the apartments in the complex — then about 75 percent rent stabilized — could quickly be converted to higher market rates. But in the wake of the credit crisis and a sagging economy, Tishman’s gamble is turning out to be more trouble than the real estate giant — and residents — bargained for.
For 59 of its 61 years, Metropolitan Life Insurance Company owned and operated Peter Cooper Stuyvesant Town. In 1943, the giant insurance company was granted a 25-year tax abatement by New York City to develop affordable housing for returning World War II veterans and their families. Four years later, the complex opened. Generals and officers of rank lived in the slightly larger apartments in Peter Cooper, which stretches from East 20th to 23rd Street and from 1st Avenue to Avenue C. Soldiers lived in Stuyvesant Town, which runs from East 14th to 20th Street. Built on 80 acres along the East River, the entire Peter Cooper Stuyvesant complex would eventually grow to 110 buildings with 11,250 apartments and 12 parks. Over the years, the complex attracted decidedly middle-class tenants, such as teachers and policemen and clerks and professionals. Long-time resident Doyle’s eyes light up and a soft smile spreads across his face when he recalls the Stuyvesant Town of his youth. “We called the company Mother Met,” Doyle says. “That’s back when the company really cared about people — long before it went public.”
In those days, MetLife carefully scrutinized tenants before allowing them to move in. Because it was one of the few developments with affordable four and five bedroom apartments, it was very desirable for families, and waiting lists usually were several years long. “You felt lucky to live there,” says Corinne Demas, who rented an apartment in Stuyvesant Town from 1948 to 1968 and now teaches English at Mount Holyoke College in Massachusetts. “You had to pass muster.” Historian and filmmaker Suzanne Wasserman, who moved into her apartment in the 1980s, certainly knows that feeling. She had to wait eight years before her name came up on the list. “The apartments weren’t anything special, but it was just such a great opportunity,” says Wasserman, who was pregnant with her son when she first moved into the community. He’s now a college student.
But Peter Cooper Stuyvesant Town’s affordable housing owed less to Mother Met’s beneficence than it did to New York’s rent laws. For much of the 59 years Met Life owned and operated the complexes, there was little that could be done to raise rents. And it wasn’t easy to sell a huge complex with little upside in generating revenues.
REGULATION MERRY GO ROUND
Given the schizophrenic history of rent regulation in New York City, it’s a wonder it still exists. From the beginning, the effort to legislate rents has fueled a tug of war between landlords and tenants, and lawmakers responded to whichever side was most vocal at any given moment. Rent control began in 1943 as a wartime federal initiative. The state took responsibility for administering rent controls in 1950 through the Temporary State Housing Rent Commission. In 1962, New York City began managing its own program, and seven years later, the Legislature expanded it through the Rent Stabilization Law of 1969. The new law placed approximately 400,000 previously exempt apartments under a new system of regulations, but at the same time created a less restrictive formula for controlling rents. It was the beginning of a trend toward converting more of the city’s housing stock to market rates. In 1971, the State Legislature passed several laws meant to gradually deregulate all of New York City’s rent-controlled and rent-stabilized apartments, a move that mobilized tenants who feared that relaxing rent regulation would cost them their homes. In response to this concern, the Legislature pulled back and passed the Emergency Tenant Protection Act of 1974 (ETPA), which amended the New York City Rent Stabilization Law, re-regulating many decontrolled apartments and placing additional buildings under stabilization for the first time. In 1983, the State gave the Department of Housing and Community Renewal the responsibility for administering New York City’s rent control and rent stabilization programs.
Needless to say, landlords were never fans of any rent-stabilization laws. Running a business is tough when income is completely divorced from operating costs, they argued. And who would invest in new housing stock with a patchwork of laws that changed every few years, leaving no clear path to profitability? ETPA was the final straw. Landlords got organized and began lobbying lawmakers to change the statutes in ways that gave them more flexibility to manage their businesses. In the last major change to rent-control laws, passed in 1997, the New York State legislature loosened the rules enough that landlords began to see a way to free themselves of the restrictions altogether. The new law, under the rubric of “luxury decontrol,” defined for the first time the kind of tenant who was eligible for affordable housing. Tenants whose household income surpassed $175,000 a year for two consecutive years and whose rent went beyond $2,000 per month (hence, luxury) no longer qualified for a stabilized apartment, and the landlord was free to charge market rate rents for their apartments. Instant destabilization often led to dramatic jumps in the rent, effectively evicting the tenants. A rent-stabilized apartment also had to be a primary residence, which meant the tenant had to live there at least 183 days out of every year. Perhaps most important, rent regulation of an apartment ended whenever it became vacant, for whatever reason. This latest incarnation of over a half-century of rent regulations finally offered some real possibility for landlords to convert the city’s rent-regulated apartments to market rates. It also provided a powerful incentive for landlords to aggressively challenge any tenant’s legitimacy. That’s what drove so many of Peter Cooper Stuyvesant Town tenants to the meeting on that warm October evening.
Photo: Citizens Housing and
Planning Council
MOTHER MET’S LEGACY
The metamorphosis of Peter Cooper Stuyvesant Town from affordable housing to amenity-filled luxury apartments began in earnest in 2001, when rents in the hip, rapidly gentrifying East Village neighborhood that surrounded the complex started to soar. MetLife threw out the waiting list and began converting rent-stabilized apartments to market rates whenever a tenant moved out or died. Then it worked the new law to find tenants who could be evicted for breaking one of the conditions for stabilized status: illegally subletting, exceeding the income limits, having their principal residence somewhere else and using the apartment as a pied a terre. It also began sprucing up the complex — adding new elevators, starting lobby renovations and so on, partly to make the buildings more attractive to higher-income tenants and partly because a portion of the costs of improvements could be passed along to stabilized tenants, pushing their rents ever closer to that magic $2,000 rent at which destabilization was more likely. Within five years, about 25 percent — or just over 2,800 apartments — had been converted to the going rate, and Met Life began shopping for a buyer. “MetLife marketed this complex as a market-rate master community,” says councilman Dan Garodnick. Marketing material published by MetLife’s brokerage company, CB Richard Ellis, and leaked to The New York Times in 2006, describes some of the real estate community’s thinking about Peter Cooper Stuyvesant Town’s money-making potential at the time. It predicted that through upgrades and evicting illegal tenants, the percentage of rent-stabilized apartments in the complexes could drop from the 75 percent it had in 2006 to less than 30 percent by 2018, which would more than double rent revenues to nearly $519 million at Stuyvesant Town and to $170 million at Peter Cooper.
Tishman took the bait. The $5.4 billion buying price was breathtaking, but if Peter Cooper Stuyvesant Town’s 11,232 rent stabilized apartments were converted to market rate, the average rents being paid by tenants in 2006 — $1,241 — could more than double, to $2,767. (Two years later, Tishman started its rentals at $3,055 for a one bedroom in Stuyvesant Town and $3,420 for a slightly larger one bedroom in Peter Cooper.) All Tishman had to do to realize MetLife’s promise of a “master market rate community” was continue the work started by Mother Met.
In the first few years as owner, Tishman went about executing the work needed to realize that promise. It undertook extensive renovations around the property, including planting 10,000 trees, building sleek, clear-glass lounges at the bottom of some tenant buildings, and installing fancy, state-of-the-art intercoms in each entryway to help promote the buildings as a luxury complex. Tenants were put on notice that they would be challenged aggressively and often as to their eligibility for rent regulated apartments. For example, about 15 percent of 3,000 residents up for renewal each year are challenged on just one of the issues in the regulations — whether the apartment is a primary residence – and half of those cases are eventually dropped, Garodnick says. “Tishman is going on fishing expeditions and forcing tenants to prove themselves innocent in order to keep their homes,” he says.
Tishman has managed to convert about 1,000 apartments — approximately 15 percent of the total stabilized units — to market rate since taking over the complex in fall 2006, according to Standard & Poor’s ratings service. But that hasn’t been enough to meet the lofty income projections the firm set out to meet when it first bought Peter Cooper Stuyvesant Town, numbers it subsequently used as the basis for underwriting its loans, according to the Association for Neighborhood and Housing Development, an affordable housing advocacy group. For instance, Tishman predicted that a net operating income of $112 million for the complex in 2006 would turn into $333 million by 2011, a nearly 200 percent increase in five years. “Those expectations were totally ridiculous and completely unsustainable,” says Irene Baldwin, the Association’s executive director. The only way Tishman could hit those numbers was to deregulate a double-digit percentage of apartments each year for the first few years. In reality, the city’s statistics show that the “natural” turnover rate for city’s rent stabilized units is around 5 to 6 percent, Baldwin says. “I don’t know what led them to believe they were so different.”
With the economy faltering and the credit markets still mostly frozen, Tishman has come under increased scrutiny recently for its financing of Peter Cooper Stuyvesant Town. Since the end of September, both Standard & Poor’s and Moody’s have downgraded bonds linked to a big chunk of the $3 billion mortgage that helped finance the deal. The value of the property has declined 10 percent, according to S&P, and the $400 million in interest reserves meant to service the debt “may be completely depleted” before the project can generate enough cash flow to meet the debt service obligation. If a shortfall does happen, the investors in the property, which include New York-based Black Rock Realty Advisors and Calpers, the giant California state pension fund, would have to pony up more cash or face the possibility of foreclosure. “Basically, Tishman overestimated the amount of rent-stabilized tenants they could get out, and now that’s getting them into trouble,” says Larry Longua, director and clinical professor at New York University’s Schack Institute of Real Estate.
ODD BEDFELLOWS
Longua has always thought that Tishman’s purchase of Peter Cooper Stuyvesant Town was an odd fit. The global real estate giant, led by self-made billionaire Jerry Speyer, made a name for itself in the commercial real estate sector, not residential. Tishman owns a number of marquis buildings around the world, including New York City’s Rockefeller Center and Chrysler Building. “It seemed like a strange combination,” Longua says. But like many other real estate companies at the time, Tishman was seduced by New York City’s skyrocketing rents. Indeed, Manhattan property values were continually increasing and demand for luxury apartments was real. In that way, Tishman, and many other real estate investors who bid on the property in 2006, saw Peter Cooper Stuyvesant Town as an attractive asset. “For any property below 96th Street, the market was hot,” Longua says. Unfortunately, the rate at which apartments could be converted to market rates was not.
Now, with the credit markets in disarray and the economy slipping into a recession, the assumptions that justified the $5.4 billion purchase price are beginning to fall apart, putting companies like Tishman – which bet the deregulation juggernaut would just keep roaring on — in danger of defaulting on their obligations. In September, Stellar Management, a New York real estate owner and operator, and the Rockpoint Group, a private investment group, warned that they might default on a $225 million mortgage for Riverton, a building in Harlem where 90 percent of the apartments are rent regulated, that they bought in 2007. Another complex on the watch list is Savoy Park, a 1,802 unit development, also in Harlem, that was purchased in 2007 by Apollo Real Estate Advisors, a Manhattan real estate investment firm. “Many borrowers knew that there would be a period of deficit cash flow, but in the end, if units could be converted the ultimate payoff would be huge,” says Frank Innaurato, managing director for Realpoint, a credit ratings agency that deals specifically with structured finance. “Plus, the terms granted in the underlying financing were too good to walk away from.”
In all, the Association for Neighborhood and Housing Development estimates that real estate private equity companies and developers own a total of 90,000 affordable housing units in New York, including Peter Cooper Stuyvesant Town. The affordable housing group found that 60 percent of the loans taken out by these real estate groups have been placed on a watch list by the loan servicer and might be at risk of eventual default. This leaves 54,000 Manhattan rent-stabilized apartments exposed to default or foreclosure should the loans go bad. Either way, it’s bad news for tenants, says ANHD’s Baldwin. “If they don’t default, tenants continue to get harassed and pressured to vacate their apartments. If they do default or go into foreclosure, the property is likely to undergo a period of disrepair — and service would suffer tremendously. It’s not a good situation.”
Tishman says it is not at risk of default or foreclosure, and that its cash reserves are sufficient to weather the storm. “Peter Cooper Village Stuyvesant Town is an extraordinary place to live and a long-term investment for us and our partners,” Bob Lawson, a Tishman-Speyer spokesman, wrote in an e-mailed statement. “We have great confidence in this asset, and we fully anticipate our partnership will fund more capital into the project, as necessary.”
Industry observers have mixed feelings about what the outcome will be. Many predict that even if Tishman has the patience and the resources to see the apartment conversion project through, it will likely take a lot longer than originally planned. “It will obviously take some time to do this,” says Schultz from Citizens Housing and Planning Council. “We’re talking ten or twenty years — maybe even more.” And there is a growing chorus of doubters that isn’t so sure the company has the time to pull it off. “If you had asked me a few months ago, I would have said no way [it would default],” Longua says. “But in this environment, things are changing overnight. It’s hard to say what is going to happen.”
What of rent stabilization and affordable housing in New York City? Housing advocates are worried that as Tishman and other landlords find themselves in financial trouble, they’ll have to push even more aggressively to convert stabilized rents to market rates just to meet revenue projections. And state and city governments may find it prudent to support their efforts in order to prevent major defaults that could disrupt thousands of New York City apartment dwellers. Already, the number of rent-stabilized apartments — like those at Peter Cooper Stuyvesant Town — declined 4 percent to 836,004 last year, according to the state Division of Housing and Community Renewal. The advocacy group, Community Service Society, estimates that New York loses about 4,000 affordable apartments each year, including those backed by government subsidy.
Still, most of the tenants at Peter Cooper Stuyvesant Town have no intention of giving up their homes without a fight. “I was born here, I’ve lived my entire life here, and I plan to die here,” says one elderly tenant, who refused to identify herself at the tenants’ meeting. “That’s one thing I know for sure.”
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