Call it the final death knell for arguably the frothiest deal that the US residential real-estate market has ever seen — the sale of Stuyvesant Town and Peter Cooper village in Manhattan for $5.4 billion in 2006. The driving force behind the deal was the expectation that the new owners could and would be much more aggressive than the old owners (Met Life) in converting rent-stabilized apartments to market rate. Now, however, all the apartments they did manage to convert to market rate are being converted back:
Lawyers for the Stuy Town tenants as well as for landlord Tishman Speyer have just announced an interim agreement while the bigger issues (like refunds on years of rent overcharges) get sorted out. Apartments will return to rent-stabilized levels in January, and each affected tenant will be granted benefits—lease renewals under stabilized rates, succession rights—under the Rent Stabilization Law.
To put this news in context, rental income from the complex was $112 million in 2006, when the deal was done; the new owners expected that number to rise to $336 million by 2011. Instead, far from rising, rental income actually fell, despite the new owners’ best efforts to convert as many apartments as possible to market rate. That income is now sure to fall further.
With hindsight, the biggest conceptual mistake the buyers (and the lenders to the buyers) made — and we’re talking some very smart people at Tishman Speyer and BlackRock here — is that they forgot about the whole living-in-a-democracy thing. Landlords, in general, are good at asserting their legal rights. But when you’re trying to make life significantly more expensive for 11,000 families all living in the same place, you have to expect that those people will organize and fight back — and that they’ll have local lawmakers on their side.
Political and legal risks are hard to price or to hedge, of course, but it really seems in this case as if none of the investors in the deal even tried. If you’re betting billions of dollars on your ability to navigate the legal system, you have a fiduciary obligation to at least think about the possibilities that (a) you’ll lose, despite your best efforts; or that (b) the law itself might change. But that’s the problem with the whole credit bubble, in a nutshell: people just stopped thinking.