By Charles V. Bagli, Dutton Group, New York, 387 pages, $28.95
In the wake of each speculative bubble, there is always one transaction that is symbolic of the times. For the period of 2004-2006, that deal was Tishman-Speyer’s $5.4 billion purchase of Stuyvesant Town and Peter Cooper Village (STPCV) in late 2006. By 2010, the highly leveraged deal was in ruins. The debacle is chronicled well in Charles V. Bagli’s new book, which expertly recounts the financial euphoria that gripped the market and threatened the most significant middle-income housing development in Manhattan.
The author begins the story at the end of World War II, when New York City was crippled by a housing crisis that was only worsened by the return of some 765,000 veterans. Pursuant to the Redevelopment Companies Law of 1942, the Metropolitan Life Insurance Co. and Mayor Fiorello LaGuardia conceived a plan to raze the drab Gas House District and construct a private development of middle-income housing that guaranteed the insurer a 6 percent return on its $90 million investment.
What emerged was an 80-acre tract containing 56 residential buildings, 11,250 apartments and some 25,000 residents. In the years to come, it became a haven where veterans, teachers, nurses, cops, firefighters, court personnel and others raised their families.
Although considered a middle-class oasis, STPCV experienced a rocky beginning. As described by the author, the initial tenant rolls excluded blacks, a circumstance that generated a major fair-housing case, Dorsey v. Stuyvesant Town, in which the New York Court of Appeals sanctioned the discrimination. In explaining the case, the author generously quotes from Judge Stanley Fuld’s impassioned Dorsey dissent, a lonely voice of reason 20 years before the Fair Housing Act.
The book richly details Metropolitan’s 60-year stewardship over STPCV, including interviews with dozens of its longtime tenants. The author states that, despite Metropolitan’s feuds with STPCV’s powerful tenants’ association, it was largely viewed as a benevolent landlord. He also points out that the development burnished the insurer’s reputation in its home city, enhanced its clout with local politicians and provided a convenient place to house many of its own employees.
By 2005, however, Metropolitan was ready to sell. The real estate market was awash in big deals and, as expertly recounted by the author, STPCV no longer fit the insurer’s post-demutualization plans.
Taking the reader behind the scenes, the author describes the heated competition that took place among New York’s top real estate brokers to obtain the assignment to sell STPCV to the highest bidder. The narrative is compelling and segues effortlessly into the resulting private auction, in which Tishman-Speyer and its investors emerged as the "victor" with a $5.4 billion bid.
The best part of the book is the author’s deft simplification of the complexities of the deal and the reasons why it failed. According to Bagli, the deal was doomed from the start because rental income defrayed only 40 percent of the debt service and Tishman-Speyer’s aggressive business plan to convert thousands of rent-stabilized units to "market rentals" was completely unrealistic.
The author also explains that the new owner over-optimistically projected that the real estate boom would continue indefinitely and underestimated the power of STPCV’s tenants’ association, which doggedly opposed plans to transform the sprawling complex into luxury rentals. By early 2010, the new owner defaulted, handing over STPCV to its lenders in order to avoid bankruptcy.
The book adroitly summarizes the STPCV’s tenants’ successful challenge to the new landlord’s interpretation of the J-51 tax abatement program in Roberts v. Tishman Speyer Properties. The program provided a property tax exemption and abatement for renovations to residential apartment buildings.
Over the years, landlords who claimed the benefit were often deregulating units when rent-stabilized tenants moved out. The practice had long been approved by the state Division of Housing and Community Renewal.
In late 2009, however, the Court of Appeals held for the tenants, who eventually reaped a $68.75 million settlement from the case. In recounting the briefing of the appeal, the author praises the acumen of the tenants’ lead attorney, Alexander Schmidt, who managed to uncover obscure legislative history that the Court of Appeals found to be decisive.
If there is a hero in the book, it is City Councilman Daniel Garodnick, who grew up in STPCV, resides there and counts its residents as his constituents. As described by the author, Garodnick’s tireless efforts protected STPCV’s vulnerable tenants against some of the city’s most powerful real estate interests. The author also posits, however, that the battle is probably a losing one, given that the Manhattan market for middle-income housing continuously shrinks by thousands of units every year.
Another strength of the book is the author’s profiles of Darcy Stacom (the broker who sold STPCV on Metropolitan’s behalf) and the leading real estate industry families of New York, including the Speyers. Although the STPVC deal ended up as a defeat for Rob Speyer, the author’s treatment of him is balanced.
According to the Bagli, Speyer miscalculated and overreached on the deal, but he has also compiled an enviable track record on dozens of other real estate transactions, many of which are recounted in detail. The book also reminds the reader that the Speyers lost only their $56 million investment in the STPCV debacle, less than 1 percent of the winning bid. The rest of the money was lost by the Speyers’ investors­—hence the book’s title.
Bagli is careful not to be too judgmental of any particular player who partook of the 2004-2006 real estate bubble. But, like the economist John Kenneth Galbraith before him, the author scolds the bankers, whose lack of underwriting discipline fueled the "speculative orgy."
One hopes that this book, and its lessons learned, will temper speculative urges the next time the "wonders of leverage are rediscovered." Galbraith would have doubted it.
Jeffrey Winn is a partner at Sedgwick Law.