In 2009, Fitch Ratings valued the 80-acre Stuyvesant Town-Peter Cooper Village apartment complex in Manhattan at $1.8 billion. Unfortunately, it had been sold three years earlier for $5.4 billion.
The largest real-estate transaction in history had turned out to be a massive real-estate bust.
New York Times reporter Charles V. Bagli tells the horror story with clarity and authority in “Other People’s Money.”
In the 1940s, New York City Mayor Fiorello LaGuardia spearheaded an effort to raze a stretch of land on the Lower East Side to begin construction of a middle-class residential oasis that would include playgrounds, lawns and modest apartments, but no luxuries like air conditioning or doormen.
Enticed in part by a 25-year tax break and 12 acres contributed by the city, Metropolitan Life Insurance Co. built the complex. By 1950, three years after the first tenants moved in, there were 6,000 children under the age of 5 living at Stuyvesant Town and Peter Cooper Village -- a fifth of the residents. For a while, the people who lived there referred to their neighborhood as “Rabbit Town.”
There were some serious problems; Met Life wouldn’t allow black residents, for instance. But the 11,000-unit development was beloved by residents who watched out for one another’s kids and passed their apartments from generation to generation.
The seeds of destruction for this modest community were sown when MetLife raised $2.88 billion in a public offering in 2000, adding new pressure to generate returns for shareholders. By 2006, the giant insurer was soliciting bids for Stuyvesant Town-Peter Cooper Village, with Tishman Speyer Properties LP and BlackRock Inc. coming out the winners.
It was an ill-advised deal even before the financial crisis sent the property into a tailspin, Bagli explains. The buyers always knew rental income wouldn’t cover the interest payments on their massive mortgages for several years. So they put aside $400 million to cover the balance and counted on pie-in-the-sky estimates of big rent increases down the road that would supposedly kick in after low-rent tenants were forced out.
The reserve fund ran out in January 2009 and the owners missed $20 million in payments. They turned the property over to their lenders.
The infuriating problem brought to light in the book is one that by now is a familiar post-financial-crisis tale: The buyers had only a small equity stake in the deal, and the lenders had little risk. After mortgage money was raised for the purchase, the mortgages were bundled and sold off.
“With no stake in the mortgage, the banks had little financial incentive to ensure that the deal made sense and the borrower could repay the debt,” Bagli writes.
The author says Tishman Speyer and BlackRock suffered relatively small losses -- a combined $225 million, or four percent of the purchase price. Even that was offset in part by $48 million in acquisition and other fees.
Five years after the 2008 credit crisis, we’ve had examples ad nauseum of the folly of financial transactions where dealmakers had no skin in the game. Often those stories lack the narrative that brings the devastation alive and sets your hair on end.
Not so Bagli’s account of the Tishman Speyer/BlackRock purchase. He takes readers on a walk through history’s biggest real-estate nightmare and lays out the facts in an even-handed, no-hysteria style.
But then again, he doesn’t need to hype the folly of his subjects, who handily hang themselves with their greedy actions and myopic business decisions.
“Other People’s Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever Made” is published by Dutton (387 pages, $28.95). To buy this book in North America, click here.
(Susan Antilla is a columnist for Bloomberg News. The opinions expressed are her own.)
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