A $5.4 Billion Deal Predicated on Breaking the Law
The New York Observer has two interesting stories today: the first is, of course, a guest column by yours truly on insider trading, but what caught my eye even more than that was a fascinating inside account of how the $5.4 billion Stuyvestant Town/Peter Cooper Village mega-deal fell apart.
As I've pointed out previously, the nation's biggest real estate deal was also its most odious, because it was predicated on breaking the law--tossing out tenants in defiance of New York's tough rent control laws.
That aspect also made it the nation's dumbest real estate deal, because you can't break New York's rent control laws if the tenants fight, and anyone with half a brain could have told these real estate geniuses that any effort to force out tenants from the two complexes was doomed.
Central to [a real estate broker's] pitch for the complex was that it could be unshackled from rent stabilization (at the time, three-fourths of the apartments were rent-regulated). The offering book repeatedly refers to the complex's future as a "market rate master community." [emphasis added]Sure, and by the same token if you "unshackle" New York's buildings from the fire codes you avoid the need for useless stuff like fire escapes and fireproof building materials, creating a "firetrap master community."
So the new owners embarked on a program of evicting the tenants, law or no law, and importing yuppies in their place:
It proved "wildly unattainable" because it was against the law. The tenants fought back, and every since cent charged from the illegal evictions is being recouped, along with punitive damages. The tenants get their bucks no matter what, even in case of bankruptcy.
Implicit but not specifically stated in these projections was that the rate of deregulation could be dramatically accelerated, a necessarily abrasive effort that tenants dislike. "I think it was pretty clear that the information was projected on what it could be if you managed to get everybody out-that's how people bought it," said one executive familiar with the marketing of the deal in 2006. "When you look at those numbers, the only way it makes sense is if you got rid of the current tenants."And that was the idea of Stuy Town's eventual buyers. In their loan documents, the Tishman Speyer-led team assumed they could deregulate more than 3,000 units in the four years following the sale, a goal that proved wildly unattainable.
I'm delighted to say that when the Tishman-Speyer people did indeed succeed in forcing out tenants, they had trouble getting yuppies to move in to these super-ugly housing complexes, which look more like something the Soviets built in postwar Kiev than a yuppie paradise.
I hope that everyone involved in perpetrating this mammoth eviction scheme suffer some real pain. They participated in this deal either out of complete stupidity or malice, knowing that the deal was predicated on breaking the law. They ought to be prosecuted, not pitied.
© 2010 Gary Weiss. All rights reserved.