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The middle-income housing projects Stuyvesant Town and Peter Cooper Village sit on an 80-acre patch of Lower Manhattan. In 2006, they came to epitomize the lunatic excess of the housing boom when their 11,232 apartments sold for $5.4 billion. They were bought at a competitive auction by Tishman Speyer Properties and BlackRock Realty.
Charles Bagli covered the purchase for The New York Times. In his new book, Other People's Money, he tells the story of how the biggest ever real estate deal came together and then spectacularly came apart. Standing in the park at the center of Stuyvesant Town, Bagli tells NPR's Robert Siegel that these housing projects provided a place where people of moderate means could set down roots.
"There's first-, second- and third-generation families living here," he says, "and it was sort of a quiet oasis and, most importantly, an affordable oasis in an increasingly expensive Manhattan."
Both Stuyvesant Town and Peter Cooper Village were built in the 1940s by MetLife, with help from the city. Sixty years later, many of the residents lived in rent-stabilized apartments. But somehow, Tishman Speyer and BlackRock thought they'd be able to make good money off the deal.
"Rents in New York were rising at a pretty rapid clip," Bagli says. "And the rent laws had actually been watered down over the prior decade. So a lot of developers thought that they could buy what they might call 'meat and potatoes' buildings and dislodge one set of tenants, or residents, for another set that was one or two rungs up the ladder. And this way they could make that profit, a bigger profit, on their complex."
A Luxury Housing Project?
Kirstin Aadahl of the Stuyvesant Town-Peter Cooper Village Tenants Association stands in a three bedroom, 1,161-square-foot apartment. Siegel grew up in a unit just like this. His family moved to Stuyvesant Town when the complex opened in 1948, and his parents moved out about 20 years later, when the monthly rent was pushing north of $200. Today, a new tenant, who doesn't fall under the rent laws, could expect to pay at least $5,242 a month for such a unit.
At the core of the 2006 real estate deal was whether this refuge for middle-income New Yorkers could really be redefined as luxury housing. Siegel says that while he has many pleasant memories of his childhood in Stuyvesant Town, one thing it was not is luxurious. The units now have dishwashers and air conditioning, a feature Siegel says wasn't allowed when he was growing up. Back then, they also didn't allow cats and dogs (they do now) and, Bagli points out, 10 years ago residents weren't allowed on the grassy area in the middle of the complex.
"There was post and chain all around every single stretch of grass here," Bagli recalls, "and the guards would chase you away if you tried to set foot on a blade of grass."
The Housing Crisis, In A Nutshell
According to Bagli, Tishman Speyer and BlackRock's purchase was doomed from Day 1.
"There was an enormous amount of debt and the income from the property only covered 40 percent of the debt service," he says. "So that's, you know, you buy a house ... and Day 1 you don't have enough money to pay the mortgage. In fact, you've got less than half the money to pay the mortgage. Now, you and I can't get away with that. But the big guys can — the guys who are playing with other people's money."
And New York's real estate juggernauts were making what turned out to be a colossal mistake.
"These firms did very well with office buildings," Bagli explains. "One of their mistakes — the hubris here — was that they assumed that real estate is all the same. But not only is residential different, but there's this peculiar subspecies known as rent-regulated housing, and if you don't understand it — its customs, its politics — it'll kill you."
The whole idea behind the deal was that Tishman Speyer and BlackRock could get tenants in rent-regulated units out, and tenants who were willing to pay market rents in. But the tenants association went to court and blocked them. It turns out, you can't take advantage of public tax breaks — which they and MetLife had been doing — and raise rents the way they planned. There was no way those thousands of monthly rent checks could match the owners' debts. So they just walked away. It was easy to do because it wasn't their money on the line.
"They pretty much went through it unscathed," Bagli says, "but CalPERS [the California Public Employees' Retirement System], the largest pension fund in the country, lost $500 million. Poof — gone. ... Another pension fund down in Florida lost $250 million. The government of Singapore, well, they lost the most — over $600 million. It all just went poof."
This was the housing crisis writ large: Tishman Speyer and BlackRock lost a lot of people a couple of billion dollars, walked away from it unscathed and went into the next deal without anyone calling them out on their colossal mistake.
"People say, 'Oh, New York is the most unforgiving market in the world,' " Bagli says. "But it seems very forgiving."