The Final Word: Charles Bagli on “Other People’s Money”
Gus Delaport March 26, 2013, 9 a.m.
The New York Times’s Charles Bagli’s new book Other People’s Money tackles the housing crisis and 2010 collapse of the Stuyvesant Town-Peter Cooper Village deal. Set for release April 4, the book takes readers inside the bidding war and the eventual loss of billions of dollars of investor money. Mr. Bagli, a former reporter at The New York Observer, spoke with The Commercial Observer about the book, how the Stuy Town deal defined an era, and whether or not investors and the industry learned a lesson.
The Commercial Observer: What is the significance of this story?
Mr. Bagli: For me—just my own thinking—it was a critical moment. Here we are in the midst of another real estate boom, and it just really highlighted the fact that these guys that used to go for the “glass and brass” are out there scooping up what some people would call “meat and potatoes,” the brick tenements. You sort of step back and say: ‘Whoa, what’s this about?’ Like I say in the book, I think Stuyvesant Town, in a way, is for New Yorkers an iconic place, not dissimilar from the Empire State Building or Rockefeller Center.
I think the question remains: what’s going on in this city? What you’re seeing here is a lot of changes. I think in some ways we may be looking at the European model, best exemplified by Paris, where the working class and the immigrants are pushed out to the suburbs. You have a high degree of alienation and unemployment. Sometimes that will manifest itself in these explosions—a riot. Can a city really function well under those conditions? If they can’t be in the city, doesn’t that make the city less hospitable? Ultimately, will companies go where the labor force goes, or where it is more hospitable? That would be outside of the city.
You’ve seen a profound change, even in Manhattan, where land is now worth more for residential than it is for commercial. What were once choice commercial sites are now sites for super luxury buildings.
I think it’s also about the disparity. Income disparity and everything else—almost half of the units at Stuyvesant Town are now at or near market rate, and I would venture your average middle-class family in New York cannot afford to pay $4,500 per month. So that is fast becoming not an option.
How does this deal and its ultimate failure characterize the real estate crisis? How does it define those years?
I think you had an era, and I don’t know that it’s completely over, because you’re seeing the revival of the CMBS markets. In the first place, Wall Street just threw out the prudent banker’s philosophy, because they had a situation where they would make money on providing mortgages and then convert them to a security, sell them to investors, get it off the balance sheet—and it didn’t really matter what happened to the loan, because it wasn’t their responsibility anymore. So, they dropped the underwriting standards. When people used to buy buildings, you saw maybe 65 percent debt-to-value, then it went up to 80, then 90 percent. You would scratch your head, because the history of real estate is boom and bust. There is no margin for error when the debt load is 90 percent.
There also wasn’t a lot of risk for buyers like Tishman Speyer or BlackRock. They didn’t have a lot of their own money in the deal, and there was a big upside potential if everything went right and very little risk if everything went wrong or even one thing went wrong. The way this thing was designed, everything had to go right, every single thing. It never happened before, and it’s probably never going to happen again.
The title of the book isOther People’s Money. You discuss the industry parlance. Could you explain how that concept shapes the story and shapes the deal?
I think that in New York now, we have three different kinds of owners. You have the old real estate families that are in their second, third or even fourth generation. These are companies that are built up over the decades. They’re risk-averse, they buy and they hold, they’re not out there to flip things and they don’t like a lot of debt.
Then you have the REITs. They’ve somewhat eclipsed the old real estate families. They have access to capital in the markets, but there are certain rules of REITs that put a certain discipline on them.
Then you have the traders who use other people’s money, and you look at the various strategies that were out there, and it was all on making a quick buck. Some people, their strategy was buy high and sell higher; other people, if they were buying residential—not just Stuy Town, but Riverton and Delano Village—the strategy was to oust the long-term tenants and drive rents up to what they perceived as market levels. It was a total disaster at Riverton, it was a total disaster at Delano Village and other smaller, lesser known complexes, but it was catastrophic at Stuyvesant Town, and all the people that put money into it, it just went poof—$500 million for CalPERS.
You could also ask about the irony that these pension funds for public employees were investing in a business plan which was designed to oust the very kind of people that were their pensioners. It’s astounding. Of course, in the case of CalPERS, they ended up passing rules afterwards that they would never do that again.
Do you think investors have learned their lesson from what happened?
It would seem that people are a lot more cautious about these kinds of deals that promise double-digit returns—13, 13.5 percent in the case of Stuyvesant Town—and sort of blithely go along with a business plan that doesn’t make any sense, that doesn’t track. Yes, I think in some cases, I think they are much more cautious. There’s more of an emphasis on properties that generate income today, not [at] some future point.
On the other hand, you look at the prices, and buildings are trading at 2007 levels or better. There’s less debt, but a lot of the investments are predicated on the assumption things will get better, but there’s not a lot of margin when you’re getting a 4 percent cap rate.
On the flip side, do you think the industry has learned a lesson?
I don’t know about that. Take someone like Gluck: he made a fortune off a failed project at Riverton, and he’s still out there gobbling up buildings. There are people that think he’s a genius. On the other hand, I think Tishman Speyer have taken their hands off the hot stove, and I don’t think they’ll be involved in something like that again. Not to say they aren’t involved in residential projects in India or China, or even San Francisco, but I think that there’s a recognition that not only is residential different from commercial, but this special subspecies of rent-regulated properties are completely different, and if you don’t understand the politics and customs, it will eat you alive.
I think it’s a double-edged sword. When the courts ruled in 2009 on behalf of the tenants, it was a shock. I think if you read the law, you would say the court made the correct decision, no matter what the real estate industry said. I don’t think it was the beginning of the end. It was the end of the end for Stuyvesant Town in that, by that point there was no hope of trying to renegotiate the debt, it just wasn’t going to happen, all was lost. That was what the signal was. So, some people might argue that this was a victory for tenants.
On the other hand, you have to look at the decision and it said the conversion of regulated housing to market rate rents was illegal while you were taking tax benefits from the city, but it didn’t decide what the legal rents were and how you would calculate them so, what’s happened is that CWCapital and the real estate industry took a very aggressive position. So, you roll back the rents to a certain year and then you look at how many times the apartment has gone vacant. Every time it’s gone vacant, they’re entitled to a 20-percent bump. If it’s gone vacant five times, that’s a 100-percent increase. So, when the settlement is done, it codifies an extraordinarily high rent. In fact, so high that in many cases they can’t charge that rent because no one would pay it. So, they’re offering tenants a preferential rent, a discount off of what they would be allowed to charge. So its codifying rent increases the transition from a rent-regulated, middle-class enclave, to something else. At the time of the sale, 28-percent of the units were at or near market. Today, it’s almost half.
You’ve got two very different cultures there. You’ve got the tenants who have been there for years, in some cases decades. There are still some people there who moved in in 1947 when the place first opened. Then, in the other half, you have students and young professionals who are packed in—if it’s a two bedroom, perhaps you have four people living there and they have no intention of staying, its very transitory. Some of that is a product of the rents and their careers and some of it is that it’s a very different society; it’s a very transitory society where you don’t have people going to work for MetLife or the City of New York as a teacher or something for the rest of your life. You’re constantly reinventing yourself. It’s a whole different society. I don’t know what becomes of Stuy Town in the future if it continues.
There are a number of larger than life characters in this industry, some of whom are in this book. Is there anyone in particular that stands out to you, who has been particularly interesting or particularly difficult to cover over the course of your career?
It runs the gamut from the more mysterious figures who never seem to appear in print to the more prolific developers in the city. One of the more interesting interviews, in my mind anyway, was with Richard LeFrak.
I asked him to walk me through his thinking in the whole bidding process. I asked him: ‘Did you get [CBRE broker Darcy Stacom’s] sale book?’
And he said: ‘Darcy’s a great broker, but I didn’t need her numbers. I’ve got over 10,000 rent-regulated units of my own and I’ve got my own stats, so I knew that the turnover rate was only two and a half or three-percent.’
So, he looks at this and his gut feeling is Stuyvesant Town is worth $3 billion. Then, he talked to his advisors and they all shake their heads and tell him: ‘You’ve got to go up if you want to play in this game.’ So, he takes his numbers, revises his return expectations, trying to get to a higher number and he gets to $3.3 billion and all these advisors are saying: ‘No, that’s not enough Richard, got to go higher.’ So, he goes and talks to the investment bankers from Wall Street and they basically tell him: ‘The more you bid, the more we’ll lend you.’ So, the first round he’s up to $4.5 billion now, but he’s like the guy standing on the edge of a skyscraper, he’s teetering back and forth, there’s sweat on his forehead. He submits the bid and once again, they shake their heads and say: ‘Got to go to $5 billion if you want to play in this game.’ What’s he going to do? He’s rocking back and forth on that ledge. He steps off the ledge and goes home, doesn’t submit in the second round.
What it illustrates is, his gut instinct of what the property was worth and the kind of hysteria, the casino that was operating on Wall Street and how it drove these prices to levels beyond what made sense. I think he become a perfect illustration of what was wrong.
I regret BlackRock wouldn’t sit down for an interview once the book was started. I think they wanted to control their own narrative, so they refused requests for an interview.
Where do you think they stand right now in terms of this deal?
They were unscathed. There was a little bit of an embarrassment when they got fired by CalPERS but if you look at the Vanity Fair interview Larry Fink did a few years ago, he’s still regarded as a wise man of the industry whose advice is sought after by the federal government, developers, pension funds and everyone else. They got bigger and I don’t think there was a lot of self-examination.
You could point out that a lot of people from BlackRock Realty aren’t there anymore. Fred Lieblich, who had actually worked at MetLife and who had headed up BlackRock Realty—he had lived at Stuy Town. He’s a different person today. He’s very focused on getting away from his old life, I think.
Moving away from the book, as an alum of the Observer, Could you share a little bit about your time here and how you look back on your time at the paper.
The paper really went through ups and downs. I was working out in New Jersey when I read an article in The Times about this guy Arthur Carter who was starting a paper in New York. He said it was going to be no-holds-barred and it sounded wonderful and I applied and they hired me just as the paper’s first issue was coming out and on the front cover there was a photograph of an empty rowboat sitting on a pond in Central Park and I had to scratch my head, it didn’t exactly say no-holds-barred and I think everyone was a little unsure.
You had a lot of newspaper veterans that were on the staff and we were all sitting cheek to jowl in the office, literally on top of each other and I used to laugh, it was just this constant tapping because there was no advertising and there was so much space to fill.
Every week there seemed to be a new focus, flip-flopping, trying to find a niche and I think it finally did with the 1989 mayor’s race and they were using polls and we were doing a poll a month and there were four columns, one each week and at that point, since polls were expensive, no one else was doing them yet, even though this big political race was dawning, and I think we got a lot of notoriety out of that.
The next big thing was Graydon Carter coming to the Observer. I didn’t agree with everything he did and he tried to fire me several times, but he really raised the profile. I think it was under him the paper’s smart focus was on politics, real estate and the media. Arthur would always say: ‘We have the 50,000 right readers.’ I’d hoped it would be more readers than that, but it was a must read in the newsrooms, whether it was television or newspapers so by 1995, I would argue it was the smallest, most heavily recruited labor pool in the city and it had found a way to, not only as a weekly, bring people behind the scenes, but also to break some stories and so I really don’t have any complaints and Arthur refused to fire me and I think he identified some great journalists in the city and they’re working at The Wall Street Journal or New York magazine or Vanity Fair and elsewhere. I think he did a great job.
It’s a different paper today but I think those are still important areas.
Lastly, what was the research experience like?
Just on Stuy Town, it was great experience. Digging back—1947 in New York is like ancient history, because our memories are only about two minutes old. You feel like an archaeologist, finding memos or letters or papers. It was a funny thing about Stuyvesant Town, in many respects. It was sort of the first gated community, but for all the regimentation there were constant signs of rebellion. Whether it was in the first 25 years, when MetLife had to go to the Board of Estimates to get rent increases, and every time, the tenants rose up and fought them. So, then it would be voted down, and MetLife would go to court and get their rent increase. They very much saw it as a rare refuge for the middle class in Manhattan. You see the photographs of that era, people are all dressed up in ties and hats. Nobody goes out in ties and hats anymore.
Even in the little ways. I couldn’t tell you how many people told me when they were kids, they got such a kick out of racing across the grass chased by security guards. In those days, there were no locks on the doors, so you could run through the front door and out the back to elude the security guards, but woe be unto you if they caught you, because a letter went in your file.
Of course, the whole history of the original sin there, the racial practices, is really extraordinary. You would think we were better than that, but that fight was waged by people who lived there, and out of that was born the whole fair housing movement, so I think it’s a real touchstone for the history of urban development.