In a decision with seismic implications for Stuyvesant Town and property owners throughout the city, the state’s top court has ruled against real estate giant Tishman Speyer on a far-reaching rent regulation lawsuit, declaring the landlord had no right to deregulate some 4,440 apartments.
In a 4-2 decision, the Court of Appeals upheld an appellate ruling that said Tishman Speyer was not allowed to take apartments out of the rent stabilization program at the 11,000-unit complex because it was accepting a tax incentive meant to encourage renovations. The ruling is a sharp reversal of the way the law has been interpreted for years, and even the New York State government previously advised landlords who accepted the tax incentive, called J-51, that they were permitted to deregulate apartments.
The costs are sure to be tremendous. The plaintiffs in the suit—a set of market-rate tenants represented by attorney Alexander Schmidt of Wolf Haldenstein—estimated that the cost to the Tishman Speyer/BlackRock-led partnership would be more than $200 million. The landlord bought the complex with BlackRock and other partners for $5.4 billion in late 2006, an amount that now seems ludicrous and to have rested on unreasonable assumptions, even without the court decision.
The deal has a long list of investors and bond holders on debt that spans from pension funds–Florida and California public employees had hundreds of millions in the deal–to big New York real estate names to the well regarded investment management firm BlackRock. The deal was structured with $3 billion in senior debt that was securitized–meaning it’s now held by a series of bondholders, including Freddie Mac-and $1.4 billion in mezzanine debt from holders, including SL Green. The rest of the $1.89 billion was in equity from an array of banks and funds that are almost certain to never see their money again.
All of which raises the question: What does this mean for the Speyers?
Jerry and Rob Speyer, the father-son duo that leads Tishman Speyer, have been the front men for the deal: They cobbled together the investors, they picked the price, they (occasionally) addressed the media, and they put the highly-regarded Tishman Speyer stamp on the deal.
But in the scheme of what was a $6.29 billion transaction–including reserve funds–they had only a sliver of investment. According to a person familiar with the financing structure, Tishman Speyer and its affiliates put only $112 million of equity into the deal. They also have taken an untold amount in fees for managing the property, likely worth tens of millions.
And Tishman Speyer did not mortgage any of their other holdings for the deal. That means their empire, which includes Rockefeller Center and the Chrysler Building, seems safe.
Still, the Speyer name is certain to be scarred. This court decision aside, the complex is now worth far less than what the family and its investors had expected. A $400 million reserve fund that was intended to last to the beginning of 2011 has been almost completely exhausted (it has $24 million left). Efforts to deregulate apartments have gone much slower than anticipated–much more on that in a story in this week’s Observer–and, more significantly, a rapid and unending ascent of rents never came to be.
With the court decision–particularly if it is applied retroactively so all the market rate tenants get their money back–the complex is worth a fraction of what was paid for it. The rents from regulated apartments simply don’t make the complex quite valuable. The $5.4 billion that the owners paid was based on the assumption that Tishman Speyer would be able to wring far more income out of the market rate apartments. But in an analysis of 2006 rents, assuming revenues and expenses would stay the same, the firm Realpoint found Stuy Town would have been worth just $1.7 billion. If all the apartments are re-regulated, the value would surely be even less than the 2006 figure.
The decision seemed to leave many open unanswered questions—such as whether deregulated apartments will be re-regulated and tenants all given refunds on their rent paid—and the judges opened up a few of them in their decision:
“Defendants predict dire financial consequences from our ruling, for themselves and the New York City real estate industry generally. These predictions may not come true; they depend, among other things, on issues yet to be decided, including retroactivity, class certification, the statute of limitations, and other defenses that may be applicable to particular tenants. If the statute imposes unacceptable burdens, defendants’ remedy is to seek legislative relief.”
Should the decision indeed be retroactive, as the tenants have requested, the existing 4,400 tenants currently paying market rates would see their rents dramatically lowered. It would be as if they never had been de-stabilized, and tenants could even receive back-rent for the difference between the market and regulated rents.
The decision applies to other owners who deregulated apartments while in the J-51 program as well.
Just how many apartments that means is uncertain. Steven Spinola, President of the Real Estate Board of New York, said his group estimates it’s between 6,000 to 8,000 additional apartments.
It’s clear from a list of those apartments entered in the J-51 program-which only gave the Stuyvesant Town owners a benefit of about $24 million since 1992-that there are few other very large buildings to which this ruling would apply. The next-largest in Manhattan that would potentially be affected, according to the list, is 415 West 23rd Street, which is listed as enrolled in J-51 for its 921 apartments.
From here, whatever the future looks like for Stuyvesant Town, it’s sure to involve restructuring and a whole lot of losses. In the event of default, typically a special servicer comes in and tries to sort through the various parties and investors-a sluggish process that often ends in a sale.
On the legal side of things, it’s sure to be a gold rush for tenant lawyers. In addition to issues like retroactivity, there are many others to think of. What role does MetLife have in footing the bill for this, given that it owned the complex until 2006? Are MetLife and Tishman Speyer eligible to get property taxes back from the city and state, given that they paid taxes on a property thought to be far more valuable than it actually was? In terms of transfer taxes alone, the numbers are gigantic: Between the $3 billion mortgage and the transfer taxes, more than $245 million came to state and city coffers, according to property records.
In a statement, Tishman Speyer spokesman Bud Perrone suggested years of legal fights are sure to arise:
“While we respect the Court’s decision, we view this as an unfortunate outcome for New York. The ruling, which reverses 15 years of government practice, raises a number of difficult issues that will need to be resolved by the courts and various government agencies in the coming months and years.”