Vig Stuy: Stuy Town Deregulation Efforts a Mess as Financial Clock Ticks
Eliot Brown Oct. 20, 2009, 4:05 p.m.
If the saga of the Stuyvesant Town-Peter Cooper Village sale is a countdown clock-the $5.4 billion purchase by Tishman Speyer and BlackRock is nearing default-there’s a loud ding every few weeks in the form of a new analysis by a real estate tracking firm.
Each shows a fresh, dismally depressed value for the property ($1.99 billion based on current income), and tells of the new low level of the reserve fund meant to cover debt payments ($24 million).
But within the numbers in the latest report, released this week by the firm Realpoint, is another tale that serves to illustrate how this deal was, in retrospect, doomed from the start, even beyond the inconvenient timing of buying at what turned out to be the market’s sharp peak.
The report found that as of June 30, for every four deregulated market-rate apartments in the 11,000-unit complex, there are now six rent-stabilized apartments, a level far below the landlord’s expectations.
This ratio-the proportion of deregulated apartments to stabilized apartments-had been a major component to making the deal work on paper when Tishman Speyer, controlled by co-CEOs Jerry and Rob Speyer, planned out the purchase three years ago. At the time of the sale, the vast majority of tenants (73 percent) had their rents restricted by the rent-stabilization program. These apartments are far more valuable when deregulated, which can generally only occur when they turn vacant or when their tenants are evicted for violating their leases.
But the Speyers saw this as territory with huge revenue potential, and they were determined to step up efforts to rout out stabilized tenants who had illegal subleases or second, primary homes.
At the time of the late 2006 sale, there were 8,038 stabilized apartments and 3,189 deregulated units. The latter had grown over time, and during the four years prior to the sale, the previous owners had deregulated an average of 6 percent of the stabilized stock annually, according to Realpoint.
The Speyers were far more ambitious. Based on statements in a 2007 document attached to debt on the property, they planned to deregulate an additional 3,000 apartments over the ensuing four years, a pace that comes out to more than 9 percent of the stabilized apartments annually. They hired a private detective to scour public records and find stabilized tenants who might not actually live in the complex; they tried to remove far more tenants for violations than the prior owners had.
The result of all their efforts: The pace of deregulation actually slowed.
According to the Realpoint figures, by the end of June, Tishman had a total of 4,440 deregulated apartments in the complex. At this rate, Stuy Town and Cooper Village should have about 5,000 deregulated apartments at the start of 2011, a checkpoint at which the Speyers had assumed 6,397. (Each deregulated unit in 2006 brought an average $1,500-plus per month more than a stabilized apartment.)
The inherent difficulties in tracking down tenants who are violating rules and illegally subletting their apartments can probably explain much of the slower rate. The easiest ones to find-through public records of a second home, for instance-would be removed quickly at the start, or by the prior owners.
There has also been strong resistance in public by the tenants, and the local councilman, Dan Garodnick, is always eager to hold a press conference decrying the latest efforts of what the tenants say is an overaggressive attempt to oust tenants.
Regardless of the reasons, the Speyers have clearly had trouble deregulating the apartments, one of the factors in the property’s high-profile saga. (A pending lawsuit could actually bar deregulation, making the deal’s finances that much more dire.)
Based on the Realpoint analysis, the property is now valued at $1.99 billion, based on numbers from the first half of 2009. That figure is down from an estimate last month of $2.13 billion, which, like the $1.99 billion figure, is based on current cash flows. (The deal assumed that by January 2011, the value by this measure would be $5.17 billion.)
As for the reserve fund, which was a proud $400 million back in November 2006: As of this month, it’s $24.4 million, an amount that could last anywhere from days to three or four months, based on the amounts withdrawn from the fund in recent months.
“If they continue at the current rate, they’ll be depleted right around December,” said Steve Kuritz, author of the Realpoint report. “It could go earlier, it could go a little later.”