Big Money, Bigger Mistakes
The $5.4 Billion Stuyvesant Town Gamble That Went Bust
“The price was dictated by the amount of debt you could put on the property. The assets were worth as much as the banks were willing to lend”
- Other People's Money by Charles Bagli
Happy Sunday!
$3.4 billion. That’s the loss lenders and investors took on a single deal. And no, this wasn’t some fly-by-night syndicator or a group of clueless LPs. This deal was put together by none other than BlackRock, in partnership with Tishman Speyer, with heavyweight LPs like CalPERS, the Church of England, and the government of Singapore, among others.
Today’s case study is a blast from the past (but it might sound oddly familiar to many of you).
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Background
In October 2006, Tishman Speyer and BlackRock bought Stuyvesant Town and Peter Cooper Village, a 110-building, 80-acre apartment complex in Manhattan, for $5.4 billion.
Originally built in the 1940s as middle-class housing, the property had a significant number of rent-restricted units.
The Capital Stack
Including acquisition costs and a reserve fund, total project cost ballooned to $6.3 billion.
Equity Raised: $1.89 billion (Tishman Speyer only contributed $56M of its own money; the Crown family matched with another $56M. BlackRock contributed another $112 million). This included over $650 million in reserves.
Debt Stack:
$3 billion senior, 10-year, interest-only mortgage.
$1.4 billion in secondary and mezzanine loans.
Yes, the loans were securitized, in case you were wondering.
Side note: the initial equity was “bridge equity” — which was later replaced with permanent equity. CalSTRS (unlike CalPERS) was not impressed with the deal. According to Bagli, a key advisor to the pension fund, Nori Gerardo Lietz, was a solo voice of reason and didn’t like the negative cash flow.
The Fee Structure
1.5% property management fee
3.5% "supervisory fee" for planned $100 million in capital projects
Asset management fees: $10 million annually from the $500M investor, $2.5 million from the $100M investor
20% promote after a 9% preferred return
Projected IRR to LPs was 13.5%.
Speaking of fees:
The Business Plan
The sponsors purchased the deal at $498 per square foot, or approximately $480,810 per unit. Tishman Speyer, a newcomer to residential property, portrayed MetLife as a "lumbering landlord that had failed to capitalize on its asset."
This was a classic value-add deal:
Deregulate rent-stabilized apartments aggressively (conversion rate was expected to be in the 12-15% range).
CapEx Budget: $160 million for upgrades, including a high-end health club, roof decks, concierge service, and fancy playrooms.
Income Projection:
Day-one income covered only 40% of debt service. NOI at acquisition was around $110 million.
Annual gap: $172M between collected income and required loan payments.
Assumed net income would triple to $336.2M by 2011 (that’s a whopping trended 5% yield on cost)
Why yield on cost should be your favorite measure:
The disparity between rent-regulated and market-rate units tells the story:
Rent-regulated 2-bedroom: $1,351
Deregulated 2-bedroom: $3,167
📉 The Collapse
Several factors contributed to the collapse:
Conversion to market rate rents went much slower than anticipated, while vacancy on renovated units rose from 2% to over 6%. Revenues in 2009 fell 6%, while operating expenses went up by 16%. The property was on pace to lose $174 million by the end of that year.
Just months after purchase, the J-51 Tax Abatement legal challenge emerged. The NY Court of Appeals eventually ruled that Tishman Speyer illegally deregulated about 4,400 apartments while receiving J-51 tax benefits, forcing them to roll back rent increases.
The 2008 financial crisis hit, causing property values to plummet while making refinancing impossible.
Tenant resistance was stronger than anticipated, with organized groups fighting conversion efforts.
⏳ Timeline
By 2009, the property was valued at approximately $1.8 billion (down from $5.4 billion in 2006)
In January 2010, just 31 months after acquisition, Tishman Speyer and BlackRock defaulted on $4.4 billion in debt
By October 2010, they surrendered the property to creditors
The senior lenders took control through a deed in lieu of foreclosure
Virtually all equity investments were completely wiped out
The Aftermath
CWCapital Asset Management took control of the property as the special servicer for the senior mortgage holders. After years of management, the property was sold in 2015 to Blackstone Group and Ivanhoé Cambridge for about $5.3 billion—nearly the same price as the 2006 purchase, but after the market had substantially recovered.
The disaster became a case study in business schools about overleveraging, flawed investment assumptions, and the dangers of misunderstanding regulatory environments.
The Stuyvesant Town failure ultimately cost investors billions and damaged Tishman Speyer's reputation, though the company later recovered. For the pension funds involved, it represented one of their largest real estate losses ever, leading to significant changes in their investment approval processes.
📚This is an excellent book on the subject (with a lot of gory details about similar CRE projects from the same time, along with stories about well-known real estate families): Other People's Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever Made by Charles Bagli
Thank you for reading! Have a wonderful week - and subscribe, if you haven’t yet.
Thanks, Leyla. Do you have a general view on real-estate investments starting at negative cash flow?