On The Lookout: Housing Complex Retired to Creditors

It's easy to read this post this morning in NE Ohio and think, but Pepper Pike isn't Manhattan.

But there's a reason we consider real estate a speculative and risky business, no matter where the deals are.  Because real estate development, by nature, involves speculation and risk, which means sometimes you win, sometimes you lose. And who wins and who loses also changes.

From a New York Times Alert I received late last night (and is only available online right now - it might be in tomorrow's paper but it's not in today's), titled, "Stuyvesant Town's Owners to Turn Over Complex to Creditors":

The surrender of the properties...ends a tortured real estate saga that saw the partnership make expensive improvements to the complex and then try to rent the apartments at higher market rates in a real estate boom. But a real estate downturn and the city’s strong rent protections hindered those efforts, leaving the buyers scrambling to make payments on loans due for the properties...

“We have spent the last few weeks negotiating in good faith to restructure the debt and ownership of Stuyvesant Town/Peter Cooper Village,” said the statement by the partnership. “Over the last few days, however, it has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives.”


...

Metropolitan Life built the complexes for World War II veterans in the 1940s, when the city was in desperate need of new housing. It received tax breaks and other incentives in return for maintaining low rents...

But with the real estate market soaring in 2005, MetLife decided to sell. Tishman Speyer and BlackRock won an auction the following year.

This month, the partnership headed by Tishman Speyer defaulted on $3 billion in debt on the properties...

Tishman Speyer is no little developer - as stated in the NYT article, they control Rockefeller Center and the Chrysler building. But,

It had been negotiating since November to restructure $3 billion worth of loans and to hold on to the properties, which cover 80 acres east of First Avenue, from 14th Street to 23rd Street. But their reserves, once stuffed with $890 million for capital improvements, interest payments and renovations, were left virtually depleted.

The rents collected did not cover the mortgage payments, as the new owners failed in their efforts to increase net income by steadily renovating and deregulating vacant apartments while raising rents substantially.

For tenant advocates and urban planners, the sale underscored the loss of affordable housing in the city and the highly speculative financial structures that, they warned, would only end in disaster.

This article from early January in Crain's New York Business regarding Tishman Speyer's default includes this passage which relates precisely to how elected officials have to take all stakeholders into account:

There's also a political element to the saga because the complex is one of the last bastions of affordable housing in the city, and there is keen interest among elected officials to protect the rent-regulated tenants who live in the building.

“We remain committed to protecting affordability, and we will continue to closely monitor the legal proceedings to prevent any negative effect on residents,” said City Council Speaker Christine Quinn, in a statement.

...

Jack Lester, who represented some tenants in a related matter, said the default wouldn't have an immediate or short-term impact on the apartments or financial negotiations. However, he said tenants feared the complex's ongoing financial problems would hurt services and maintenance.

I'm actually not sure which way this example of developers giving up cuts regarding Sterling Lakes' interest in changing their plan with Pepper Pike (they want to increase the number of units to be built at The Pointe but make them less expensive).  As the Chagrin Solon Sun article noted (and I specifically asked: what does it mean if Sterling Lakes decides it can no longer afford the project),

Another option discussed for the development [called The Pointe, which is in Sterling Lakes, west of New Brainard] is to give the property back to the bank. Hartt said Forest City does have more interest in the project than would the bank and a better likelihood to preserve the potential market.

“If it goes back to the bank, they will sell it for less than the original plan. And, if it was another developer he will come in with a less expensive product,” Hartt said.

The Chagrin Valley Times article on the same 1/13/10 meeting covered this aspect too:

"At some point, it doesn't make sense to continue," Forest City representative Thomas Gerber said. The company could consider turning the property over to the bank, he said

The area is approved for 93 units, but Forest City has a potential deal with national builder Pulte Homes if a development agreement is amended to increase the number to 132.

The reality is there probably won't be any profit when the area is fully developed, Mr. Gerber said. The company is a "non-recourse borrower," he said, because it is a publicly traded company, and it pays a premium for it. With a traditional home loan, whatever the balance is on the note, the bank will go after the borrower if he defaults, he said. As a non-recourse borrower, Sterling Lakes can give the property to the bank and walk away, he said. While it's an option, the company believes Pepper Pike is of value, and it wants to reach an agreement, he said.

Sterling Lakes has more interest and likelihood of maintaining the property and sustaining the quality and character of the property to preserve its future potential market than the banks do, David Hartt, planning consultant to the city, said. If the banks took over the land, homeowners association responsibility and maintenance on the property would be much more difficult, he said. The banks are looking at the situation from a monetary standpoint and would sell the land for significantly less, he said.

And about the speculation and risk inherent in the real estate development industry, known to the developers before, during and after they engage? Again, consider Tishman Speyer:

Tishman Speyer and its partners bought the complex in 2005 with the hopes of deregulating many of the apartments and boosting the rents to market rates. However, its deregulation push fell far short of expectations, forcing the new owners to dip into their reserve funds to make mortgage payments.

A $190 million reserve fund to finance improvements and mortgage payments has been nearly exhausted. By October, that fund had fallen to $24.4 million, down from the $400 million available when the complex was purchased, according to Fitch.

The outlook for the complex's finances worsened last year when the New York State Court of Appeals ruled that it was illegal for Tishman Speyer and its partners to deregulate apartments while receiving special tax benefits for building renovations. Experts have estimated Tishman Speyer and its partners may have to pay $200 million in rent rebates to tenants.

City Council is responsible for shielding the taxpayers from the loss involved in risk - whether we're talking the New York City Council or Pepper Pike City Council.

Does allowing Sterling Lakes to change the plan and build more but less expensive units keep it further away from defaulting?