Is this déjà vu all over again? Nine years after the disastrous purchase of the landmark Manhattan rent-regulated apartment complex Stuyvesant Town – Peter Cooper Village by alt-investment funds Tishman Speyer Properties and BlackRock Inc. for $5.4 billion, PE giant Blackstone Group and Ivanhoe Cambridge have inked a deal to take over the property for a reported $5.3 billion. The Tishman Speyer/BlackRock buyout was a costly failure for tenants who saw rents jacked up (illegally as it turned out) and were denied necessary repairs, for investors – including three public employee pension funds in California and Florida that lost a total of $850 million, and for creditors when the owners defaulted on the $3 billion mortgage on the property.
Private equity boosters like Private Equity Law360 are flattering the de Blasio administration for its cleverness in winning a side agreement with the new owners to maintain 5,000 of the complex’s 11,241 apartments as affordable housing for the next 20 years and to phase in rent increases on another 1,400 apartments over five years after 2020 when these units are scheduled to be decontrolled. Flattery is PE’s stock in trade – everyone who signs a contract with them is oh so clever and has extracted the very best deal from them. No mention at all in media reports of the 4,841 apartments on which the new owners are able to charge Manhattan prime real estate rents. Should we celebrate preservation of 5,000 affordable housing units or mourn the loss of 4,841 apartments that are priced out of reach for most New Yorkers?
Prices in the New York City housing market now exceed the levels attained at the height of the real estate boom and the deal for the city’s largest rental property is important for Blackstone which gets to add massively to its strategic investments in Manhattan rental units. The property comes with tax breaks under the J-51 program that governs affordable housing units and the side deal with the de Blasio administration includes a $144 million low-interest rate loan from the city’s Housing Development Corp. as well as a waiver of $77 million in mortgage recording taxes. Despite these advantages for Blackstone as well as lower interest rates and nearly twice as much rental income as nine years ago, the reported price to be paid for Stuyvesant Town – Peter Cooper Village has not budged from what the previous owners paid in 2006. Blackstone has to be pleased with the deal.
On the plus side, Blackstone and its partners – unlike the former owners – plan to finance the acquisition with a much more manageable 50 percent debt and they plan to maintain the complex as rental units rather than evict tenants and convert it to condos. But the transaction was described by Private Equity Law 360 as “a fast-moving transaction that came together in a matter of weeks.” That’s not a lot of time for the city’s lawyers and housing market experts to study what is presumably a very complicated contract. It would be interesting to know what contingencies are addressed in the agreement the de Blasio administration struck with Blackstone, and what has been left out. As economists know well, it is impossible for contracts to be ‘complete’ in the sense that all future contingencies can be foreseen and addressed. Contracts rely on implicit agreements that are not able to be spelled out and on the assumption that the parties to the contract will deal fairly with each other. Trustworthy behavior by all parties is essential. On this score, private equity’s track record has not been stellar, as outlined by SEC Chair Mary Jo White in a recent speech in which she specifically cited an SEC enforcement settlement with Blackstone over its failure to fulfill its contractual relationships with the limited partners in its funds.
Rumors that the apartment complex’s caretaker owner had settled a dispute with a hedge fund that held some of the debt on the property led to renewed interest by developers and investors in buying it. One has to wonder why there was such a rush to sell it to Blackstone. Was this really the least bad deal city government could get? One thing is clear: For Blackstone, which views the rental market as an important investment opportunity, this is a sweet deal.
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