Apartment Finance Today

Editor's Letter

Troubled Times for Tishman

APARTMENT FINANCE TODAY • November/December 2009

BY Shabnam Mogharabi

I CAN’T STOP READING about Tishman Speyer. The commercial real estate titan entered the residential sector with much fanfare at the height of the market and has been stumbling and tripping its way into dangerous territory ever since.

The timeline starts in 2006, when Tishman partnered with BlackRock Realty for the $5.4 billion purchase of Stuyvesant Town/Peter Cooper Village, New York’s sprawling complex of 56 multi-story buildings on 80 acres with 11,227 apartment units.

And what a boondoggle that has become. Since late summer, ratings agencies Moody’s, Fitch, and Standard & Poor’s have downgraded various portions of the complexes’ debt, saying that the property’s conversion from rent-controlled to market-rate was behind schedule and decimating its rainy-day reserve funds.

And the pillars continue to crumble. Eastdil Secured recently marketed a $100 million debt position owned by insurer The Hartford that was used to help finance the purchase of the complex. In Florida, the state pension program lost $250 million it invested in Stuy Town/Peter Cooper Village. And industry sources began predicting a default on the Tishman loan would hit the industry as early as this fall.

Despite these warning signs, Tishman Speyer maintained its course, emphasizing the long-term success its plan would have. Turns out that strategy may not be foolproof, either. Last month, the New York Court of Appeals said Tishman and BlackRock may have to pay $200 million in damages for charging improper market-rate rents on what should have been affordable or rentcontrolled apartments. According to a story in The New York Times, the decision could affect the owners/managers of as many as 80,000 apartments in Manhattan who may have improperly raised rents while receiving tax breaks from the city to complete upgrades to various buildings and communities.

Yes, the property’s performance is problematic and its financial standing more than questionable. But I also worry about the implications that Tishman’s problems will have for the residents of these massive communities. Many have been suffering from illegal rent increases. And recent observations of the site itself indicate that on-site security measures appear to be falling by the wayside. In a year where crime at apartment communities across the country seems to be on the rise, it’s unfortunate that this kind of environment would be breeding at a massive epicenter of Manhattan housing.

Interestingly, Stuy Town/ Peter Cooper Village wasn’t Tishman’s only misstep. Another one of the firm’s deals— the 2007 $22 billion purchase and privatization of Denverbased REIT Archstone—is also seeing trouble. The loan’s managers have been on the road recently looking for investors that can help shore up Archstone’s finances. But that will be tricky, considering the size of Archstone’s operations as well as the demise of Lehman Bros., Tishman’s partner in the Archstone purchase.

All in all, it’s one hot mess. Perhaps Stuy Town/ Peter Cooper Village can be saved from default, though a default of that size—coupled with a settlement of such magnitude—could have a ripple effect through the entire real estate industry, not just the multifamily sector. Or, perhaps Archstone will opt to reenter the public markets to raise capital.

Whatever the solution, there is one question that still deserves to be pondered: At what point should the government intervene to prevent a catastrophe in the making? And where will such an intervention leave Tishman? Truth be told, I don’t know. But a solution needs to come soon. Otherwise, the firm will likely face more trouble than its troubled balance sheet can handle