As we wrote in October:

As a plugged-in reader notes, Tishman Speyer’s led 2006 investment of $5.4 billion in Manhattan’s Stuyvesant Town and Peter Cooper Village continues to head south with all equity investors likely being wiped out.

Amongst those equity investors, the California Public Employees’ Retirement System (Calpers) to the tune of $500 million and the California State Teachers’ Retirement System (Calstrs) to the tune of $100 million.

That being said, “Tishman-Speyer apparently has very little skin in the game. The firm contributed just [$112 million] of its own money to the $5.4 billion purchase price and did not use any of its other properties as collateral.”

As the Wall Street Journal reported late last night:

A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the value of its price. By that measure, all the equity investors—including the California Public Employees’ Retirement System, a Florida pension fund and the Church of England—and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out.

We’re kicking ourselves for not putting the apostrophe “s” in “Speyer’s” in quotes.
The California Connection(s) To Tishman Speyer’s Manhattan Flop [SocketSite]
Tishman Venture Gives Up Stuyvesant Project [WSJ]

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Comments from “Plugged-In” Readers

  1. Posted by Conifer

    The Church of England invested in Stuyesant/Peter Cooper? You would think there were enough investment opportunities in England.

  2. Posted by diemos

    ^ Diversification!

  3. Posted by ex SF-er

    this wipeout has been set in stone for some time now. This deal only made sense if they could boot the rent-controlled denizens, and they couldn’t.
    the deal was dumb from the get go, and only made sense in bubble-mania times.
    the larger issue of course is that the loan was more than 100% of value, even on origination. (this way the debtor could use the loan itself to make loan payments early on in the deal). This type of financing will face headwinds going forward, hampering future RE development.
    Tishman Speyer has a host of economic woes right now, this is just one of them. one of their office parks in SoCal is also going through foreclosure proceedings (this loan is secured only by the property as well)
    thus, Tishman’s books are technically ok. Except for the fact that they like many RE empires were built using a tremendous amount of debt. As they continue to default/foreclose it will make their future money raising efforts more difficult.
    “Let me get this right, you want to build an office tower in downtown San Francisco right now, and you want me to invest, but you’ve had x defaults totalling $y billion in the last 5 years?”

  4. Posted by FormerAptBroker

    ex SF-er wrote:
    > This deal only made sense if they could
    > boot the rent-controlled denizens, and
    > they couldn’t.
    They needed to boot the rent controlled tenants “and” have massive rent increases for “all” the units “and” get those high rents with “very little” capital improvement and renovation costs…
    P.S. I was surprised that the Wall Street Journal mentioned the Lembi family (and not other NY based with even bigger problems than the Lembis)…

  5. Posted by asiago

    I hope this will dislodge any remaining stigma or scruples still associated with walking from your home and handing the keys back to the bank: if the big guys can do it because it is a rational economic decision, why not everyday Joe?

  6. Posted by 45yo hipster

    The article also gave a shout out to the lembi’s plight. But I disagree with ex- sfer’s characterization. They all played it smart: they took big bubble risks with mostly others peoples money. Same with lembis. The principals primary personal assets should be shielded (maybe macklow is an exception here.) these are all business plays and you win some, you loose some. Same for the lending institutions and institutional investors who really took the big hit- wait about 2 years and they will be back into high risk ventures. As falls wichita, so falls Wichita falls.

  7. Posted by diemos

    “They all played it smart: they took big bubble risks with mostly others peoples money. Same with lembis.”
    Good for them, bad for people whose money they were playing with.
    “Heads I win, tail you lose” capitalism is a disaster for society because it breaks the link between risk and reward leads to rampant speculation (i.e. gambling) instead of investment.

  8. Posted by killbotkondo

    Amen Asiago. If it doesn’t make sense to keep paying your mortgage(s)and you are properly informed about the consequences, STOP PAYING THE BANKS. One caveat: Continue to pay your HOA dues. Delinquent property taxes are filed as a lien against the home itself but HOA dues are a personal lien, so you can’t get out of those until foreclosure is complete and you aren’t on title.

  9. Posted by 45yo hipster

    ^ oh diemos cry me a river! I don’t think the church of England or calpers are going out of business soon :)
    Big money goes around the world
    Big money underground
    Big money got a mighty voice
    Big money make no sound
    Big money pull a million strings
    Big money hold the prize
    Big money weave a mighty web
    Big money draw the flies
    Sometimes pushing people around
    Sometimes pulling out the rug
    Sometimes pushing all the buttons
    Sometimes pulling out the plug
    It’s the power and the glory
    It’s a war in paradise
    It’s a cinderella story
    On a tumble of the dice
    Big money goes around the world
    Big money take a cruise
    Big money leave a mighty wake
    Big money leave a bruise
    Big money make a million dreams
    Big money spin big deals
    Big money make a mighty head
    Big money spin big wheels
    Sometimes building ivory towers
    Sometimes knocking castles down
    Sometimes building you a stairway —
    Lock you underground
    It’s that old-time religion
    It’s the kingdom they would rule
    It’s the fool on television
    Getting paid to play the fool
    Big money goes around the world
    Big money give and take
    Big money done a power of good
    Big money make mistakes
    Big money got a heavy hand
    Big money take control
    Big money got a mean streak
    Big money got no soul…

  10. Posted by zzzzzzz

    No doubt CALPERS’losses on this will have to be made up by California taxpayers, as if the state’s budget problems weren’t already bad enough.

  11. Posted by Gil

    Any impact on Tishman SF project?

  12. Posted by huh?

    From what I understand this project was a stretch from the start. The annual cost of capital was 7.5% and the initial revenues from rents were 3.5%. The only way for this project to make sense was massive evictions and raising of rents, which was essentially the business model. Shockingly, things didn’t quite work out and they burned through all of the LP equity. Hard to believe the list of institutional investors that thought this disaster was a good idea. Were they getting their advice from specuvestors in Infinity’s Tower I, another Tishman disaster? :-)
    I also wonder when Calpers will roll out the dolt who thought it was a good idea to invest $500m in this project. And, will they tar and feather him/her before firing them?

  13. Posted by diemos

    “And, will they tar and feather him/her before firing them?”
    If they do that they will have to admit that they made a mistake, the dolt will be promoted.

  14. Posted by 45yo hipster

    ^ a pretty accurate description of the business model for that project. Stupid is right. The lembis were also following a similiar strategy. (not their fault banks and institutional investors were just as dumb.) Folks…I think a whole lotta peoples learned a whole lotta lessons!

  15. Posted by anon

    45YOH is somewhat correct, although the principals lost a pile of their own money on this disaster too. But the real chumps are those who bought rental properties with their own money in the last 5 years.

  16. Posted by huh?

    “If they do that they will have to admit that they made a mistake, the dolt will be promoted.”
    Diemos – Given my experience will Calpers, I hate to admit it, but you are probably right. That said, medieval corporal punishment (including public flogging) was custom designed for those nimrods even though it sadly won’t be enforced.

  17. Posted by wow

    As a side note: Blackrock is Tishman Speyer’s partner in the Stuyvesant deal. BLK bought the SF jewel iShares from Barclay’s last year. I don’t think there will be any impact from that business connection, but the relationship to an SF business is worth noting for such an SF-centric blog.

  18. Posted by corntrollio

    “From what I understand this project was a stretch from the start. The annual cost of capital was 7.5% and the initial revenues from rents were 3.5%.”
    This is/was a problem with so many projects that started during the boom and with so many companies that are/were dependent on debt financing. The cost of capital vs. return on equity calculation assumed all kinds of things that never were going to happen, and one of the worst assumptions was that cost of capital would go down or stay the same, or that one could avoid worrying about it because property values would continue to skyrocket.

  19. Posted by ahnold

    I am a little surprised that CALPERS would invest so much in a scam to evict so many tenants.

  20. Posted by ahnold

    I am a little surprised that CALPERS would invest so much in a scam to evict so many tenants. Not so surprised they were played.

  21. Posted by Brahma (incensed renter)

    I am a little surprised that CALPERS would invest so much in a scam to evict so many tenants.

    I’m not. You have to realize that a lot of this kind of thing depends more upon personalities, relationships and who scratches whose back and a lot less of the normal “due dilligence” that one is taught in business/finance classrooms. I wouldn’t be surprised at all if CalPERS announced in the next week that they had “no idea” that the deal hinged on lots of people getting evicted and rents jacked up to market rate. Of course, that doesn’t mean that they shouldn’t have known.

  22. Posted by EBGuy

    They all played it smart: they took big bubble risks with mostly others peoples money. Same with lembis.
    From what I can tell, personal guaranty agreements were signed by the Lembis on some of their properties. Not sure how they can survive, but obviously they rebuilt after the ’89 crash.

  23. Posted by anon

    Calpers wrote this off almost a year ago. Here is my favorite quote from the attached:
    http://latimesblogs.latimes.com/money_co/2010/01/money-cocalpers-loses-500-million-on-new-york-apartment-deal.html
    “CalPERS had originally projected that the $5.4-billion deal would net it a 13.5% return over seven years.” What a joke. Well -100% isn’t too far off from that absurd 13.5% (annual) projection.

  24. Posted by NoeValleyJim

    CalPers has been investing in real estate for a long time, so they made a lot of money in the boom times as well. Overall, they have made money, though the real estate section of their portfolio has underperformed.
    From their website:
    “.. The real estate portfolio’s 10-year net return was 4.4 percent”
    “CalPERS 20-year investment return remains steady at 7.75 percent – the assumed rate of return necessary to pay future member pension benefits.”
    That is a pretty good long term rate of return, and if they can keep it up the taxpayers are safe.
    The actually did axe a bunch of people, including the person in charge of the real estate portfolio.
    http://articles.latimes.com/2009/dec/09/business/la-fi-calpers9-2009dec09

  25. Posted by anonn

    Stuyvesant Town bought for 5.4B, now valued at 1.8B. Hypothetical guy bought a 1br condo South Beach SF for 800K, now valued at 675K. Apples. Oranges.

  26. Posted by jon

    The pages of real estate history are littered with these former “players”. Reichmann (Olympia and York), Bill Zeckendorff…..to name a couple. .No, not Lembis…they’re pishers
    They ride the bull market up and look like geniuses. But they don’t know enough to get off. It’s called a “round trip”.
    And then, we have the schmucks at Calpers. Smucks with earflaps.

  27. Posted by anonn

    Err, sperm whales to oranges?

  28. Posted by ex SF-er

    45yo hipster,
    although I do eventually expect to see a return to foolish lending, I don’t think it will be in a 2 year timeframe. a lot of these construction companies rely on other people’s money. the continuing fallout in CRE is making it harder and harder to get OPM for commercial real estate.
    thus, it will continue to be difficult for companies that rely on OPM to build.
    the financial system has largely avoided cleaning itself up, however there are a few lessons it has learned FOR NOW
    1) now is not a good time to invest in CRE
    2) now is not a good time to invest in non-federally backed residential real estate
    3) now is not a time to lend >100% on assets in general (unless federally backstopped)
    4) complex bank securities are toxic. don’t bid on them unless they are federall guaranteed.
    this will all change in time… but it’s going to be a while.
    high risk investments will surely be back soon, especially since the Fed is forcing the issue by dropping safe investments (treasuries, etc) to negative real rates.
    but the high risk investments will likely not go to RE, instead they will likely go to equities and commodities.

  29. Posted by Brahma (incensed renter)

    ex SF-er wrote:

    although I do eventually expect to see a return to foolish lending, I don’t think it will be in a 2 year timeframe. A lot of these construction companies rely on other people’s money. The continuing fallout in CRE is making it harder and harder to get OPM for commercial real estate.

    We all know where this story is going, don’t we? From the slightly more focused story in Crain’s New York Business:

    Tishman and BlackRock in November signaled the transaction was in trouble by transferring to CW Capital, a special servicer, the $3 billion mortgage that helped finance the purchase. Special servicers help owners and lenders salvage troubled investments.
    Now, CW Capital will work with the creditors to determine who will take over ownership of the complex.Government agencies Fannie Mae and Freddie Mac hold the largest part of the debt, approximately $2.1 billion.

    Emphasis added. As long as you can get some other sucker, like U.S. taxpayers, to take the debt off your books, you can continue the “foolish” lending and borrowing pretty much indefinitely.

  30. Posted by Brahma (incensed renter)

    Whoops, my bad. The above link wasn’t the correct one. This is the link to the news story I mentioned above from Crain’s New York Business.

  31. Posted by Kurt Brown

    @FormerAptBroker
    “They needed to boot the rent controlled tenants “and” have massive rent increases for “all” the units “and” get those high rents with “very little” capital improvement and renovation costs…”
    Small comment — I’ve visited Stuy Town a few times since TS took over, and they actually invested quite a bit in improving the place — landscaping, common areas, fancy daycare centers, elevator improvements. Things were a bit creaky at the end of the Met Life era, and even tho the business model was crap, TS does know how to manage properties and a classy way. I think the rent-stabilized tenants actually made out OK here. They got a spiffed up complex, no increases in rent, and they get to sit back and watch someone else lose big money. What’s not to love?
    As for the Lembi’s I think the Times was just giving an example of the nationwide nature of the problem, not trying to equate the dollar amounts.
    Oh, and I found out today that Sunset Scavenger removed the garbage bins from my Lembi-owned apt building today for failure to pay the bills. We’re taking bets on when the common area power gets shut off. Unlike Stuy Town, we didn’t get any improvements when our idiotic owners imploded. Boogers.

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