Developer in Distress: Tishman loses $3 billion in NYC

Tishman Speyer, the New York real estate company that owns the Chrysler Building and Rockefeller Center, struck what must have appeared to be a clever deal back in 2006. Why not venture downtown, and a bit down market, and buy Peter Cooper Village and Stuyvesant Town, the massive middle-income housing developments that sit on 80-acres of land in the Gramercy section of Manhattan?

It was the height of the real estate boom, and cash was referred to dismissively as "a commodity." So Tishman casually made U.S. history by making the largest single-property deal and agreeing to pay $5.4 billion for the site, which includes 110 buildings and more than 11,000 apartments.

Yes, the price was a bit aggressive. But the assumption was that the value would soar once rents at the site were deregulated and rose to market value. Some team of MBAs doubtless ran the numbers and concluded that there was value to be unlocked.

Tishman Speyer analysis failed to fully account for one risk factor, though. That turned out to be the tenants of the complex, which was erected in the 1940s and where the feint scent of brisket still can be detected in the hallways and elevators.

The Peter Cooper-Peter Stuyvesant demographic is a holdover from pre-hedge fund era New York, home to bus drivers, school teachers, and the occasional blue-haired old lady with misapplied lipstick who emerges from the local D'Agostino's grocery at 3 in the afternoon, laden with shopping bags. Of course, it also includes more than one or two sharp lawyers who hung onto the rent regulated apartments they snapped up in the lean years of the their mid-20s.

For most of its life, apartments in the sprawling complex were a value, which in Manhattan effectively qualifies as less than $2,000. These days, Peter Cooper and Stuy Town are hardly low income housing. A three bedroom apartment costs about $3,700 a month, which is enough to fund a McMansion in many parts of the country.

The tenants sued Tishman Speyer, arguing that the company erred when it tried to deregulate and raise rents on up to 25 percent of the units, according to Bloomberg. A lower court agreed, and now Tishman is imploring the Court of Appeals to reverse the ruling. If the appeal fails, Tishman could lose $3 billion, Bloomberg said, citing FrontView Advisors LLC. FrontView told Bloomberg that without deregulation, the property is worth about $2.13 billion. The tenants argued that Tishman and the previous owner, MetLife, shouldn't have raised rents because they continued to collect $25 million in tax abatements, Bloomberg reported. If the lower court ruling stands, Tishman could also be forced to reimburse tenants for any improper rent increases. Default is a worry.

For now, the only thing saving Tishman Speyer from the pitch fork brigade is that Peter Cooper-Stuy Town is in Manhattan, and who really needs a pitch fork in New York City?