Revenge of the New York Renters

The sale of the New York City's massive 1940s-era subsidized middle-class housing developments, Peter Cooper Village and Stuyvesant Town, set a record in 2006. Insurer Metropolitan Life sold the properties to a partnership that included Blackrock, developer Tischman Speyer, and MetLife for $5.4 billion. It was the largest single-property deal ever, but it was justified by rising real estate prices and a belief that the rent-controlled apartments could be converted into market-rate dwellings.

Now the deal is in jeopardy, and the partnership faces a risk of default. The era of rising property values is over, at least for now, cutting into the property's value. And on Wednesday, the partnership suffered a huge blow in the New York Court of Appeals, which refused to overturn a lower court ruling that said the landlord improperly raised rates on 4,000 apartments because it was receiving $25 billion in tax abatements at the time. The New York Times reported today in a piece by Charles V. Bagli that "the partnership is running out of cash to pay building loans and could default within the next several months."

The ruling means that the developer may be forced to pay $200 million in rent givebacks and penalties. But after accounting for the depressed value of the property, the partnership could lose $3 billion. Frontview Advisors told Bloomberg in September that without deregulation, the property is worth about $2.13 billion. Under the $2.13 billion valuation, Tishman owes more to bondholders than the apartment complex is worth, according to Bloomberg. Investors in an additional $1.4 billion mezzanine loan borrowed to finance the deal are “wiped out,” the news service said.

The ruling is a huge win for tenants, who brought the suit. It also could benefit tenants from around the city. The Times reports that as many as 80,000 rental units around the city could be affected by the ruling.

Stuy Town and Peter Cooper Village, where a three-bedroom apartment can cost $3,700 a month, is hardly cheap. But that is much less than what the owners hoped to charge for for the spacious apartments with parquet floors.

The court, in a 4-2 ruling, said that the developers can still hope for legislative relief to stave off financial crisis. But getting New York lawmakers to side against tenants in this case sounds like a joke. The lawmakers would very possibly find themselves strung up in effigy.

Of course, who know what the bondholders may do if the legislature doesn't intervene.