Book review: Charles Bagli’s “Other People’s Money”
In the years since the financial crisis, a bookcase full of writers have taken a crack at telling the story of the boom and bust — each one turning a cast of bankers, analysts and government officials into their own heroes, villains and Cassandras.
In “Other People’s Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever Made,” author Charles Bagli examines the collapse through the lens of a single transaction: the much-ballyhooed acquisition and subsequent loss of Manhattan’s Stuyvesant Town–Peter Cooper Village.
At the height of the market, developer Tishman Speyer and the asset manager BlackRock paid an unprecedented $5.4 billion for the 80-acre residential rental complex — the largest real estate deal in U.S. history. A mere three years later, they turned the property over to lenders, losing hundreds of millions of dollars for their investors.
But in this nuanced and exhaustive retelling, published last month, Bagli makes the case that the failed deal wasn’t merely a victim of the downturn, but was an over-leveraged gamble based on flawed financial forecasts.
“The catastrophic failure was not simply a matter of bad timing,” Bagli writes. “The reality is that nearly every single assumption in their business plan for Stuyvesant Town–Peter Cooper Village was wrong, dead wrong.”
While “Other People’s Money” isn’t exactly a page-turner, it offers a compelling look at how, during the boom, a Wall Street mentality seized even the unsexy world of affordable housing. Investors took on the same kind of risk acquiring rent-stabilized apartments as they did buying into esoteric financial instruments.
As a reporter with the New York Times, Bagli has been covering Stuy Town since its former owner, the insurance giant MetLife, put the 11,000-unit complex on the market in 2006. MetLife built Stuy Town in the late 1940s, urged on by Mayor Fiorello La Guardia, who provided the company with free city land and a 25-year tax abatement.
When the company went public in 2000, however, it began selling off many of its real estate holdings.
Following a cutthroat “beauty contest” — in which every broker who was anyone pitched MetLife to become the complex’s exclusive sales agent — MetLife hired Darcy Stacom of CBRE Group to market the sprawling property.
“Stacom, bidders said, was very effective at leaving each bidder with the impression that she was telling them, and them alone, some vital piece of information that would help them gauge the unfolding battle,” Bagli writes.
Bagli studs his account with these behind-the-scenes details. For example, Eastdil Secured’s Doug Harmon is “a street dragster of a real estate executive.” Richard LeFrak, who considered a bid, scoped out Stuy Town’s boilers. Rob Speyer, the co-CEO of Tishman Speyer, looks dapper in a suit and has a “machine-gun laugh.”
As it turned out, Speyer won the bidding war, topping his nearest rival — a partnership of Apollo Real Estate Advisors (now known as AREA Property Partners), ING Clarion and the Dermot Company — by $70 million.
To fund the deal, Tishman Speyer and BlackRock took on a $3 billion interest-only mortgage plus another $1.4 billion in loans; they drummed up an additional nearly $2 billion from pension funds, foreign governments and other sources.
The final cost of the deal was $6.3 billion, but Tishman Speyer invested only $56 million of its own money.
The developer’s profit-making strategy involved a plan to aggressively raise rents — both by deregulating the 72 percent of the complex’s units that were rent-stabilized, and by renovating apartments and introducing building amenities to woo a younger, more affluent clientele.
In short, Speyer wanted to turn this “urban version of Levittown” into a “yuppie haven,” Bagli writes.
But from the start, the projections were wildly optimistic. When the deal closed, the complex’s annual rental income didn’t even cover the cost of debt service. And tenants distrusted Tishman Speyer, the only bidder that did not meet with their representatives before submitting an offer.
“It got to the point where anything that Tishman Speyer did at Stuyvesant Town was seen as a threat,” Bagli writes. “Including the gardening.”
Once Tishman Speyer had control, the firm failed to generate as much rental income as predicted, according to Bagli, and by January 2009, the reserve funds ran out.
A few months later, an appeals court ruled in favor of a group of tenants who had sued in 2007, claiming the owners had illegally deregulated about 4,400 units while taking J-51 tax benefits.
When Speyer heard about the decision, he had a succinct response: “Shiiitttt!”
The ruling, upheld by New York State’s highest court that fall, meant that Tishman Speyer could have been on the hook for as much as $200 million in rent overcharges.
The case was officially settled last month, but shortly after that decision, Tishman Speyer relinquished the complex to lenders, walking away from the soured deal.
CWCapital Asset Management, a special servicer, officially took control in October 2010.
Certainly, the court decision and a rental market weakened by the housing collapse hurt the buyers’ chances of profiting off Stuy Town. But, Bagli argues, the acquisition “required a financial leap of faith and a total disregard for worst-case scenarios by buyers, lenders and investors.”
And, like the Wall Street CEOs who pocketed bonuses while their firms floundered, Tishman Speyer left Stuy Town with nary a financial scratch. Ultimately, it was the pension funds and foreign governments that lost it all.
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