Other People's Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever M ade

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9780142180716: Other People's Money: Inside the Housing Crisis and the Demise of the Greatest Real Estate Deal Ever M ade

A veteran New York Times reporter dissects the most spectacular failure in real estate history

Real estate giant Tishman Speyer and its partner, BlackRock, lost billions of dollars when their much-vaunted purchase of Stuyvesant Town–Peter Cooper Village in New York City failed to deliver the expected profits. But how did Tishman Speyer walk away from the deal unscathed, while others took the financial hit—and MetLife scored a $3 billion profit?
 

 

Illuminating the world of big real estate the way Too Big to Fail did for banks, Other People’s Money is a riveting account of politics, high finance, and the hubris that ultimately led to the nationwide real estate meltdown.

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About the Author:

Charles V. Bagli is a New York Times reporter who covers the intersection of politics and real estate. He has written about the sale of high-profile buildings, political contributions of the real estate industry, the battle to build a two-billion-dollar stadium for the Jets, bid rigging in the construction industry, payoffs at the tax assessor's office, and a Sutton Place co-op that turned public land into a private park. He has worked for the New York Observer, the Daily Record of Morristown, New Jersey, the Tampa Tribune and the Brooklyn Phoenix. He lives with his wife in New Jersey. They have two daughters.

Excerpt. © Reprinted by permission. All rights reserved.:

Introduction
  The Poster Child of the Real Estate Bubble

October 16, 2006, 5:01 P.M.

Rob Speyer had spent hours pacing the small conference room near his office on the seventh floor of 50 Rockefeller Plaza, trading locker-room jibes and stories about real estate deals with Paul A. Galiano and Fred Lieblich, when the telephone finally rang.

Speyer, a thirty- seven-year-old with a marathoner’s lanky build; sandy, close-cropped hair; and a machine-gun laugh, was the heir apparent to Tishman Speyer Properties, an international real estate company that operated on four continents and controlled some of New York City’s most enduring icons, from Rockefeller Center to the Chrysler Building. For ten weeks, he and his colleagues had labored over a bid for a property whose size was almost unimaginable in densely packed Manhattan: Stuyvesant Town-Peter Cooper Village, a complex of 110 buildings with 11,232 apartments spread across 80 contiguous acres south of midtown, overlooking the East River.

Galiano, at forty-one years old, was Tishman Speyer’s intensely focused co-chief of acquisitions. Lieblich was president of BlackRock Realty Advisors, forty-five years old and a partner in the prospective deal. They had formed a friendship with Speyer as they read the financial history of the rental complex and engineering assessments supplied by the seller, Metropolitan Life Insurance, or as it is known today, MetLife. By noon that day, they submitted their offer. They were up against an international who’s who of real estate and finance that had gathered in New York for what promised to be the biggest real estate deal in history. Aside from New York’s real estate royalty, like the Durst, Rudin and LeFrak families, there was the emir of Qatar; the Rothschilds and the Safras; the mysterious billionaire investor Simon Glick; the irascible Steve Roth of Vornado Realty Trust; Stephen Ross, a builder active in New York, Florida, Las Vegas and Los Angeles; the government of Singapore; and the Church of England, not to mention the many pension funds and private equity firms that had raised tens of billions of dollars to invest in real estate and other assets. Nearly a dozen rival bidders from around the globe were gathered in similar rooms high above Manhattan waiting to learn whether their multibillion-dollar offers had won the day and if they would spend the night negotiating contractual details of what would be the largest transaction in American real estate history.

The stark white walls of the Tishman Speyer conference room yielded nothing as the hours ticked by. One minute Speyer exuded the cocky confidence of a tycoon who prowled the world making deals, the next he wondered what might have gone wrong as a dark cloud of self-doubt descended over the conversation.

They had spent the afternoon of October 16, 2006, talking about anything but the call they desperately hoped would come. Adrian Fenty, who was running for mayor in Washington, DC, where the Speyers owned more than two dozen office buildings, popped into the room for a minute to say hello. He asked what was going on. Speyer explained it was “a fairly momentous day”; they were waiting to see who had won the bidding war. “I just came from Apollo’s office,” Fenty said with a chuckle, referring to Apollo Real Estate Advisors, Speyer’s primary rival for the property. “They told me the same thing.”

Then with the evening shadows gathering over Fifth Avenue, the phone rang a second and third time. Speyer snatched up the receiver and heard the voice of Darcy A. Stacom, the real estate broker conducting the multibillion-dollar auction of Stuyvesant Town-Peter Cooper Village.

Stacom, who was forty-six years old and a rare woman in the testosterone-fueled world of high- stakes real estate deals, quickly got to the point: “C’mon down to Two Hundred Park, now.” But she warned, “Don’t bring your whole team together. Come in ones and twos in case any reporters have staked out the lobby of the building.” Two Hundred Park housed MetLife’s law firm, Greenberg Traurig, and at the top, MetLife’s ornate, old-world boardroom.

Stacom had not offered him congratulations, but Speyer knew what the call meant: If they could get through what promised to be hours of arguing over the final terms of the contract, Stuyvesant Town-Peter Cooper was his. He let out a yell as he put the phone down, almost simultaneously pumping his fist and hugging Galiano. Speyer turned and embraced Lieblich, who headed the real estate arm for one of the world’s largest investment management firms for pension funds, institutions and high- net- wealth individuals.

Speyer and Galiano took the elevator to the ground floor and marched out the Fifth Avenue doors of the building, past the fifteen-foot bronze statue of a heavily muscled Atlas carrying the world on his shoulders. Speyer was under his own mythic strain and would remember little of the eight-block walk downtown.

Although not nearly as glamorous as Rockefeller Center, Stuyvesant Town held a pride of place in the minds of many New Yorkers. Stuyvesant Town, and its sister complex Peter Cooper Village, was unlike the real estate properties that seemed to trade like pork bellies on a daily basis in cities from Atlanta to Los Angeles, Boston to Dallas and Seattle during what was now a five-year-old real estate boom like no other in its intensity. Stuyvesant Town-Peter Cooper Village covered eighteen blocks of some of the most valuable real estate in the world.

The two complexes, which were erected by Metropolitan Life in what was once known as the Gas House District, were an urban version of Levittown, an inspiration for housing in the 1950s and 1960s that broke up the street grid rather than conformed to it, while keeping city life affordable to the middle class.

In the 1960s, Stuyvesant Town begat LeFrak City, a complex of ten eighteen-story buildings on forty acres in Corona, Queens, and Co-op City, a sprawling complex of 15,372 units in 35 high- rise towers and seven clusters of town houses spread across 320 acres in the Baychester section of the Bronx. Architecturally it was a failure. The red brick buildings were uniformly plain and looked more like the low-income housing projects nearby, the Jacob Riis, Lillian Wald and Alfred E. Smith Houses. But the buildings occupied neatly landscaped real estate on the East Side. In 2006, there were not eighty, or even twenty, contiguous acres available anywhere else on the thirteen-mile-long island of Manhattan, no matter what the price.

And Stuyvesant Town-Peter Cooper Village, despite its blandness, had been a safe, leafy oasis for thousands of middle-class firefighters, nurses, union construction workers, civil servants, writers, police officers, secretaries and even a few judges for nearly sixty years. For many New Yorkers, the complex had become a cherished landmark akin to the Empire State Building, the Statue of Liberty and Rockefeller Center. Early in their careers, Mayor John V. Lindsay, sportscaster Howard Cosell, reporter Gabe Pressman and presidential adviser David Axelrod had made their homes there. So had author Frank McCourt, mystery writer Mary Higgins Clark, actor Paul Reiser, operatic soprano Beverly Sills and Knicks basketball star Dick Barnett.

In 2006, hundreds of original tenants, many of whom had moved to Stuyvesant Town when it opened in 1947, were still living there. Thousands more had grown up in those twelve-and thirteen- story buildings and were now raising their own families in Stuyvesant Town-Peter Cooper Village.

“It’s one of the most unique assets in the city,” said Lieblich, who had himself lived in Stuyvesant Town when he was a MetLife executive in the 1990s. “A lot of people know of it. There’s a lot of fond memories.”

As Rob Speyer entered 200 Park Avenue, a fifty-eight-story skyscraper looming over Grand Central Terminal that had once been known as the Pan Am Building, he paused, noticing a handmade sign Scotch-taped to a storefront window promoting a sale. Tishman Speyer had bought the tower from MetLife eighteen months earlier for $1.72 billion, the highest price ever paid for an office building. The makeshift placard was just the kind of seedy thing that he had been trying to eliminate since taking control of the property. Shake it off, Rob said to himself, focus on the task at hand. He was up against eight other buyers who, in preparation for a bidding war, had collectively lined up a staggering $50 billion from money center banks, insurance companies, pension funds and private investors.

Every day seemed to bring another record real estate deal somewhere in the country and the prospect of windfall profits. The December 2004 sale of the 110-story Sears Tower in Chicago for $835 million had set a local record, despite the building’s sizable vacancy. Maguire Properties, a publicly traded real estate investment trust, paid $1.5 billion for 10 office buildings in the Los Angeles area, thereby doubling the size of its portfolio and solidifying its position as the top landlord for first-class office space in Southern California. In the biggest retail deal of 2005, a joint venture of Regency Centers Corporation and Macquarie CountryWide Trust paid $2.7 billion for 101 shopping centers in 17 states and the District of Columbia.

Buyers jostled in line for bulk purchases of hotels, shopping malls, casinos, office buildings, apartment complexes and raw land. Prices accelerated far faster than rents, even as profit margins got thinner. Expectations were that prices would climb still higher. It was as if the markets had broken loose from their tether to the boom-and-bust nature of capitalism. At least that is the way the lenders acted, as well as the rating agencies whose job it was to judge the viability of the financial architecture underpinning the deals. And nowhere was the real estate market as hot as it was in New York.

That summer, Beacon Capital Partners, in partnership with Lehman Brothers, outbid thirty rivals when it paid $1.52 billion for 1211 Avenue of the Americas, a thirty-three-year-old, forty-four-story office tower whose prime tenant was News Corporation, the mass media conglomerate headed by Rupert Murdoch. At $800 per square foot, analysts expected Beacon to lose money, at least in the short term, because the mortgage payments were likely to exceed cash flow from the building. But Beacon, like many investors, was supremely optimistic about the future and it was determined not to lose out again. Previously, Beacon had been an also- ran in the bidding for twenty-three-story 522 Fifth Avenue, at Forty-Third Street, a prize captured by Broadway Partners with a bid of $420 million.

Speyer and Galiano settled into a small fifteenth-floor conference room off the main reception area at Greenberg Traurig, soon to be joined by Tishman Speyer’s lawyer, Jonathan L. Mechanic, and two associates. Stacom, whose blond hair floated halfway down her back and who had a fondness for dangling costume jewelry and Technicolor clothing, was already present with her partner William M. Shanahan, the numbers specialist for the duo. In a conference room down the hall sat Robert R. Merck, a senior managing director and chief of MetLife’s real estate investment unit; David V. Politano, who oversaw MetLife’s real estate investments in the Northeast; and their coterie of lawyers. The insurer was selling the sister complexes as a single real estate asset.

Much of the contract had been marked up and completed in the course of the bidding, but now the lawyers would take over, hammering out language that would cover every possible contingency. The shuttling between the two rooms went on through the night, as lawyers for Tishman Speyer and MetLife inserted clauses to protect their clients against any possible trouble.

In between, Speyer, Lieblich, Galiano and other executives in the conference room debated the latest revisions. During the prolonged interludes, they played poker, five-card draw. One of the young associates from Mechanic’s law firm cleaned up, even as the others teased him about how his skinny black suit and tie made him look like a member of the late-1970s New Wave group Devo.

Finally, at about nine thirty in the morning on October 17, they finished. Speyer had a $400 million nonrefundable deposit wired to MetLife for the biggest real estate deal of all time. He and his partners agreed to pay an astounding $5.4 billion—$70 million more than the number two bidder—for a single asset.

But that was not the total price tag. When all the acquisition costs were tallied, the sum would total $6.3 billion. Ultimately, the money would come from banks, foreign and domestic pension funds, a foreign government and the Church of England. A tiny fraction of the money would come out of the well-lined pockets of Tishman Speyer or BlackRock. Both firms traditionally bought property with what is known in the business as OPM (other people’s money). They largely made their money on fees—asset fees, management fees, partnership fees, construction fees—while putting up only a sliver of equity, if that. Of course, no pension fund or wealthy family would invest with Tishman Speyer or BlackRock simply for the privilege of paying fees if the firms did not consistently generate annual returns on the order of 20 percent. Of the total cost of $6.3 billion, Tishman Speyer put up only $56 million of the firm’s own money, less than 1 percent of the winning bid, with another $56 million coming from their longtime partner, the Crown family of Chicago.

The deal immediately created a media storm of headlines around the world, generating editorial comment from the Agence France-Presse, the International Herald Tribune, National Public Radio and Bill Maher at HBO.

The New York Post put it succinctly: “$5.4 Bil Stuy Town Deal Shatters Record.” Rob told the tabloid that “the opportunity to buy 11,000 units in Manhattan is what you live for.”

Elated but tired, Rob called his father, the real estate magnate Jerry I. Speyer, to deliver the news in a voice scratchy with fatigue. The elder Speyer congratulated him, heaping praise on a son who had forsaken a career in journalism to join his empire a decade earlier. Now his son was debuting on a very public stage.

“It’s a dream come true,” confided the elder Speyer, whose powerful reach extended from his company to the Federal Reserve Bank of New York, the Council on Foreign Relations, the Museum of Modern Art and the New York Yankees. He helped Michael R. Bloomberg successfully clear the legal and political hurdles to run for a third term as mayor in 2009 and both he and his son were close to Andrew Cuomo, who would become governor in 2010. “I expect he’ll be far more successful than I was,” Jerry Speyer said of his son. “He has great vision, wonderful people skills, and above all, he loves what he does.”

The two men quickly divided up a list of courtesy calls, with Jerry taking Mayor Michael R. Bloomberg and Rob reaching out to Daniel R. Garodnick, a lifelong resident of Stuyvesant Town-Peter Cooper Village and a newly elected city councilman. Rob assured Garodnick, “There will be no dramatic shifts in the community’s makeup, character or charm.”

But Garodnick did not greet the news with the same breathless enthusiasm as the New York Post, Wall Street, city hall and the Speyers’ fellow private equity moguls, who never seemed to want for cash for the next deal. Sure, MetLife would make $3 billion after taxes, fourth-quarter profits would soar and its stock would hit a fifty-two-week high. Mayor Bloomberg would endorse the Speyers’ takeover and Robert White, founder of Real Capital A...

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