Affordable Housing Institute : US

 

[Continued from yesterday's Part 6.]

[Previous Stuy Town posts can be found here:

1, starting gun, 2, opening bets, 3, what's at stake

4, paging the cavalry, Part 5, must the public pay?]

In yesterday’s post we saw that for the time being, MetLife is the conductor and everyone is scrambling to keep up with MetLife’s tune. But the overture is not the climax, and there’s a lot of sturm und drang between opening and crescendo.

This entire process, being public, may be likened to a long complex unfolding movie or con game. In con scams, as one knows, the only thing that matters is who gives money to whom; you can deduce absolutely everything else by working backward from those defining events. Here MetLife is seeking to induce someone, anyone to give it a very large sum of money — and it is doing so within the public eye, where every move is visible and the moves come slowly.

Everybody ponders a long time over each step

We need, therefore, to understand MetLife’s probable strategy, and in the opening, the major element is posturing.

You see, no one is rewarded for being nice at the start and cruel at the finish. Far better to present oneself, at least initially, as fearsome and utterly ruthless:

Thus so far, if I were advising Met Life solely to maximize net proceeds, I would start by trying:

1. To anchor the marketplace at a big number — like $5 billion.
2. To create a climate in which everyone accepts the inevitability of change.
3. To put the public sector on the defensive by making them fearful of the offstage market buyers.

Not unlike what MetLife’s done so far, is it?

I am fearsome, fear my evictions!

For MetLife, there are two key questions:

The two unanswered questions

1. How close to market price can the affordability-oriented buyers come?

2. How painful will it be for MetLife to sell to a market converter?

First step, therefore, is pump up the market price. Hence the advertising, the thick brochure, and so on.

But we also discovered that MetLife is offering to sell and take back paper, in the form of a continuing equity ownership interest. That’s a striking flinch — what seller offers to take anything other than cash?

What could possibly motivate them to do that?

Maybe they want to please a former mayor?

There are two reasons, one financial, one political:

· Financial. The seller knows that the property’s current NOI, suppressed as it is by judicial rent control, will not support anything like the $5 billion anchoring price MetLife cleverly leaked into the public arena. So MetLife is suggesting to buyers, “Hey, raise as much of that cheap global capital as you possibly can, and pay all of it over to us, and then you can have control of the property and we’ll take a retained interest while you convert.”

Would you buy a used property from this man?

· Political. “Gee, we’d really rather somebody other than ‘the world’s largest insurance company,’ as those darn newspapers keep calling us, take all the political heat for boosting the NOI to pay us.”

Translation: “We’d like to rent a heavy.”

Take two, they’re large

After all, somebody’s got to be the bad guy in this morality tale:

The pending sale of this leafy enclave [Aww, isn't that nice? — Ed.] for generations of teachers, graphic artists, police officers and Con Edison workers has also become a lightning rod for public anger over skyrocketing housing prices in recent years, which have put Manhattan apartments outside the grasp of so many middle-class New Yorkers.

Thinking of selling Stuy Town? Be prepared!

In auditioning for its punching bag, MetLife will be looking for several criteria, so the first round of discussions is much more like a beauty contest:

The company plans to review the bids and ask a smaller group to make a second, non-contingent offer by Oct. 15.

Unfortunately, not even a $10 prize for coming in second

What will MetLife be examining in between its rounds?

1. Price. This will likely be the only number on which the media will focus, but it’s only part of the story, because the next is terms.

2. Terms. As my alumnus client Arthur Winn likes to say, “price and terms: you can choose the price if I can choose the terms.” Prices that are not cash, or are deferred-payment, or have formula earnouts, are all worth less than their face amount.

3. Contingencies. Many offers will be ’subject to’ conditions, approvals, financing raised, due diligence, or otherwise. Indeed, I’ll be shocked if any of the offers are uncontingent. Most will have at least a dozen substantive ones.

4. Closing credibility. Putting this property up for sale places MetLife in the public pillory. Naturally the company wants to be there only once.

5. Closing speed. Same reasoning: “if it were done when ’tis done, then ’twere well done quickly.”

It’s just a matter of execution, my dear

MetLife thus has a multivariate problem — it values many different things that are not readily convertible one into another. It thus wants to review each proposal (at this stage, a much better term than ‘bid’) to see who’s most likely to consummate:

Is this a subject-to I see before me?

Meanwhile, there’s a huge actor lurking in the weeds. Government is waiting, waiting. There’s no point in excoriating the transaction until a buyer comes forward. Instead, government is undoubtedly working behind the scenes to help create the white knight:

Couldn’t you hurry up, sir?

The tenants association at Peter Cooper and Stuyvesant Town is also putting together a bid of more than $4 billion based on a plan that involves selling some apartments at market and below-market rates, while preserving about 20% of the units as rentals affordable to middle-income families.

Observe the enormous psychological gains MetLife has already made.

Even the tenants association now understands that:

· The income mix will change.

· The tenure will change — some flats will be sold.

· Affordability will be reduced.

· All this will cost money.

· They need the seller’s goodwill.

This last point is especially relevant in this waiting period. By allowing the residents to propose, MetLife temporarily muzzles them. Why picket or rush to the barricades if there’s still the chance MetLife will pick them?

You know, if I could just keep studying the issue, nobody’d go away mad

So far, MetLife has done a superb job of anchoring the marketplace.

But the offer is dependent on MetLife’s willingness to accept less money from the tenants if bids escalate to $5 billion and beyond.

Please sir, we tenants ask you to take a bit less.

Well, yes, but the other thing lurking in the shadows is the ability of elected officials and others to create downside to the pure-market alternative. All that powder is being marshaled and kept dry.

“I hope the tenants are able to swing this,” said Sonny Fink, a Peter Cooper tenant for 45 years. “We want to buy this thing. It looks very good, if they give us any kind of break at all.”

If I were advising MetLife solely to maximize MetLife’s net proceeds, I would weigh very carefully the potential gain from a pure economic transaction — if you can consummate it in the face of what is going to be a spectacularly public assault (more about this in future blog posts) — versus the good-guy scenario.

As which would you rather people see you?

Classical negotiation theory suggests that the Forces of Affordability must at some point try to create and magnify MetLife’s downside. They have many ways of doing this (which we’ll cover in future posts, never fear), but as of right now, they have deployed none of them — because it’s premature to do so. (Again, we’ll talk about why in future blog posts.)

For now, MetLife is running in open space. And if I were MetLife, under no circumstances would I flinch (yet) from a strategy of pressing forward with the goal of pushing up the market offers.

Come on, boys, get those prices up!

That means stretching the buyers:

[Buying Stuyvesant Town] is a long-term strategy with a small return in the early years, given a high purchase price, bidders say.

It also means that whoever wins the bid will be seeking to boost effective gross income (EGI) as quickly as possible, and that means tackling the rent-controlled residents:

Today, about 27% of the 11,232 [Times had the wrong count; this is the correct figure, Ed.] apartments rent at market rates.

In other words, 8,200 registered voter households benefit from rent regulation.

Line up and vote against MetLife

The sale documents anticipate that 600 more units will be decontrolled next year and 1,000 more in 2008.

Buyers will seek to boost, and the biggest accelerator to do that is pushing apartments out of rent control, which the New York law does allow:

[Continued tomorrow in Part 8.]

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