Affordable Housing Institute : US

[Previous Stuy Town posts can be found here:

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

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

6, orchestra warms up, 7, unpublished score, 8, hidden free riders.]

A couple of weeks back, MetLife adhered to its self-imposed sprint schedule and announced a winning bidder for Stuyvesant Town/ Peter Cooper Village, as reported by the New York Times:

It always rains when a property goes under sales agreement

October 18, 2006

$5.4 Billion Bid Wins Complexes in New York Deal

By CHARLES V. BAGLI

Jerry I. Speyer, who controls some of the city’s most prominent landmarks, from Rockefeller Center to the Chrysler Building, yesterday signed the largest American real estate deal ever, agreeing to pay $5.4 billion for Stuyvesant Town and Peter Cooper Village, a vast corridor of 110 apartment buildings along the East River.

There’s a reason we use ’signed, sealed, and delivered’ as shorthand for completed:

“Signed, sealed, delivered, I’m yours.”

Title transfers when it is delivered, and the execution has been affixed with the corporate seal. Signing is just the first step: no money irrevocably changes hands.

Mr. Speyer, the chief executive of Tishman Speyer Properties, and his partner, the BlackRock investment bank, outmaneuvered more than a half-dozen other bidders, including a group aligned with tenants who had hoped to preserve the two adjoining complexes on First Avenue between 14th and 23rd Streets as enclaves of middle-class housing.

‘Outmaneuvered’ is a curious word. Mr. Speyer, simply put, outbid the others. Maneuvering had nothing to do with it … yet.

Step right up and buy a property!

The maneuvering begins now.

With rents and housing prices soaring in recent years, the pending sale turned the issue of affordable housing into a cause celebre among New York politicians –

Not all of them, including the most important man in the story:

But Mayor Michael R. Bloomberg stayed on the sidelines,

Mayor Bloomberg’s neutrality, however understandable, is for the residents the dog that didn’t bark in the night.

and MetLife was intent on selling for the highest possible price.

How scurrilous of them, to want the highest price.

At $4.5 billion, the tenant offer lagged behind bids from some of the biggest names in real estate, from Apollo Real Estate Advisors in a joint offer with the Dermot Company, to the Related Companies with Lehman Brothers; the Millstein brothers; and Vornado Realty Trust.

Stop right there; the game is not over. Indeed, more likely, it’s just beginning.

1. Not sale but agreement to agree to sell. The announcement is not of a sale but of an agreement to sell. In fact, it may be less than that.

This could be Letter of Intent (LOI) or purchase and sale agreement (P&S) — most likely an LOI. Drafting the P&S will now take some time, probably measured in weeks (and several hundred thousand dollars’ worth of legal time and overtime).

Man, those meters run fast

Even with the P&S signed, then starts due diligence — the comprehensive examination and inspection of anything and everything known or knowable to the seller.

As we follow a story that I continue to believe will take eighteen months to play out, we need to recognize how the leverage shifts as between seller and buyer.

In due diligence, a normal buyer tries to squeeze the price down (”Oh my God, we’ve discovered X, and fixing it will cost $Y, therefore your price must be lower”).

I’m shocked, shocked, to find undisclosed environmental conditions

Sellers brace for this, because there’s very little they can do about it.

A typical Letter Of Intent is thus not a sale, but rather, “an agreement to agree if we agree that we have agreed.” Why then would MetLife sign one? Because nobody will spend the due diligence substantial sums without the LOI.

MetLife’s leverage was at its absolute apex on October 14, and as of that instant Tishman’s was nil. Now, with Tishman anointed and MetLife publicly engaged, the leverage will steadily seep away from MetLife and toward Tishman:

I anoint thee my well-beloved buyer, in whose bid I am well pleased

As each day passes, the seller’s emotional and political moving sidewalk keeps sliding, and the more time that passes, the harder it will be for the seller to cancel this particular sale and reopen the auction. (After all, if the condition uncovered is a factual one, and Tishman finds it, everyone else will find the same condition as well.)

2. Co-opting the tenants by co-op’ing the building? Equity is expensive; high-risk equity is very expensive. Any buyer worth its salt will try, therefore, to reduce (a) the amount of equity it actually puts out at closing, and (b) the length of time that equity is out.

How might it do this? Quite straightforwardly, by selling as many of the apartments as it can the day it buys the property. The buyer is likely to develop some plan to convert some buildings to condo’s co-ops’ immediately (or very quickly) so as to reduce its equity investment. The equity is the expensive money.

To that end, the buyer may open a sub rosa communications channel with the residents, in hopes of buying their acquiescence with its offer to sell them some apartments as-is cheap. (In fact, if that channel hasn’t already opened, I’d be very surprised. Indeed, there were probably discreet and deniable overtures even during the bidding process.)

Sing along with me?

The likelihood of back-channel discussions makes public statements like these much more comprehensible:

An elated Mr. Speyer appeared well aware of the complexes’ place in the city’s culture and the political sensitivity of the sale.

“As a business with deep roots in New York City, we have a sincere appreciation for these cherished neighborhoods, and we are honored to become stewards of the property,” Mr. Speyer said. “We are committed to working closely with residents, elected officials and community leaders to ensure a dynamic and vibrant future for this New York community.”

Very shrewd tone, well done.

Translation: Hey, fellows, if you play ball with us, we might sell you your flats cheap.

“What the owners really meant to say was …”

His son, Rob Speyer, a senior managing director at Tishman Speyer, also tried to reassure tenants, emphasizing, “There will be no sudden or dramatic shifts in the community’s makeup, character or charm.”

Translation: Since the law is ironclad, we lose nothing by pledging to respect it.

Further, offering residents the chance to buy their flats (in a manner not entirely dissimilar to the UK’s right-to-buy, albeit at bigger prices) is a way to kill a wench with kindness, driving a wedge between different resident groups. Indeed, a shrewd buyer would try to offer a deal that saps a lot of resident cohesiveness by giving a big fraction of the residents a chance to buy by signing agreements before the closing that become effective only if the deal goes through.

But he would not commit to preserving a large block of apartments as affordable housing, which the tenant group had sought.

There’s no reason to commit now; you trade it for something.

It’s only a good trade if I get something for my concession

3. What about the preservation brigade? They’re off to a bad start.

[Continued in Part 10.]

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