On October 17, 2006, Tishman Speyer Properties and partner BlackRock Investment Bank signed the largest American real estate deal to date, agreeing to pay $5.4 billion for Stuyvesant Town and Peter Cooper Village, an immense complex of 110 apartment buildings with a total of 11,232 units, on 40 acres of land, along the East River. With the help of tax breaks and the government’s use of eminent domain, Metropolitan Life, Inc. (MetLife) built the complex for returning veterans in 1947.
The sale panicked many tenants of the two complexes, where almost three-quarters of the apartments were rent regulated — at one-third to one-half of market rates. Rent stabilization rules state that an apartment can be deregulated after it becomes vacant, or if the rent reaches $2,000 a month and the existing tenants’ household income rises above $175,000 for two consecutive years. MetLife had brought 27 percent of the apartments to market rates, and tenant activists feared that a new owner would want to accelerate the deregulation process.
Tenants organized a failed $4.5 billion offer intended to preserve at least 40 percent of the complexes as middle-class housing for buyers or renters. City officials refused to provide assistance or tax breaks as requested by the tenants’ group. New York City argued that it could create and preserve affordable housing for significantly less money at other sites. A group of tenants also made a failed attempt to stall the deal when they discovered a condition in MetLife’s 1942 agreement with New York City that stated that the owner must keep rents low and could not make more than 6 percent annual profit on the apartment complex, in exchange for a 25-year tax break.
Despite these efforts, the deal between MetLife and Tishman Speyer, and BlackRock was finalized in November 2006. While Tishman pledged that there would be no sudden shift in the neighborhood’s makeup, they refused to commit to preserving a large block of apartments as affordable housing. Tishman planned to deregulate 1,800 units during its first two years of ownership.
The tension between Tishman and residents continued to flare after the sale. For example, residents of Stuy Town and Peter Cooper Village complained that Tishman Speyer hired investigators to find information that would allow the owner to issue non-renewal leases. In a year and a half, Tishman turned down the renewal of roughly 800 rent-stabilized leases because the company alleged that tenants were not using their units as primary homes, as mandated by rent-stabilization rules. Tenants believe that this claim was an attempt to replace low-rent households with market-rate renters.
In May 2009, the Stuyvesant Town/Peter Cooper Village Association and four tenants filed a civil suit against Tishman claiming that the company made “improper residence challenges.” The developer has converted about 43 units to market-rate rents, or about 4.3 percent annually, since taking over the complex. The conversions were contested by elected officials, tenants, and housing advocates, but the developer maintained that the conversions had only taken place in cases where tenants were abusing the system.
In January 2007, several tenants filed a lawsuit in New York State Supreme Court charging that Metropolitan Life unlawfully charged market-rate rents for more than 3,000 apartments. Met Life had received $24.5 million in tax breaks since 1992 under the city’s J-51 property tax program.
The class-action suit alleged that the receipt of city tax breaks prevents the buildings’ owners from converting a majority of the apartments from rent-regulated to market-rate units. The suit was thrown out, but on March 5, 2009 the Appellate Division of the State Supreme Court ruled that it was illegal for Tishman Speyer and other property owners to deregulate apartments while receiving special J-51 tax benefits.
In October 2009, the New York Court of Appeals upheld the appellate court’s decision. Tishman Speyer and BlackRock may be forced to pay $200 million back to building tenants. It is unclear how and when tenants will receive this money.
In addition to general public opposition and legal battles, Tishman Speyer has run into financial trouble. In September 2008, Standard and Poor’s cut the bond rating on the $5.4 billion the developer used to purchase the complex because the value of Stuyvesant Town and Peter Cooper Village dropped 10 percent and because Tishman was quickly exhausting its reserve funds. In December 2009, Tishman Speyer Properties and BlackRock Realty agreed to reduce rents on the wrongly deregulated buildings.
In January 2010, Tishman Speyer and BlackRock Realty announced it would return the property to the lenders after defaulting on a $16 million loan payment. Accordingly, Tishman Speyer and BlackRock felt there was no other way to avoid bankruptcy. The creditors will assume ownership of the apartment complex and seek a new manager. Appaloosa Management filed a motion in the United States District Court to gain control of the properties but was denied.
Concurrently, members of the Stuyvesant Town and Peter Cooper Village Tenants Association are gathering signatures to in support of buying back the complex. Mayor Bloomberg said the City will not help residents purchase the property. In June 2010, Judge Alvin Hellerstein ruled the property could be foreclosed upon and ordered the property to be auctioned.
In June 2010, an interim rental rate agreed upon earlier in the year was extended until December 2010. The agreement allows tenants to pay the “lower of either their existing rent or their estimated rent-stabilized rent.” In addition, the agreement covers rights that are guaranteed under New York City’s rent stabilization laws.