If you have ever looked at Manhattan from across the East River you have probably noticed a large development that looks out of place. There are symmetric rows of square, brick twelve story buildings that stand out from the modern glass skyscrapers that generally inhabit this incredibly valuable spot of harbor front. The area I am talking about is known as Stuyvesant Town-Peter Cooper Village, locals refer to it as Stuy Town (pronounced Stai Town probably so they can instantly tell exactly who is not a local).
The neighborhood started as a project to promote “working-class rentals” by Mayor La Guardia in 1943. It was funded through a number of tax exemptions and developed by what was then Metropolitan Life, one of the country’s fastest-growing life insurance companies. The project was intended to house many of the veterans returning from the war. The irony is that, even though Metropolitan life succeeded thanks to it being one of the first companies to accept deposits from black policyholders, it ended up creating covenants that would segregate the entire complex of 110 buildings and 11,250 apartments, making them off-limits.
The entire 80-acre site was bulldozed in 1945 and the resulting construction would use 36 million bricks. The neighborhood was even designed not to have any city services like schools or public parks in order to prevent anyone from outside the complex from coming in. The racial discrimination that happened in the development would be subject to a number of lawsuits, eventually opening it up for Black renters but many say the area’s reputation as a “no-go” zone for African-Americans never went away.
Stuy Town went through its ups and downs along with the city of New York. It was the subject of many civil liberty complaints in the 60s, and was hit hard by the recession in the 70s. It was plagued with substandard wiring that prevented the complex from installing air conditioning until 1997 after a $100 million renovation project was completed. By 2006 Metropolitan Life had become MetLife and its stock had been listed on the New York Stock Exchange. The company was streamlining its operations and wanted out of the landlord business. They were looking for possible buyers for what would be the largest single property purchase in American history.
There were a number of bidders for Stuy Town but the offer that was ultimately accepted was from well known NYC landlord Tishman-Speyer and the world’s largest private equity firm BlackRock. The offer that was ultimately accepted was for a whopping $5.4 billion dollars, the most ever paid for a single asset in the United States. The total cost of the deal was even more, $6.4 billion once acquisition costs and reserve funds were added in. Most incredibly, the two principals of the deal, Tishman Speyer and BlackRock Realty, only put up $225 million or right around 3.5 percent of the equity.
The plan was to upgrade the units as they turned over. The new landlords hoped to crack down on illegal sublets and non-qualified affordable housing renters as a way to speed the transition. Needless to say, the new ownership met a lot of pushback. The complex had established its own community, one that was willing to fight to protect poor renters from displacement, especially by the big, bad new landlord. During the two years that the complex was run by Tishman-Speyer the company was met with numerous lawsuits and the ire of many local satirists.
Ultimately the mortgage crisis ended the redevelopment plans. The struggles of the real estate industry were widespread and disappointed investors, as well as a number of legal losses, finally pushed the project into bankruptcy. The mortgage was taken control of by a special servicer and was carved out into pieces so it could be more easily sold on the bond market. At the time Fitch Rating appraised the giant property at $1.8 billion, meaning that the deal had lost $3.6 billion of investor money, many of which were pension funds, in under two years.
There are all kinds of lessons to be learned about this landmark property, its historic purchase, and its precipitous insolvency. But, I will leave those lessons to be gleaned on your own. What I can say about this amazing story is that, much like the book that it inspired, it shows the importance of using other people’s money.