By Andrew Tangel, The Record, Hackensack, N.J.
Feb. 1--A $5.4 billion New York commercial real estate deal involving two huge apartment complexes -- Stuyvesant Town and Peter Cooper Village -- fell apart last week.
Among those who helped put together the deal was Rob Friedberg, a real estate investor who lives in Woodcliff Lake.
Friedberg, now managing partner of the Englewood real estate investment firm Capstone Realty, helped secure financing used to buy the massive 11,227-unit Stuyvesant Town and Peter Cooper Village apartment complexes on Manhattan's East Side when he was a managing director at BlackRock Realty.
BlackRock, which Friedberg said he left in late 2008, partnered with Tishman Speyer to buy the 110-building complex in 2006. But last week, the buyers announced plans to hand over "Stuy Town" to its creditors.
Some of the investors who provided debt or equity financing for the deal include, according to news reports: the Republic of Singapore, the Church of England, and CalPERS, the California public employees' pension fund.
The ratings agency Realpoint pegged the apartment complexes' current value at $1.99 billion.
Friedberg spoke with The Record about the ill-fated deal recently. (Condensed and edited for space.)
QUESTION: What did you envision this would be?
ANSWER: The plan was to take apartments that were renting for less money, vacate them at some point -- through natural attrition plus also through finding illegal tenants -- and to increase the rents. What happened was, all the unemployment, all of the layoffs, caused rents to compress a lot so what they could achieve for rentals was not what they projected.
The loan was structured with an interest reserve, and the interest reserve was intended to last a number of years, at which point, when that ran out, there would be sufficient cash flow at the property to support paying interest.
Q: At what point did it become clear there was something wrong with the projections?
A: This loan was on the ratings agency watch list over a year ago.
There was no secret here... that the interest reserve would run out at some point... but it probably happened a lot faster than anyone anticipated with the change in the market.
Q: What went wrong, what went right?
The turnover of the apartments went a lot slower than anyone had ever anticipated and the rents they could achieve [were] a lot less than what was anticipated... It was like a perfect storm for a lack of cash.
Q: What lessons can real estate investors draw from this?
A: Buy real estate on existing cash flow, not on projected cash flow... Real estate is cyclical, and during the good times, real estate investors tend to forget that. It gets heated up, and there's a frenzy. We were at the top of the frenzy.
Q: Does this deal falling apart mean the end of pro-forma lending (based on projected cash flows)?
A: No. What will be a result of this cycle will be more recourse required with real estate lending. You're going to have to give a personal guarantee.
Q: Will that be healthier for commercial real estate?
A: It will clearly be healthier for the banks. Many of the smaller banks lend on a recourse basis and only lend on a recourse basis. But of the larger banks, they lend non-recourse because they know they're going to sell the debt -- they're not keeping it on their balance sheet.
It'll mean less risk, absolutely. If a borrower needs to guarantee a loan, he's going to think twice before entering into a project. Will that further erode values because it's more onerous to obtain credit? Absolutely, it will erode values further. But that means that we're going to get to a healthy equilibrium, and prices need to reset. Further erosion of real estate values is not a bad thing. We need to establish the bottom so we can start to go up, and a bottom has not been established yet.
Q: With so much attention to who lost big, who are the winners in this deal?
A: There are two winners: the borrowers who used this non-recourse, securitized debt [and] who cashed out are giant winners. The property went down, they give the property back, no recourse to them personally. The other winners are all the investment bankers who made these loans. There are a lot of fees when you borrow $4.5 billion.
Q: Anything significant missing from recent discussions of the deal?
A: It's probably a good thing for the city and for the tenants for a new owner to take over, because it will eliminate any unknown for the tenants. This is no different from thousands of other projects that are underwater and the borrower does the right thing, and gives the keys back.
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