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Sunday, September 6, 2009

Shocking Revelations

I received the following link:

http://www.tampabay.com/news/politics/state-pension-funds-266-million-investment-disappeared-in-2-years/1034097

This is a far more detailed exposé, via Sydney P. Freedberg of the St. Petersburg Times, than we've had before of Florida's pension fund investment in Stuyvesant Town and Peter Cooper Village. Well worth reading. The main meat of this article:

On Oct. 17, 2006, MetLife announced the winning bid, an eye-popping $5.4 billion — $400 million more than the asking price — by Tishman Speyer Properties and BlackRock Realty.

The buyers put in $225 million of their own money, then passed much of the risk to others.

Enter Florida.

Tishman Speyer and BlackRock each had business and political friends in the state.

Tishman Speyer had vast real estate holdings in South Florida in the 1980s and early '90s and was looking to get back into the market. The company contributed $5,000 to the Florida Republican Party in 2002. Two of its executives donated the maximum $500 to the 2006 political campaign of Gov. Charlie Crist.

BlackRock, which is 49 percent owned by Bank of America/Merrill Lynch, gave $500 to Chief Financial Officer Alex Sink during her 2006 campaign.

Crist and Sink, who serve as pension fund trustees, declined to be interviewed for this story. Their aides said there was no connection between political contributions and the investment in the Peter Cooper Village venture.

BlackRock already managed more than $300 million in Florida pension money. They wanted more business.

On Jan. 9, 2007, five BlackRock executives visited Tallahassee to make their case. Among those they met with were Steve Spook; Doug Bennett, the senior investment officer in the SBA's real estate unit; and Kevin SigRist, the agency's deputy executive director.

A few weeks later, BlackRock sent the real estate unit a confidential document outlining the strategy for achieving double-digit returns on the Peter Cooper Village project.

The 92-page memo revealed that Tishman Speyer and BlackRock planned to weed out rent-regulated tenants and turn the units into a "market-based environment'' in seven years. They would woo young, affluent renters and "position the asset for a value-maximizing sale.''

Ash Williams, who took over as the SBA's executive director in October 2008, concedes that in hindsight, the projections made by Tishman Speyer and BlackRock may have been "overly aggressive.''

But the documents provided to the SBA show that the agency's managers were made aware of the risks all along.

Line by line across 13 pages, the confidential memo lays out the risks. They included the possibility that Tishman and BlackRock could fall short of cash to pay off debt.

"Unless net operating income from the property increases materially,'' the memo said, "the partnership will not be able to meet its interest payment obligations in which event it would default.''

Spook evaluated the Peter Cooper Village deal for the SBA. The analysis relied heavily on the owners' statements.

• The report stressed the apartment complex's "excellent physical condition'' and "competitive advantages.'' But some prospective renters were turned off by the plain brick buildings that looked like a low-income public housing project.

• The report spoke of the "favorable fundamentals'' in the Manhattan apartment market. But some experts were predicting a weakening market.

• The report noted the owners' "extensive experience'' in managing rent-regulated apartments. Tishman Speyer had limited experience managing multi-family rental properties. Its expertise was in office towers like Rockefeller Center in New York City.

Spook's report also highlighted "issues'' with the investment, including possible cash flow problems, contaminated soil beneath the property and concerns about "liquidity,'' meaning Florida could have trouble unloading the investment if it declined in value.

Spook also noted a "lack of full Townsend due diligence.'' Townsend is the Townsend Group, a firm that Florida paid $200,000 a year for real estate advice.

SBA spokesman Dennis MacKee said that Townsend doesn't normally do due diligence. He said the SBA thoroughly vetted the investment.

On March 12, 2007, Spook recommended investing $250 million. Two weeks later, Doug Bennett concurred. In a three-paragraph memo, Bennett acknowledged that the deal could be a "risky proposition'' but said Florida would benefit from increasing its New York City exposure.

Kevin SigRist concurred with Bennett, and then-executive director Coleman Stipanovich approved the deal.

The Peter Cooper Village sale fueled a political uproar in New York City over the future of affordable middle class housing.

New York City Council member Dan Garodnick said the high selling price put pressure on the owners.

"They started sending legal notices to many perfectly legitimate longtime tenants claiming they were not using their apartment as their primary residence,'' said Garodnick, himself a resident of Peter Cooper Village.

Garodnick helped tenants fight eviction and supported a lawsuit. It contended that the owners had improperly raised rents after getting special tax breaks. The tenants sought $215 million in rent they overpaid.

BlackRock and Tishman Speyer's confidential memo to Florida's pension fund had warned that a lawsuit could cripple the deal.

The owners said they thought the tenants' claims were without merit. But if the residents were to prevail, the memo said, the owners would "suffer an immediate and very substantial loss of revenues and would be unable to carry out a significant part of its plan to convert rent-stabilized units to market rate.'' ....

On June 7, 2007, with the real estate market about to head south, the SBA sank $266,780,948 into the Peter Cooper Village partnership with other investors: $250 million for the investment plus $16,780,948 in fees.

By September 2008, the investment was in deep trouble. BlackRock and Tishman Speyer were having trouble converting the rent-regulated apartments to market-rate units. Expenses were higher than expected, income,lower. The new owners were running low on cash to cover payments on their $3 billion mortgage.

On Dec. 4, 2008, at a meeting of the group that advises the Florida pension fund on investments, a member questioned why nobody at the SBA had mentioned the troubled Peter Cooper Village investment.

"I think this should have been on the agenda,'' said Jim Dahl, a Jacksonville investor. "Let's make sure we talk about 'em so we don't repeat mistakes. … This is a serious, serious problem and we almost went through the meeting without discussing it.''

Dahl said many investors thought the deal was based on "pie-in-the-sky'' assumptions and was "going to have a bad ending.''

The SBA said otherwise.

"This is a long-term investment,'' SigRist said in an interview a few weeks later. "The view here is, as a long-term investor, we're uniquely qualified to hold these investments.'' He blamed problems not on inadequate vetting but on the changing financial world.

For months, the SBA did not respond to information requests from the Times about the Peter Cooper Village deal. They did not disclose documents the newspaper requested in December 2008, again in January 2009 and again in March.

Prompted by a fourth request, in April the agency released copies of appraisals and two redacted reports. Information about fees, expenses and investment issues was blacked out. The agency is still withholding documents about the deal, saying the legal department is reviewing them to determine if they can be released.

More at the above link.

One of the numerous things that stood out in the above excerpt is:

They [Tishman Speyer and BlackRock] would woo young, affluent renters and "position the asset for a value-maximizing sale.''

3 comments:

Anonymous said...

Very interesting article. Thanks STR. The Speyers and their ilk obviously have no consciences whatsoever. What a bunch of dirty, amoral parasites.

Anonymous said...

The point that I find most disappointing is that TS only invested $225 million of their own cash and have undoubtedly been paid significant (mis)management fees in the interim.

Any sense as to whether they had to fund the two slush funds--the general operating fund and the inter fund? At least then they'd be out another $6-800 million.

Anonymous said...

PLEASE send this to the NY Time and other media! The facts of this transaction need to be exposed to a wider audience. The just burns me up! This is white collar crime, fraud, and influence peddling and the politicians/pension managers in Florida should be investigated.