Memorandum from Guterman Copied to Firm Representing the Tenants Association

Guterman Partners LLC

M E M O R A N D U M

To:  Daniel Alpert, Jon Messersmith

        Guterman-Westwood Partners LLC

Copy:  Meredith Kane, Paul Weiss et al, 

             William Derrough, Moelis & Co

From:  Gerald Guterman

             Guterman Partners LLC

Date:  September 28, 2011 to October 31, 2011

Re:  Stuyvesant Town – Peter Cooper Village

As we discussed earlier in the week, the article in the New York Post on the trashing of Stuyvesant Town - Peter Cooper Village (“STPCV”) confirms our company’s conclusions (as a prospective purchaser of STPCV) concerning the physical maintenance of the project, as well as management’s current and ongoing rental policies. Our conclusions are the result of direct and personal on-site inspections and visits to the rental office, including interactions with rental agents at STPCV.

In short, we believe that Fortress Investment Group ("Fortress") through its subsidiary CWCapital Asset Management ("CW") and thereafter Rose Associates ("Rose") its property management agent, is managing the project to maximize the vacancy available to a subsequent acquirer and to spin up rent levels on vacant renovated apartments to market levels as quickly as possible following the “re-stabilization” of the previously deregulated units as a result of the Roberts v. Tishman Speyer Properties L.P. decision  It appears that they are aggressively screening for short term tenancies – with a focus on the multi-occupant student population that tend to take one year leases for apartments that Rose is evidently subdividing with additional partitions, to increase the number of occupants (as it is easier to maximize gross with multiple occupants sharing in higher rents). Management appears to be actively discouraging other leasing.

While it is in Fortress/CW’s and, as a potential purchaser, our own interest to have the project come closest to the 10% maximum vacancy at the point of a conversion to condominium or cooperaive, there are legitimate concerns that the leasing practices at the project are  discriminatory and, as the Post article points out, are disturbing the community and upsetting tenants who we hope will ultimately become buyers of the apartments after we undertake our acquisition and condo/co-op conversion plans.  Furthermore, there is the question of whether or not Fortress/CW is instructing Rose to "park” apartments with student tenants, in a way that might be deemed by the Attorney General’s office to go beyond the spirit of the regulations governing maximum vacancy, or that the aggressive spinning of turnovers – and the multi-occupant issue as a way of pumping the rent roll – might be successfully challenged, as was Tishman-Speyer’s illegal destabilization activity, and further taint the project.

Our Investigation

I was curious as to whether the information I was hearing from my people and others was in fact the case, so I went down to the property leasing office myself.  Appearing as a prospective tenant who is quite obviously not a student, I attempted to rent an apartment in a normal and usual manner. This is an action I undertake for all properties in which we have a sincere acquisition interest.

It should be noted here, that this summary is not about age specific discrimination. My experience in the rental office is included as background only, to illustrate a personal view of one portion of this demographic change as it is currently taking place.  

I was dressed in slacks and a golf shirt and went directly to the rental office as an applicant. I had not made any advanced appointments and did not personally know any of the rental agents in the office. The rental agents told me that an advanced appointment must be made. I was told to call in approximately two weeks and make an appointment with any rental agent who answers the phone.

There were approximately six to eight rental agents in the office at the time of my visit. There were about two dozen people who appeared to prospective tenants. The average age of the prospective tenants appeared to be about eighteen to twenty-four years old. There appeared to be about three or four individuals together for each apartment and I over-heard the mention of a referral from the NYU student housing center, as a topic of conversation.

From our ongoing physical inspections of the property (by onsite tours), as well as my experiences with the rental agents at the onsite rental office, we are convinced that the concerns we laid out herein are legitimate and we should pay attention to what is going on.  

Condition of Apartments and Project

I am also particularly concerned that the assumptions we have made with regard to the condition of the renovated apartments (in terms of the ultimate sales value thereof), may prove challenged by the high-turnover, student tenancies that Rose (as management and rental agent) is pursuing.

On a broader level, it is also troubling that CW has adopted a plan (in conjunction with Rose) to convert STPCV from the middle income, stabilized, residential community we find attractive from an acquisition and conversion standpoint, to student/dormitory style housing offering one (and, I imagine a smattering of two) year leases to groups of individuals joining together to rent a single apartment. 

The lease terms would, of course, correspond to a single school year or maybe two school years with an individual student free to either rent or sublease their portion (a bedroom, or maybe even a couch or two) of the total apartment, in order to cover ever changing personal and individual plans.

We understand that CW entered into this leasing plan with the intent to continue it over and indeterminate term.  It is clearly driving up rental rates (potentially defeating the spirit of the rent stabilization laws) because of (i) the substantial vacancy allowances as well as additional equalization allowances, which additional allowances are authorized based on each vacant apartment's previous occupancy by a rent stabilized tenant who lived in the apartment for at least eight continuous (8) years. 

A major result of the current leasing practices is to directly remove the renovated STPCV apartments from protection (from unreasonable increases) under the rent stabilization laws, thereby eliminating the middle income family profile of the community by negatively impacting the intentions of rent stabilization and protections of New York City residents.

Possibility of Self Dealing

I think we also ought to be concerned here that the activity is part of a sub rosa plan on the part of CW’s parent – Fortress Investment Group – to purchase STPCV at a lower market value for the total property, based on its rental value without credit for the  potential up-side value to a condo/coop conversion.   I admit this last portion may sound “over reaching,” but we believe that their current policies and actions demonstrate that they are setting the stage to buy the property based on nearly fully leased conditions with rents at the top of the comparable market (other than those apartments that are held at lower rents through entrenched stabilization) and fairly controllable vacancies Thereafter, they may just be able to argue that they are paying a fair price.

Of course, in an auction situation (with us bidding) the foregoing would be difficult (but then again, they are showing no signs of actually intending to run an auction any time soon).  The current market value (with the condo/coop conversion potential), is still approximately $3 billion, in our opinion.

We need to monitor this situation carefully and I am having counsel work with HPD and the AG’s office to inquire as to whether any of CW’s acts might gum up the works as and when CW proceeds with the ultimate liquidation of the property on behalf of the existing senior mortgage holders.

Building Plans

I believe additional comments are necessary to further clarify my original notes dated prior to September 28, 2011 and concerning the physical dangers and other consequences of the conversion of STPCV from a middle income, stabilized, residential community with a defined average population, to student/dormitory style housing with a significant increase in the physical number of people occupying the same amount of original limited space.

Our team reviewed the current work (building) plans as submitted to the building department of New York City by CW/Rose.

 We estimate that the increase in new STPCV resident population within the same original space, (thereby decreasing fire safety, maintenance, management and sanitation services) will be at least fifty  (50%) percent over the current STPCV resident population, to as much as a two hundred fifty (250%) percent over the current STPCV resident population.

The population increase depends on the individual apartment layout and the number and position of the new room partitions installed or currently being installed by CW/Rose. An example is a recent advertisement on Craig's List....
"We are 2 early 20's females and we found a great apt in East Village (Stuy Town- near 14th and 1st). The apt is a 3 bedroom flex with a living room also. ...
newyork.craigslist.org/mnh/roo/2641099547.html "

Another way at looking at this increase in resident population, is that for every one hundred (100) apartments partitioned and leased as student/dormitory housing, the physical occupancy (in the same original space) at STPCV will increase by at least two hundred (200) additional tenant residents, to as many as five hundred (500) additional tenant residents.

To expand the reality of what is happening, for every five hundred (500) apartments partitioned and leased (Fortress/CW and Rose have already renovated and leased approximately five hundred apartments) as student dormitory housing, the physical occupancy of the additional tenant residents in the same original space, will increase by at least one thousand (1,000) additional tenant residents to as many as fifteen hundred (2,500) additional tenant residents.

Fortress/CW and Rose have made a clear statement in their (building) work permit, or in the alternative, have allowed the following statement to appear in their (building) work permit; NO CHANGE IN USE, EGRESS OR OCCUPANCY.

At best this statement is not true. At worst, the statement is deliberately false with the specific intent to mislead the Building Department and the City of New York.  

We are convinced that by allowing such statement to be prominently inserted into the (building) work permit, Fortress/CW and Rose understand that the building department does not fully recognize the drastic increase in residential tenant population or the serious potential dangers that accompany such population increases in an original, small physical space.

If Fortress/CW and Rose are allowed to continue this active partition of the original apartment as many as seven thousand five hundred (7,500) additional residential tenants will be added over the current residential tenant occupancy, without any without any increases to the physical space of the housing or the upgrades and modifications to fire protections as well as egress from the buildings, or additional and required maintenance, management and sanitation services.  

While the increased residential tenant population will occupy the same original space as currently exists this increase in population without adequate increases (in STPCV as well as in the general area of the community) in fire, police, maintenance, management and sanitation services  will place an unusually heavy burden on community services due to the increased physical danger as well as a substantially lower quality of life to the average family in the STPCV community.

In addition to our very substantial concern about the physical welfare of the STPCV residents and surrounding community, those elements that relate to "quality of life" will face serious downgrading for all of the families in the community.  The results of such deliberate and drastic "over population" has already started with the first few hundred apartments in which the partitions have been installed or are planned to be installed. 

Lastly and worthy of note are the projected costs to reconvert the property from student/dormitory style housing back to a middle income, stabilized, residential community with a well defined, average population. This process of re-stabilizing the STPCV community, will require a long number of years and a highly significant capital investment.

For clarity concerning the building permit and the intentions of Fortress/CW and Rose, I have attached an actual signed copy (as filed and accepted by the Building Department on September 16, 2011).

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STR here: I myself have questioned for years how adding partitions to an apartment does NOT change "use, egress or occupancy." This is something the TA should have fought ever since it started. I'm not aware if the TA ever challenged these type of work permits.  If not, why not?

Below is the signed copy referenced in Guterman's memorandum (click to make larger):