NYC’s Stuyvesant Town was bought by Tishman Speyer back in the good old days (2006) at a big price of $4.3b. It went into default last year and the equity and Mez debt got taken to the cleaners.
There was a $3b senior mortgage. $1.5b was taken down by Wachovia and later put in a $7b CDO. The other $1.5 billion was taken up by our pals at Fannie and Freddie.
This a political deal and a business deal. There are many rent controlled apartments in Stuy Town. The city of NY will not let anyone walk on those people’s rights. And Ackman wisely got ahead of this issue with a plan he made public last week. (NYT and NY magazine) He made it clear that he was not going to mess with that problem. Any of those renters with subsidized apartments were welcome to stay. With that issue defused the only remaining questions were (1) what was the price Ackman was willing to pay and (2) how was he going to finance it.
The price Mr. A put on it is $3b. Exactly equal to the outstanding 1st mortgage. The way to pay for it? Simple. The existing lenders would restructure the notes and stay in the deal for a very long time.
Well done Bill. You plan to buy one of the largest properties in NYC with next to no money down. Here are some of my problems with this transaction.
I asked The FHFA (the regulator for Fannie and Freddie) sometime ago about this deal. I will rely on their responses to make some points.
The Stuy Town property is not worth $3b. Fitch recently valued the property at $1.8 billion. When I asked about this the FHFA responded:
BK: Comment on Fitch value of 1.8B?
FHFA:This is Fitch’s estimate. Other firms estimates place the values between $1.6 and $2.2 billion depending on the cap rate.
That’s interesting. The lender thinks their loan is underwater. But Bill Ackman thinks it is money good. So Fannie and Freddie love Bill. He is going to bail them out of a problem. He is going to force F/F to lower the mortgage to a much lower rate and the loss on F/F’s books will just be moved down the road for a decade or so. Everyone will be happy. Except me and few hundred million other taxpayers who have to support it.
It does not have to be like this. The value of the Stuy Town property does not have to be artificially inflated. F/F do not have to jump through hoops to avoid an accounting loss. They had credit protection on their holdings of Stuy Town debt:
BK: Did F/F have other credit enhancement?
FHFA: F/F had enhancements for this deal that were typical for large loan deals. Other investors had the same enhancements.
Color me shocked. They had “enhancements”. In other words they either had some form of CDS or they put the bonds in a CMO/CDO and took back senior tranches. They did not do the latter:
BK: Did F/F put the securities in a larger CMO transaction?
FHFA: No, they did not put the securities into a CMO. The GSEs approached this as typical investors.
So they have a CDS or insurance contract that protects them from some or all of the losses relating to Stuy Town.
If F/F can get out whole today there is no reason for them to stay in this deal. They never should have been in this transaction in the first place. There was a fat coupon on this, but we now know that that the coupon was not enough to compensate for the risk. It was a bad deal from the time it was signed. The evidence of that is the fact that F/F and “other investors” sought credit protection. The real motivation for F/F was the “low income housing credits” that the Agencies needed to fulfill their Congressional obligations. On that subject:
BK: Did F/F do this to get low-income housing credits?
FHFA: They did receive housing goals credits and did so in the context of meeting their standard securities investment criteria.
The silly game of housing credits and the GSE is one of the reasons were are in a decade long housing crisis. It is/was a bankrupt concept. It no longer exists. There is no excuse for F/F to roll over and stay in the Stuy Town transaction.
This is a “story deal” that is going to come to a head in the next few months. Wilbur Ross is also a player; but he is keeping his cards close. If Ackman wins this one it will prove once again that he is force to be reckoned with and that the taxpayers are suckers.
Note: I would love to know if those “enhancements” came from AIG. Wouldn’t that be a kick in the head?
