The collateral damage from the largest real estate deal ever -- Tishman Speyer properties' and BlackRock Inc.'s $5.4 billion purchase of Stuyvesant Town/Peter Cooper Village from Metropolitan Life Insurance Corp. (NYSE:MET) in 2006 -- is starting to boil to the surface. The Florida state pension fund announced Tuesday that it lost $250 million on its investment in the deal, which was consummated during the height of the real estate bubble.
For the Florida pension fund, the loss is only a tiny fraction of the $121.9 billion of pension and other assets the Florida State Board administers, but the loss is still money out of someone's pocket and, in this case, it's the pension recipients of Florida. "We are carrying that investment at zero because the market softened dramatically," Ash Williams, executive director of Florida's State Board of Administration said at a meeting in Tallahassee Tuesday, according to Bloomberg.
Florida is a junior partner in the Tishman/Blackrock venture, Williams said, according to Bloomberg. And with the pension having an equity-only investment and none of the mezzanine debt held by senior partners, according to Williams, the equity stake "could be wiped out."
What went wrong with the deal? The most glaring mistake was that Tishman, BlackRock and their partners overpaid for the 80-acre, 120 building property, comprised mostly of middle-income residents in Manhattan. Meanwhile, the buyer's $400 million reserve fund is being depleted faster and is expected to be gone by year's end. The money went fast, between improvements on the property intended to lure more affluent renters and huge legal fees to evict lower paying tenants on any legal grounds possible. The evictions never really worked and proved too costly. Meanwhile rents have been fallen by an average of 10% in Manhattan for the month of August, making it difficult to lure higher-paying tenants. Meanwhile, Fitch Ratings and Moody's Investor Service downgraded its bonds used to acquire the property, which will cost the buyers even more in debt service.
The Florida pension fund is the first retirement fund to come out of the wood works over its losses in the Stuytown investment, but it likely won't be the last. The acquisition had gone from a supposed safe investment to a major disappointment, with the loss prompting questions such as: what
other pension funds have taken losses from their investment in this
real estate deal? And, if so, how much harm will these losses pose to
these pensions? Stay tuned. - Gerald Magpily
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