Tuesday, December 22, 2009

Global property rout sends Tishman Speyer to earth

Unravelling billion-dollar purchases severely testing father and son CEO team

Rob Speyer showed little interest in his family’s real estate business until his father began talking about buying Manhattan’s Rockefeller Center.

It was 1995. Mr Speyer, then 26, was a reporter for the New York Daily News. His dad’s plans to purchase the art-deco complex for US$1.2 billion changed everything. He joined Tishman Speyer Properties LP, the firm co-founded in 1978 by his father, Jerry, and Robert Tishman.

Mr Speyer, now co-chief executive officer of Tishman Speyer, is getting another lesson, one on enduring the global commercial property rout. Tishman Speyer and BlackRock Realty LP’s US$5.4 billion purchase of New York’s Stuyvesant Town and Peter Cooper Village apartments is unravelling, testing the young Speyer and his father, a 30-year real estate veteran.

‘A default is expected’ on the complex, according to Fitch Ratings, which has estimated the property’s value at US$1.8 billion. The transaction is among at least four – including the US$13.6 billion purchase of Archstone-Smith Trust with Lehman Brothers Holdings Inc in October 2007 – that the company made as values rose and Jerry Speyer was giving his son increasing responsibility for running the company.

Tishman Speyer is in talks to overhaul debt on five downtown Chicago office buildings. Partnerships including the company have been sued for foreclosure on a 22.7 hectare California office park purchased with another parcel for US$200 million. And last Friday, Standard & Poor’s withdrew its credit rating on a group of Washington-area properties with debt payments that Tishman and its partners have been trying to restructure.

The Speyers are being hurt in part by US commercial real estate prices that have fallen 43 per cent since late 2007.

The fallout represents the biggest challenge for Rob Speyer since he became co-CEO with his father in June last year, said Lawrence Longua, director of the Reit Center at New York University’s Schack Institute of Real Estate.

Since 2001, Tishman Speyer has been the biggest US commercial real estate buyer after Blackstone Group LP, according to the New York research firm Real Capital Analytics. Rob Speyer is part of a multi-generational group of New Yorkers whose families made fortunes in real estate, including the Milsteins, Zeckendorfs and LeFraks. Jerry Speyer was named the world’s No. 1 developer in a 1998 New York Times article that referred to him as the anti-Donald Trump.

Rob Speyer’s first job in the business was in management and leasing at Tishman Speyer. He worked on revamping Rockefeller Center, the 6.2 million sq ft complex built by John D Rockefeller Jr in the 1930s as a show of faith in America during the Great Depression. Mr Speyer described himself as ‘the low man on the totem pole’ when he first joined the New York-based firm.

His first lease brought the luxury Reebok Sports Club to the centre, replacing a US passport office.

In 1998, Rob Speyer joined the company’s redevelopment unit and modernised 300 Park Ave, the Colgate-Palmolive Co headquarters Tishman Speyer bought for US$180 million, Jerry Speyer said. An appraisal last month valued the property at US$650 million, Jerry Speyer said.

Things have turned out differently elsewhere.

In Chicago, the company is trying to restructure debt on office properties it bought in 2007 for US$1.72 billion. The Federal Reserve Bank of New York oversees US$1.4 billion of loans made by Bear Stearns Cos.

In Los Angeles, KeyBank National Association sued to foreclose on the Playa Vista industrial, office and film production property that Tishman Speyer and Walton Street Capital LLC bought in 2007. The owners failed to repay US$154 million of debt on the complex due in July, KeyBank said in a complaint filed on Oct 20. Broker CB Richard Ellis Group Inc was hired to sell the property, according to manager Trigild Corp.

A foreclosure won’t affect any of Tishman Speyer’s other properties, spokesman Rick Matthews said in October.

In New York, the company is facing default on Stuyvesant Town and Peter Cooper Village, Manhattan’s biggest apartment complex. The property is a World War II-era, 32 ha development housing about 25,000 people. The US$3 billion in debt used to buy it was bundled with other commercial mortgages and sold as bonds.

Tishman Speyer is trying to win a forbearance agreement, according to a person familiar with the financing who declined to be identified because the talks are private. Such an accord would halt default proceedings and allow negotiations on a restructuring.

When Tishman Speyer and BlackRock Realty bought the 11,200-unit property in 2006, they planned to raise rents, evict illegal occupants and upgrade the complex with amenities including a gym, concierge service and new gardens.

Those plans were challenged by a recession, slackening demand for rentals and a legal victory for tenants who claimed some rent increases were illegal. Average rents for a two-bedroom Manhattan apartment fell 16 per cent after peaking in May 2007 at US$3,907, according to Gary Malin, president of property broker Citi-Habitats Inc.

Tishman Speyer has ceased signing new leases at the complex, Bud Perrone, a company spokesman, said. It reached a temporary agreement with tenants this month that will reduce some rents starting in January.

In the year after the purchase, Tishman Speyer filed ‘hundreds’ of non-renewal notices against rent-stabilised tenants, accusing them of having a residence elsewhere, according to Jack Lester, the attorney representing the Stuyvesant Town-Peter Cooper Tenants Association in a class- action lawsuit.

New York City rent stabilisation protects tenants of about one million apartments from sharp rent increases, according to the New York City Rent Guidelines Board. A unit remains stabilised as long as the rent is less than US$2,000 a month or the tenant’s income is less than US$175,000 for two consecutive years, according to the board’s website.

Since acquiring the property, Tishman Speyer served 1,062 non-renewal notices to Stuyvesant Town-Peter Cooper residents who own or reside in a second home, the company said. Those notices were backed by evidence that the home was their primary residence. The company has had a total of 10,595 expiring leases in that period. Tenants gave up their apartments in 45 per cent of cases resolved to date, the company said. Since March, 72 non-renewal notices have been served for the same issues.

Tishman Speyer’s losses will be limited to the US$112 million equity investment that the firm made in the complex, a person familiar with the structure of the deal said. The company has about US$2 billion in cash on its balance sheet, said the person.

Both Speyers said that they don’t think the purchase will hinder their standing or ability to buy and sell buildings.

Sitting side-by-side in a conference room at Bloomberg LP’s headquarters in Midtown Manhattan, Rob Speyer takes the lead in discussing Stuyvesant Town and his father sits silently for almost an hour.

It’s only when the subject of the firm’s reputation is raised that Jerry Speyer speaks. ‘Even in this really dreadful period that we’ve been through, we sold this incredible amount of real estate thanks to Rob’s foresight,’ he said.

‘I jotted down some specifics if you’re curious,’ the elder Speyer said, removing a folded paper from his suit pocket. It contained a handwritten list of well-timed property sales that his son arranged.

They include the sale of the New York Times Building in 2007 to Africa Israel Investments Ltd for US$525 million. Tishman Speyer bought it three years earlier for US$175 million. The company also sold 666 Fifth Ave to Kushner Cos. for US$1.8 billion in 2007. It was the highest price ever paid for a single US building at the time.

Jonathan Mechanic, chairman of the real estate practice at Fried Frank Harris Shriver & Jacobson LLP, said that Rob Speyer shouldn’t be blamed for deals that have lost value.

‘If I told you Lehman wouldn’t exist or Bear Stearns wouldn’t exist, you would have asked me if I was out of my mind,’ he said. ‘Tishman Speyer and Rob were part of that world, and they’re one of many that suffered.’

‘When you go back to the history of the deals he’s done and the profits he’s made for investors, you had years of tremendous returns,’ Mr Mechanic said.

No matter how the Stuyvesant Town transaction is judged, Rob Speyer will one day take over the company, Jerry Speyer said.

For now, they work together from seventh-floor offices linked by a conference room at 45 Rockefeller Plaza.

Source: Business Times, 22 Dec 2009

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