Ackman Loses – Fannie/Freddie Win! Not…

Bruce Krasting's picture Submitted by Bruce Krasting on 10/27/2010 15:40 -0500

CDOCollateralized Debt ObligationsFannie MaeFitchFreddie MacNew York CityPershing SquareReutersStuyvesant TownTim GeithnerTreasury DepartmentWachovia

Bill Ackman of Pershing Square Capital looks like he lost a small battle. He was in a fight to take over NY’s Stuy Town. The property was foreclosed on today, so Bill lost out. But, as is usual, he came out a winner. Fannie Mae and Freddie Mac were on the other side of this. So you might say they won. I think they just made a mistake they will regret.

Stuy Town was bought in 06 for $5.4b. The cash flow never covered interest. So when the reserve ran out the deal cratered. The transaction was financed with a $3b first mortgage. The balance of debt was subordinated junk and worthless equity. Fannie and Freddie bought a total of $1.5b of the mortgage. The other half was picked up by Wachovia. The Wachovia interest was put in a mega ($7b) CDO .

The Wachovia piece has been scattered to the wind. That puts Fannie and Freddie in complete control. CW Capital is the servicer, but one can assume that nothing happens without F/F signing off on it.

Ackman got into the story by buying a piece of the sub debt. He paid $45mm for a $200mm chunk and tried hard to use his position to muscle his way into controlling the property for little money down. He has been fighting this in the courts and delaying the foreclosure for months. I have no connection to this deal but it might have sounded like this:

Ackman to F/F/CW:
“My lawyers have bigger balls than yours do. We will paper you to death. You want me to take a walk?  Pay me the $45mm I’ve got in the deal.”
This from Reuters:

Under the settlement, an entity created by CWCapital will buy back the loans for the $45 million the joint venture between Ackman’s Pershing Square Capital and Winthrop Realty Trust paid for them, Winthrop said in a statement.
Okay, Bill is out, money good. And Fannie and Freddie are sitting on a loser. This discussion of the Stuy Town value comes from the FHFA. Fitch had valued Stuy Town at only $1.8b I asked FHFA about it:

FHFA:This is Fitch’s estimate. Other firms estimates place the values between $1.6 and $2.2 billion depending on the cap rate.
The first mortgage is at $3.6b and there is accrued and unpaid interest piling up. The assets don’t cover the principal. But the worst news is that our pals at Fannie and Freddie are about to become one of the biggest landlords in all of NYC. This is a 60 year old property on 80 acres with 11,250 apartments. It is hard to even conceive of the cost of maintenance and infrastructure improvements. Keep in mind that this in Manhattan.

If you follow the ownership responsibility for Stuy Town it goes straight to the Treasury Department as they are the administrators of the zombies called Fannie and Freddie. A letter to the T.Sec might read:

Dear Mr. Geithner,

I am writing to you as you are responsible for Stuy Town now that you own it. So here are some of my problems:

-The water tastes bad and the pipes are leaking. The electric is faulty and dangerous.
-The washing machines are always broken. The coin changer keeps getting robbed.
-My windows all leak air. The heat never works. The lights are out in the hall.
-The sidewalks are all broken. There is graffiti everywhere. Our playgrounds are in disrepair.
-I think I saw a rat near the garbage bins.

Please help me with these problems. Thanks in advance!

New York City Councilman Dan Garodnick
(represents Stuyvesant Town and Peter Cooper Village and lives at Stuy Town)
I am sort of joking about the citizens of Stuy Town directing their complaints to poor Tim Geithner. But in another way I am not. Fannie Freddie and Treasury will rue the day they took control. The New Yorkers will just eat them alive.


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by Gordon Freeman
on Wed, 10/27/2010 – 16:12

The most absurd aspect of this whole grotesque wet fart of a deal is that it has always been about buying…old HOUSING PROJECTS.  What a fucking sick joke!

Login or register to post comments by Captain Willard
on Wed, 10/27/2010 – 16:25

Ackman can, and will, speak for himself. But I think he viewed the sub debt piece as a bargaining chip to get to participate in any reorganization. Controlling a creditor class got him a seat at the table. He figured, correctly, that whomever reorg’d this thing, unless it was Ackman himself, would pay him to go away.

It’s worth pointing out that a major insurance company (Met Life) also took a beating on this deal. You have to wonder how many of these vintage deals are still lurking on the books of Pru, Met Life, GE, Morgan Stanley and other who were hyperactive during the heady days.

Meanwhile, if the orginal cap rate was 2 or 3, the cap rate at the NEW $2B valuation should be roughly 5.5-7.5, assuming rents haven’t gone up. This is not unreasonable if you don’t mind fixing 60 yr-old plumbing!

So this brings up the question Bruce: are FNM/FRE’s piece of the CMBS senior to Wachovia? If they are junior, they are in big trouble. Do you know? Your article implied they are on equal footing.

You have to believe Ackman thought he could get them to re-negotiate the mortgage if more equity came in. I wonder if they would have done so, on behalf of all of us beleagured taxpayers?

Login or register to post comments by Bruce Krasting
on Wed, 10/27/2010 – 18:07

I believe that F/F are pari passu (equal) with the Wachovia piece. I maintain that does not matter. F/F are 50%. Therefore nothing happens unless the want it. So I think the Wachovia piece is functionally subordinated to the control interest that F/F have.

The Ackman deal would have kept F/F in the fire. It would cost (believe this) $100mm in taxes to rewrite a mortgage. So that was just a loser for all. But I think the Ackman plan had a chance to pay down the debt. That would have been the only way he got real money out of the deal.

Now it is just F/F. I am sure they will fuck it up.

Login or register to post comments by whatsinaname
on Wed, 10/27/2010 – 16:23

And Chicago had just about gotten rid of its last projects. Here we go again.

Login or register to post comments by Rainman
on Wed, 10/27/2010 – 16:25

Haha…..CalPers gobbled up a half billion of the “worthless equity” on this old house. Easy come, easy go. 

Login or register to post comments by Augustus
on Wed, 10/27/2010 – 16:47

Met Life was the seller for the $5bln.  I haven’t followed all the details, but am wondering how they lost on the deal.

Login or register to post comments by RockyRacoon
on Wed, 10/27/2010 – 16:50

How many people live in 11,250 units?  You’d think ONE of them was a ZH regular.

Not even one?  That should tell us about the penetration of ZH amongst the “masses”.

No wonder nothing will be done about anything.

(Is my financial fatigue that obvious?)

Login or register to post comments by TuesdayBen
on Wed, 10/27/2010 – 17:08

Hmmmm.  What to do with 11,000 units, solid but dated property, essentially Gubmint-owned, in Manhattan, right there near Wall Street.

Could be converted into one hell of a Bankster Prison… The FanFred Fed.

Login or register to post comments by traderjoe
on Wed, 10/27/2010 – 20:19

I like it!

Login or register to post comments by StychoKiller
on Thu, 10/28/2010 – 01:10

Cue Kurt Russell trying to “Escape from New York!”

Login or register to post comments by blunderdog
on Wed, 10/27/2010 – 17:47

A friend of mine lived there for a few years during the mid-late aughts.

Was a nice place.  Tiny one-bedroom fully renovated with semi-luxury trappings.  Something like $2600/month.  Perhaps another division is stabilized and/or “middle income,” but I didn’t see it.  The complaints I’d expect from tenants would be more like, “the granite counter is scratched,” “the dishwasher clogs sometimes,” and “it’s hard to keep a stainless steel finish appliance looking clean.”

There’s plenty of demand for the apartments, and there’s plenty of rent to be charged, but the place was never worth $5bil.  Given that everyone except the bankers is going broke, the rents may have to fall a bit.


Login or register to post comments by tip e. canoe
on Wed, 10/27/2010 – 17:50

stuytown to squattersville by 2013 right on schedule.

Login or register to post comments by Ratscam
on Wed, 10/27/2010 – 17:51

another 9/11?

Login or register to post comments by apberusdisvet
on Wed, 10/27/2010 – 17:53

I feel one of those Red Adair type implosions coming; watch the news. 10———9———8———–7———–6————5

Login or register to post comments by Mercury
on Wed, 10/27/2010 – 17:56

Fannie Freddie and Treasury will rue the day they took control. The New Yorkers will just eat them alive.

U.S. taxpayers will be doing the rueing here.  They’ll paying maintenance, city taxes, overhead and keeping resident’s rents low for the next twenty years I bet.

Login or register to post comments by Purely Anedoctal
on Wed, 10/27/2010 – 18:14

I was there last month. Stuy Town and PCV are very nice, even friendly neighbors. Clean and very safe with well kept parks and playgrounds. Across the street from one of the best hospitals in the world and backed by the East River. The Subway is on the corner and has dinning and shopping attached along 1st ave. I think rent for 1 bedroom is about $1500, way down from highs. It’s a beautiful piece of property in the heart of NYC. The problem is rent control and the squatters. They can’t make enough in rent to cover the bills. Nothing is broken, the heat works, no weeds growing in the sidewalks and no graffiti. You should see the women laying out in the middle park on sunny days in the summer, unbelievable.

Login or register to post comments by beastie
on Wed, 10/27/2010 – 18:32

“You should see the women laying out in the middle park on sunny days in the summer, unbelievable.”

Going to have to junk you unless you post pics

Login or register to post comments by Purely Anedoctal
on Wed, 10/27/2010 – 18:48

No pics, its creepy to pull out the iphone and take pics of girls in bikinis. It is funny to see the old men lined up on the benches surrounding the park. Plus, I don’t have pic posting privileges.

Login or register to post comments by tip e. canoe
on Wed, 10/27/2010 – 18:50

“The problem is rent control and the squatters.”

squatters in stuytown right now?
you mean the rent control folks? 
you ain’t seen nothin yet bub.
just wait what a couple years of fedgov mgmt does.

and btw, they were only a problem to the fools who vastly overpayed for the joint and who thought they could squeeze the ol’ folks out without a good ol’ fashioned NYC catfight.

Login or register to post comments by Diogenes
on Wed, 10/27/2010 – 18:47

11,250 units times $2600 a month = $29,250,000 per month rent, or $351 million per year gross income. And that is minimal as the $2600 was for a tiny one bedroom, five years ago (according to Blunderdog’s friend).


That is a Gross Rent Multiple of 15.38, given the price of $5.4bn.  Think of that as the equivalent of P/E for real estate. Under 7 is real good, 15 is very high but not unusual for New York real estate at the height of a boom.

$2.7 billion would be a good buy, $1.8 a steal.

Let’s see if we can figure this out a little farther. Expenses on that class of property typically run 42% of the gross rent. That gives us a net of $203,580,000.

Plug that into a price of $5.4bn and you get a cap rate of 3.7%, lousy but let’s not forget how low interest rates are and how low returns are elsewhere. At the height of a boom, in a low interest rate environment, maybe it looked good.

Cut the price in half to $2.7bn and return jumps to 7.4%. If you could get it for $1.8bn your return would be 11.3%. Not too shabby compared to government bonds at negative interest rates.

It would be interesting to know what their interest expense was. It looks like they financed the whole deal (“no money down”) and still had a positive cash flow.

These are just back of the envelope calculations and mean very little, except to point out that maybe the people who made the original deal were not crazy, just enthusiastic. While anyone who can buy today at fire sale prices will make out like a bandit.

Login or register to post comments by Bruce Krasting
on Wed, 10/27/2010 – 20:53

A significant number of the apartments are rent controlled. As/when those tennants leave the rents are brought to market. The RC apts are cheap. No one wants to leave. So your #s are high.

The actual principal outstanding is $3b. The extra 600mm is a penalty that would no doubt be waived.

Ackman saw value at this level. I don’t get it. But i don’t have an extra $45 mil to take a look see……


Login or register to post comments by Reggie Middleton
on Wed, 10/27/2010 – 21:34

It is also not that simple to bring the apartments to market price. You have to jump through hoops, do significant renovation of which you can recoup some in price increases, save a vacancy of X time units, and prove the RC tenants moved voluntarily and produce a non-harassment affidvavit.

As you said, RC apartments in nice parts of NYC are just as valuable (Actually more in downward trending housing market) than owning with some equity. The reason is becaue it makes NYC living so cheap of extended periods of time. You actually have the apartments pass from generation to generation under RC.

The folly of the original investors is that they came in at the height of the bubble and thought they could muscle the RC people out and convert to condos. This was never meant to be a cash flow deal. Problem was they never bothered to look around. There were already too many condos in NYC, much too many. An extra 11,000 would have made a difference. They also severely underestimated the difficulties in overcoming RC. Peter Cooper Village and Stuyvesant town are not the LES projects of old. Those beauties in bikinis in the part either are, or come with educated professionals – lawyers, doctors, accountants, consultants, junior bankers, and degreed entrpeneurs – most of whom would not go down without a fight in order to save their RC goldmines.

NYC real estate investors should know to take these things into consideration BEFORE they throw money around. BTW, I wouldn’t touch that project with your money for anything under a 10% cap rate. But then again, I’m poor and need the money.

Login or register to post comments by Buck Johnson
on Wed, 10/27/2010 – 18:47

How much you want to bet that much of that 5 billion dollars loaned out to the group who had it the first time was siphoned off into offshore banks and such.  Nobody and I mean nobody would go into a big deal like this without looking at the property, and the property at best was worth 1.8 billion (I’ll be willing to say 1 billion).  I would love to have been one of the realestate brokers on the 5 billion dollar deal.

Login or register to post comments by tom
on Wed, 10/27/2010 – 18:56

Gee, nobody wants to pay $2600 a month for a small one-bedroom in an ugly ex-project? I can’t imagine why not.

What will be interesting is how it’s managed. Reportedly it’s switching back to the pre-2006 management company, Rose Associates. Reportedly there’s a lot of vacancies, both renovated and unrenovated. The previous management seemed to think it better to maintain the pretense that $2600 and up was going to work. Will Fannie and Freddie direct their new managers to remember the affordable housing mandate? I kinda doubt it. Probably will continue more or less as it has been, overpriced and increasingly vacant. Boss says the recovery’s underway, didn’t you hear?

(Diogenes: rents currently start at $2600, but that’s for renovated, lots of legacies paying less and lots of vacants. Your numbers are way too generous.)

Login or register to post comments by Diogenes
on Wed, 10/27/2010 – 18:52

By the way I find it hard to believe that the rent on a nice apartment in a good neighborhood in New York, has dropped from $2600 to $1500. That usually does not happen, rents and property prices don’t correlate that closely, usually rents do not change as fast as real estate prices. I could see a drop in rent of 10% or so but not 40%.

Login or register to post comments by tom
on Wed, 10/27/2010 – 18:59

You know nothing about real estate, of course rents plummet as much as prices plument. NYC however still hasn’t deflated that much, thanks to Fed and government largesse.

Login or register to post comments by SteveNYC
on Wed, 10/27/2010 – 19:32

Crikey, walked right through Stuy Town last weekend. Looks nice still, grounds well maintained etc. The moment this deal happened in 2006 I was ridiculed for saying that it was going to go under. It was done at about a 2% cap rate if I recall…fuckin ridiculous.

Oh well, Ben will buy it….

Login or register to post comments by tom
on Wed, 10/27/2010 – 20:30

Stuy Town is notorious for its size and and the public financing and litigation and its aggressive battles with legacy tenants. But financially it’s pretty ordinary. Must be scores of Manhattan condo projects going bust just as badly on a relative scale. NYC is no place to own income property. As high as the rents seem, if you compare them to the cost of the property (even now), plus taxes and costs, the yields are pitiful. Worst in the US.

Login or register to post comments by SteveNYC
on Wed, 10/27/2010 – 21:12

Agree. I’ve been a renter my entire stint here, my rent barely covers the landlord’s tax & maintenance. Nailed a deal last year on a new pad, a condo, very high-end and the rent is less than lower quality properties that are managed/owned by rental companies.

There are some excellent deals out there if you have some cash, are patient, and willing to walk away. Plus, never cut a deal in the spring/summer, ALWAYS hold out for Fall/Winter in Manhattan.

Login or register to post comments by Careless Whisper
on Wed, 10/27/2010 – 21:45

The cash flow never covered interest.



Login or register to post comments by Coldfire
on Wed, 10/27/2010 – 22:30

Location may be good, but it looks like it’s built out of baked turds.

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