Taxpayers get stuck with over $200 million in direct costs for give-aways to Blackstone-Ivanhoé
Blackstone-Ivanhoé gets to keep or sell air rights that, by one estimate, are valued at $350 million
Affordable housing will be provided in the form of preferential rents, a method of discounting that is ripe for exploitation by landlords
Potential conflicts of interest between the buyer and the seller
By LOUIS FLORES
Updated 11 Nov 2015 04:05 p.m. ⎪ The sale of the Stuyvesant Town and Peter Cooper Village apartment complex by CWCapital Asset Management LLC, to a joint venture between Blackstone Property Partners L.P., an affiliate of Blackstone Property Advisors L.P., and Ivanhoé Cambridge, a subsidiary of the Canadian pension fund Caisse de dépôt et placement du Québec, involved city officials, business leaders, and lobbyists.
The goal of the multiple parties was to promote the idea that limited affordable housing was going to be preserved, as reflected in the self-laudatory press releases issued following the announcement of the sale, even though the goal of the buyers has been to make money from their investment, as reflected by the financial extractions that the buyers have been able to win from the City of New York.
The joint venture representing the buyers made a successful offer to buy the apartment complex for $5.3 billion, according to a report broadcast by the NY1 cable news channel. Such a large purchase price comes with an expectation for a very large return on the investment, not with aims of charitable housing work that will act to reduce the return on their investment.
To subsidize the costs for the buyers of maintaining limited affordable housing at Stuy Town-Peter Cooper, the City, under the administration of Mayor Bill de Blasio (D-New York City) and Deputy Mayor Alicia Glen, packaged financial incentives that transferred the cost of maintaining limited affordable housing to city taxpayers, instead of being bourne by the buyers. One press release, issued by the Canadian pension plan, seemed to indicate that without the city's financial sweeteners, the buyers would eventually reduce the number of apartments subject to rent regulations to just 1,500 out of the total 11,241 apartments that exist between the two apartment compounds. The plan announced by Mayor de Blasio will only preserve 3,500 more apartments than that, at a cost of :
- A 20-year loan from the New York City Housing Development Corporation in the amount of $143,718,750 to the joint venture, or its affiliates. The loan, at 0% interest, will be forgiven annually at a rate of $7,185,937.50 per annum, according to the Term Sheet signed by the City and Blackstone. Since the loan, essentially a give-away, may be made to affiliates of the joint venture, there's no guarantee that the loan will be used for preserving affordable housing ; it could be being used to lower the over-all capital cost structure for the joint venture -- or for the affiliates of the joint venture.
- The joint venture bought, by one estimate, approximately 700,000 square feet of unused air rights that could allow it to develop buildings on green spaces, playgrounds, and parking lots. A controversy erupted after the announcement of the sale when concerns were aired that the de Blasio administration had not placed any binding legal restrictions on the joint venture in respect of the unused development rights to the 80-acre complex. According to a report published by The Wall Street Journal, the unused air rights could be worth perhaps as much as $350 million to Blackstone and lead to greater construction density elsewhere in New York City if the unused development rights were sold by the joint venture. The report in The Wall Street Journal speculated that by providing Blackstone a backdoor to sell the unused air rights, "The incentive offers a window into why Blackstone may have agreed to a deal to preserve middle-income housing that was viewed as a low-cost win for the city." Councilmember Daniel Garodnick (D-Manhattan), who represents the district, published an open letter to constituents, trying to address worries that the de Blasio administration had made a serious omission in the City's negotiations with Blackstone, writing that Blackstone was not presently considering any sale of the unused air rights. However, it is also true that the Term Sheet was silent about any restrictions on unused air rights.
- Only 500 of the total 5,000 apartments reportedly being preserved for affordable housing are being set aside for low-income families earning up to $63,000, according to The Wall Street Journal report. The balance of the apartments are being set aside for families of three making up to $130,000 annually, again raising questions about the de Blasio administration's inability to truly help the families most struggling to find affordable housing during the housing crisis playing out on the mayor's watch.
- The duration of the affordability for the extra 3,500 apartments being set aside by the de Blasio administration expire at the end of 20 years. The restrictions on the 1,500 apartments that the Canadian pension plan had estimated would still be subject to rent regulations at the end of 20 years will now be summarily lifted at the end of the 20 years -- with the City's consent, meaning the entire Stuy Town-Peter Cooper complex can be converted into market-rate apartments, or for any other purpose at the joint venture's discretion.
- Although the 5,000 apartments are being nominally described as preserving affordable housing, the method agreed to by each of the de Blasio administration and Blackstone to achieve affordability is by offering tenants preferential rents, a method shown in a report published by Progress Queens that creates a loophole ripe for abuse, exploitation, and possible illegality by landlords.
- New York City has committed itself to providing to the joint venture a one-time 100% tax exemption from the mortgage recordation tax, according to the Term Sheet, in anticipation of the joint venture receiving mortgage financing to finance the $5.3 billion purchase. The mortgage recordation tax exemption will save the joint venture -- and cost the City -- an estimated $77 million, according to a report published by The Real Deal.(*)
Oversight by conflicted public officials
As a result of the controversies specific to the unused air rights, four elected officials -- some with conflicts of interest -- sent a letter to Jonathan Gray, global head of real estate at Blackstone, outlining the officials' concerns. The letter revealed that the unused air rights at the Stuy Town-Peter Cooper complex could total 10.7 million square feet, if community facility uses were included, making the unused development rights potentially worth billions of dollars to Blackstone.
Inexplicably, State Sen. Brad Hoylman (D-Manhattan) was a signatory to the letter to Blackstone, even though he has conflicts of interest with Blackstone by virtue of their membership in The Partnership for New York City, State Sen. Holyman's former employer. Before State Sen. Hoylman became a state legislator, the disastrous, prior sale of Stuy Town-Peter Cooper in 2006 to a partnership between Tishman Speyer and Blackrock was made possible because of real estate mogul Rob Speyer's close business and government ties as former head or co-head of each of The Partnership for New York City and the Real Estate Board of New York, as reported by The New York Times.
Mayor de Blasio is exposed to various real estate developers, big business interests, and even Mr. Gray, Blackstone's global head of real estate, by virtue of City Hall's many nonprofit arms, including the Mayor's Fund to Advance New York City, chaired by his wife, Chirlane McCray, and the Campaign for One New York, a political slush fund that raises money from real estate interests to pay political consultants with close ties to City Hall. Many real estate and big business executives also served on Mayor de Blasio's unsuccessful 2016 DNC Host Committee, including Mr. Gray.
Reportedly, the politically-connected lobbying firm, BerlinRosen, which has close ties to the de Blasio administration and has been known to represent various real estate developers with business before City Hall, was working with Blackstone in respect of the purchase of Stuy Town-Peter Cooper. According to BerlinRosen's Web site, one of its professionals represents the Stuyvesant Town-Peter Cooper Village Tenants Association, placing BerlinRosen in a position to be able to persuade tenant advocates to accept terms of affordable housing protection that would be politically-expedient for the de Blasio administration.
According to supplemental information received by Progress Queens, BerlinRosen also apparently represents Blackstone Charitable Foundation, as evidenced in a Blackstone press release, where the media contact is a communications associate at BerlinRosen, placing BerlinRosen in a tripartite advisory role along side each of Mayor de Blasio, Blackstone, and the Tenants Association.(*)
According to the Form ADV (Long Form) filed by Blackstone Property Advisors L.P., with the Securities and Exchange Commission, signed on 11 June 2015 by Judy Turchin, the general counsel and chief compliance officer for Blackstone, Blackstone Property Partners L.P., only had a gross asset value of $300,448,456 under management. This was approximately five months ago.
Nevertheless, this particular Blackstone fund was being identified, along with Ivanhoé Cambridge, as being able to finance the $5.3 billion purchase of the Stuy Town-Peter Cooper complex. Without knowing Blackstone Property Partners L.P.'s financial records, it is not known to what extent that real estate fund may already use leverage.
Whilst the Term Sheet indicated that Blackstone Property Advisors L.P., was acting on behalf of affiliates, is not known if any of a number of other Blackstone real estate investment funds (or other non-Blackstone funds, for that matter) were going to invest alongside Blackstone Property Partners L.P., to provide the necessary equity for the joint venture's financing of the $5.3 billion purchase of Stuy Town-Peter Cooper.
Other financial questions remain about Blackstone's partner in the purchase.
According to a marketing bulletin published on 8 July 2010, by the Canadian law firm of Fasken Martineau, there are restrictions on registered pension plans in Canada. "Registered pension plans are prohibited from borrowing money except in limited circumstances, pursuant to s. 8502(i) of the Income Tax Regulations. This rule should be remembered when considering innovative investment structures and derivative contracts," wrote a Fasken Martineau attorney in the firm's marketing bulletin. How the Canadian pension plan would address its borrowing restrictions was not clear, other than its subsidiary's name was being attached to the purchase of Stuy Town-Peter Cooper. It might be possible that, if the Canadian pension plan were to be an investor, then the Canadian pension plan might contribute pension plan assets directly into the joint venture, thereby exposing those pension plan assets to borrowing. However, it's not known if such a hypothetical arrangement would receive the approval of Canadian pension plan regulators.
Furthermore, if the Canadian pension plan, Caisse de dépôt et placement du Québec, were to provide equity into the joint venture, then it might be using foreign money that might expose pension plan assets to U.S. income taxes. Typically, when an investment fund is created that will draw on domestic and foreign investors, some kind of master fund structure is created with onshore and offshore feeder funds, to create separate tax treatments for investors in different jurisdictions. However, the Blackstone Property Advisors L.P. Form ADV indicated that Blackstone Property Partners L.P., was not a master fund in a master-feeder arrangement. A request made by Progress Queens to interview the Paul Hastings real estate partner, Mark Eagan, who represented Ivanhoé Cambridge, was not immediately answered.
It is not known if, by providing the financial sweeteners to the tune of several hundred million dollars, City Hall was consenting to the creation of a tax structure that would allow foreign investors to evade U.S. and New York state and city taxes. A request made by Progress Queens to the City Hall press office was not answered by Wiley Norvell, an administration communication official.
Between the low asset value of Blackstone Property Partners L.P., and the restrictions on borrowing and tax implications facing the Canadian pension plan that owns the subsidiary that is participating in the joint venture, it's not known where the entire debt load for the $5.3 billion purchase would be being booked. If the joint venture is not sufficiently seeded with equity, the mortgage may require parent company guarantees. Under a guarantee scenario, it is not known if the guarantees for the joint venture's participants would roll up to their respective parent-holding company, something that may not be possible for the Canadian pension plan.
It's also not yet known whether an affiliate of the joint venture will receive the City's $144 million interest rate-free, forgivable loan.
The Term Sheet indicated that Fannie Mae and Freddie Mac could also serve as lenders to the joint venture. The size and terms of those loans are not yet known.
Finally, the Term Sheet, which was executed by Deputy Mayor Glen, on behalf of the City, and by Mr. Gray, on behalf of Blackstone, also referenced documents that were not attached to the Term Sheet. A request made by Progress Queens to Liam Bland, a communications aide to Councilmember Garodnick, for the missing documents was not immediately answered.
Potential conflicts of interest between the buyer and seller(*)
After this report was published, Progress Queens received information from an anonymous source, raising questions about potential conflicts of interest between the buyer and seller, as set forth below :
- A majority stake in CWCapital Asset Management LLC, the seller, was once owned by Otéra Capital, a subsidiary of the Canadian pension plan, Caisse de dépôt et placement du Québec.
- In 2010, after the previous owner of Stuy Town-Peter Cooper lost ownership stake in the apartment complex due to a mortgage default, Otéra Capital sold its majority stake in CWCapital Asset Management LLC to Fortress Investment Group L.L.C.
- Charles Spekta, a long-time executive with CWCapital Asset Management LLC during the years it was owned by the subsidiary of the Canadian pension plan, was the target of negotiations by Rob Speyer, an executive with one of the investors in the prior owner of Stuy Town-Peter Cooper, before the mortgage entered into default. Mr. Speyer was reportedly trying to reach a work-out with CWCapital Asset Management LLC to prevent a mortgage default. Mr. Speyer has been described to be a close friend of Mayor de Blasio. Mr. Speyer's company, Tishman Speyer, has been a donor to one of the mayor's nonprofit groups.
- As the Canadian pension plan, through one of its subsidiaries (Ivanhoé Cambridge), attempts to finalise the joint venture's purchase into Stuy Town-Peter Cooper, the Canadian pension plan is doing so by negotiating with a corporate entity (CWCapital Asset Management LLC) in which a majority stake was formerly owned by one of its other subsidiaries (Otéro Capital).
Therefore, this is a second play by Caisse de dépôt et placement du Québec on Stuy Town-Peter Cooper. The Canadian pension plan may have a high tolerance for risk. During the 2008 financial crisis, the Canadian pension plan reported a Canadian $40 billion loss tied to investments that lost their value, according to a report filed at that time then by CBC News.
Notes : (*) Updated to reflect (i) the consulting relationship between BerlinRosen and Blackstone Charitable Foundation, (ii) the estimated cost of the mortgage recordation tax exemption, and (iii) potential conflicts of interest between the buyer and seller.
- 2015-10-19 City of New York - Blackstone - Stuyvesant Town - Peter Cooper Village - Term Sheet [Scribd]
- 2015-11-07 Blackstone Property Advisors LP - SEC Form ADV (Long Form) [Scribd]
- 2015-10-XX Caisse de dépôt et placement du Québec - Stuy Town-Peter Cooper (Press Release) [Scribd]
- 2015-10-20 Paul Hastings - Ivanhoe Cambridge Joins Joint Venture to Purchase Stuyvesant Town-Peter Cooper Village [Scribd]
- 2015-10-26 Stringer Maloney Hoylman Kavanagh - Lettter to Blackstone [NY State Senate]
- 2015-10-28 Daniel Garodnick - Constituent Letter on Stuyvesant Town-Peter Cooper Village (Air Rights) [Scribd]
- 2010-07-08 Fasken Martineau - Pension Plans - Marketing Bulletin [Fasken Martineau]