"Creditors Take Over $5.4B NYC Housing Complexes"

ROBERT SIEGEL, host:

The last few years have seen a lot of people lose money in real estate. But the loss people are talking about in New York today is in a class by itself.

A New York investment group said that its walking away from its purchase of Stuyvesant Town and Peter Cooper Village, two sprawling apartment complexes on the East Side of Manhattan. The move marks the collapse of the biggest residential real estate deal in U.S. history.

NPRs Jim Zarroli reports.

JIM ZARROLI: Stuyvesant Town and Peter Cooper Village were built by the insurance company MetLife after World War II for returning veterans. And over time, they have become iconic properties, 11,000 apartment units spread over 80 leafy acres in the heart of the city.

But when a group of investors led by Tishman Speyer decided to buy the complexes in 2006, a lot of people were startled by the price they paid, $5.4 billion, much of it borrowed. Sam Chandan is president of Real Estate Econometrics.

Dr. SAM CHANDAN (President and Chief Economist, Real Estate Econometrics): Embedded in the underwriting was a very, very optimistic set of assumptions around how cash flow would grow, around how the New York market would perform.

ZARROLI: At the time, New York City was easing its rent control laws and the new owners figured theyd be able to charge market rents for the properties. But residents fought them in court and won. At the same time, the real estate market was losing steam in New York, and the owners had trouble paying off their debt.

Today, the company said it would surrender control of the complexes to their lenders. The decision leaves the legal status of the complexes up in the air. Long-time resident Peter Vecsey who writes for the New York Post says a lot of people are worried, especially the elderly.

Mr. PETER VECSEY (Columnist, New York Post): What do they do? Theyve been having trouble worrying about being forced out, you know, the last few years ever since it was sold. And so, everything like this makes everybody nervous, no question.

ZARROLI: But the big losers will be the investors. They included Tishman Speyer which is expected to walk away from an investment worth $112 million, and several big pension funds like the California Public Employee Retirement System.

Peter Slatin is editorial director of Real Capital Analytics. He says theres a lesson in whats happened to the two complexes.

Mr. PETER SLATIN (Editorial Director, Real Capital Analytics): To me, this is emblematic of the extremes of the last cycle when investors really lost sight of the value of real state as an income producing asset and saw it as speculative investment on a grand scale.

ZARROLI: Slatin says with the commercial real estate market as weak as it is right now, this wont be the last property to go under, though few of the deals that collapsed will be as big as this one.

Jim Zarroli, NPR News, New York.