Within the past several weeks, a couple of interesting developments have taken place in the heady world of New York City real estate. While in and of themselves these developments have little bearing on the lives of most Americans, they do point to an intriguing dynamic shared by both the haves and have-nots in our country.
After all, greed is still greed, whether perpetrated by the rich or poor - and you get plenty of all three in The City That Never Sleeps.
The Five Billion Dollar Gambit
Remember the post I wrote about public housing, in which I mentioned Peter Cooper Village and Stuyvesant Town in Manhattan? These two apartment complexes house thousands of middle-income professional New Yorkers, like nurses and electricians, who pay below-market rents in an artificially-deflated, city-regulated incentive program to keep a middle class presence in the heart of the Big Apple.
I had mentioned that Met Life, the private corporation which built and managed the complexes for decades, had sold them to a private developer who intended to transition as many apartments as it could to market-rate rentals. While in theory this would generate signficant profits for the new owners and their investors, Manhattan's already-limited inventory of rent-controlled units could be decimated.
A group of financiers constructed an elite investment package into which a number of wealthy organizations contributed hundreds of millions of dollars. The total price, $5.4 billion, made the purchase of Peter Cooper Village and Stuyvesant Town the largest single real estate transaction in history. Tenants were understandably nervous and skeptical, but they could not come up with the funding to beat the higher offer. So in 2006, Manhattan’s great experiment in middle-class housing went private in what was heralded as a bold real estate coup.
What nobody seemed to realize was that North America's housing market had been rushing to the brink of catastrophe, in part because of myopic and reckless deals like Stuyvesant Town's. What to investors had been solid opportunities suddenly began to look more like Bernie Madoff ponzi schemes. Although the sharpest pain would be felt in California and Florida, Manhattan Island would become home to the biggest real estate flop in history. You guessed it… the Stuyvesant Town deal went belly-up last month. Its new owners couldn’t turn around enough market-rate apartments fast enough, and with the slide of rental rates even in New York's market, the margins necessary to turn a profit never materialized.
Amazingly, the two companies that brokered the whole deal will emerge from the disaster relatively unscathed, while public employee pension funds and other investors – including the Church of England – will, combined, lose billions. That’s Billions, with a “B”. Gone in one transaction everyone thought looked so good on paper.
Everyone, that is, except the tenants at Stuyvesant Town, who now can only hope that the interim management won’t let their aging buildings deteriorate to the point at which they’re not even worth the controlled rental rates that once seemed such a bargain.
Do Taxpayers Owe People Public Housing?
Now, let’s hop across the East River and through the bustling heart of Brooklyn, to a dismal collection of public housing towers that have been slated for demolition in what could be the city housing authority’s first significant shift in its philosophy.
Up until now, while other large cities have been tearing down their public housing high-rises and transferring residents into low-rise, low-density facilities using a variety of vouchers and benefit mechanisms, New York has been sailing against the tide, plowing incredible amounts of money into renovation projects for existing structures.
But even the New York City Housing Authority has its limits, and it found them here at Prospect Plaza. After spending millions of dollars over seven years to discover it would cost less to raze the existing buildings and construct new ones, the authority has halted renovations at this 35-year-old complex, and has begun proceedings to raze it.
Actually, Prospect Plaza used to have four buildings, but one has already been torn down, the very first authority-built building the city has ever demolished. So, while ignominious in life, in death Prospect Plaza is becoming quite the historic site.
History which, not surprisingly, the 1,200 people displaced from the already-closed complex decry as a sham and disgrace. Public housing residents consider themselves to be the victims of bad management and devious powerplays by the housing authority. Some believe that the three remaining towers serve as a better promise for housing than having them torn down and replaced with… what? Isn't one bird in the hand worth two in the bush? With the towers still standing, former residents see the potential for moving back in; with them gone, plenty of vacant land sits primed for possible private investment.
Which brings us to this uncomfortable question: who has rights to this scruffy patch of land and these derelict, now-vacant buildings? The residents who used to live there – on the taxpayer’s dime – or the taxpayers, who might see a much better return if the land was redeveloped into less expensive public housing or sold to developers for market-rate housing?
As you might expect, this question has already been answered by Prospect Plaza's former tenants. Suspicious and contentious, they see nothing altruistic in the authority’s plans, even though they have already been resettled in other developments, and will not be responsible for paying the $481,000 tab for renovating each existing unit if they win their fight.
Meanwhile, hard-working New Yorkers struggle to afford a home for half that amount, watching their paychecks shrivel from overtaxation. Who has the right to be disgruntled more?
New York Provides the Stories, But We All Share in Them
One of the things I like so much about New York involves the uncanny knack the city has for presenting so much dichotomy and irony. Within mere miles of each other, some of the world’s wealthiest real estate tycoons can slather together a record-breaking deal with other people's money, only to have it unravel three years later; while recipients of public housing try to lay claim on old apartments provided to them by the taxpayer.
What is the extent to which both the real estate developers who brokered the Stuyvesant Town deal and the disgruntled former residents of Prospect Plaza expect their way to be paid by other people? The developers wanted investors, public housing residents want taxpayers, and at the surface, neither is immoral or illegal.
Don't think I'm minimizing the duty of the developers and public housing residents to shoulder their own responsibility. The developers couldn't pass up the opportunity to make a fortune while risking an entity already recognized as a valued asset to the city. Public housing residents seem to have forgotten that taxpayer-funded housing isn't their right, it's a privilege originally conceived as a short-term stop-gap for people between jobs or facing other hardships. While legitimate opportunities to make money or accept temporary public assistance should not be denied, neither should they be abused.
Hmm... I probably should stop there, but I can't resist wondering if any parallel can be drawn between the investors and taxpayers in our stories? The investors could have held themselves more accountable by drenching the Stuyvesant Town opportunity in due-diligence and realistic trend forecasts, but apparently, they didn't. As far as the Prospect Plaza story goes, we taxpayers - not just in New York City - may leave too much of a burden for the care of the poor in the hands of government agencies, diluting accountability on all sides.
And from both the Stuyvesant Town and Prospect Plaza situations, can a simple economic lesson in capitalism also be seen? Both variants of subsidized housing ultimately met a test of financial inevitability: what the market says is fair, that is what should be paid. To the extent greed has corrupted both of today's stories, albeit in different ways, can we draw the conclusion that greed is not in the market's best interest?
I imagine the armies of lawyers working their way through these two dramas would beg to differ.