HUD Clips Starrett Buyer

The investor group faces daunting challenges if it can clear HUD's hurdles.
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Updated from 1:35 a.m. EST

At a press conference Friday morning, Housing and Urban Development Secretary Alphonso Jackson blocked the $1.3 billion sale of Starrett City in Brooklyn, N.Y, to Clipper Equity LLC, a private investor group. Jackson had said earlier that he had not completely shut the door on a sale, demanding more information about financing and Clipper's plans to maintain affordability in the complex; it's clear now the deal is dead.

Although those particular questions prompted Jackson's decision, it is clear that concerns about the buyer's management capabilities and its attitudes toward some of New York's most vulnerable tenants were also at issue. As the city's overall housing stock for its working-class population faces increasing market pressures, officials seem willing to draw a line in the sand at Starrett City, and even if Clipper succeeds it faces stiff financial challenges.

Built in the mid-1970s, Starrett, with just under 6,000 units in 46 buildings, is the nation's largest federally subsidized housing development, and it is being sold by the investment group that took it over in the early 1990s, which is a complicated general partnership structure led by investor Disque Dean, who also was a lead in Corporate Property Investors, which was the entity that sold the General Motors Building to Donald Trump and Conseco Insurance in the late 1990s.

Well over 90% of the units are subsidized in some form: Some 3,600 are low-income subsidies such as Section 8, and the remainder are for moderate-income or working-poor families. Almost all the subsidized units are protected, meaning a new owner will not be able to churn tenants to try to create market-rate housing.

What concerns Jackson, as well as New York state and city officials, is the spotty record of Clipper principal David Bistricer, who has been known to operate apartment complexes with many hundreds of violations. Although Clipper has cured thousands of violations at Flatbush Gardens, which it acquired 18 months ago, many new violations have reportedly been created. It should be noted that a small group of tenants there has written a letter to authorities in support of their landlord. Bistricer has also been barred by New York state's attorney general from converting buildings to co-ops and condos. However, Bistricer was given clearance to convert a Brooklyn office building last year, indicating that the prohibition may be under review.

The sale of Starrett City follows right behind the much publicized sale by Met Life of the huge Stuyvesant Town and Peter Cooper Village complexes in Manhattan to Tishman Speyer Properties for $5.4 billion. That sale was conducted by the same high-octane brokerage team at

CB Richard Ellis

(CBG)

that is handling Starrett City. Strong concerns over maintaining affordability in that deal did not halt the transfer, and the 11,000 apartment units will all eventually be market rate (two-thirds are currently subsidized).

Clipper's winning bid values the complex at roughly $220,000 per unit, which is cheap for Manhattan apartments but steep for a 33-year-old postwar housing project that has had its share of wear and tear. It seems understandable that Tishman Speyer, with nearly $24 billion under management, and its Stuyvesant Town partner, Blackrock, are willing to wade through years of low-single-digit returns at their 80-acre waterfront Manhattan complex as they convert it to market rents. But it's difficult to see the same outcome for the steep price Clipper and its rival bidders are willing to bet on a low-rent apartment complex deep in Brooklyn (although also on the water).

What's more, Clipper has pledged to keep rents low if it acquires Starrett; the current ownership has declared that if the deal falls through, it will opt out of the various subsidy programs and move toward market rents.

Clipper, if it prevails, faces a formidable challenge. Without cutting services at Starrett City (now officially called Spring Creek Towers), it has to maintain quality of life at high-maintenance properties whose tenants have daunting social needs. And it has to do so with its own actions -- perhaps rightly -- under an array of official federal, state and city microscopes and those wielded by housing advocacy groups.

With an ultimate payoff seemingly far down the road at a time when many opportunistic investors want out as soon as possible -- and with this week's market turmoil still reverberating -- Starrett City's affordability for this buyer may actually be out of reach.

At the time of publication, Peter Slatin had no positions in stocks mentioned.

Slatin publishes the independent real estate newsletter theslatinreport.com. He has written extensively about real estate and architecture for publications ranging from Barron's to The New York Times, and is on the editorial board of Real Estate Portfolio, published by the National Association of Real Estate Investment Trusts. He was the founder and editor of Grid, an award-winning real estate business magazine.