After Two Years of Trying, Owners Give Up on Selling Starrett City



– February 18, 2009 –

The owners of Starrett City, the country’s largest federally subsidized housing complex, have abandoned their heady dream of selling the property for more than a billion dollars.

The owners, a group of investors led by Disque Deane, cited the faltering economy and a lack of financing as the reasons. But the sale may have foundered over price, said Donald Cogsville, who until Monday led a consortium of nonprofit organizations and developers that had been negotiating to buy Starrett City for the past two months.

Neither side would discuss details of the proposed sale, although some real estate executives familiar with the talks said that the group had offered about $700 million. Mr. Cogsville said his consortium was unwilling to raise its offer to meet the seller’s demands.

“We weren’t prepared to offer a higher price that jeopardized either long-term affordability, or a commercial return,” Mr. Cogsville said.

The owners had put the complex — 5,881 apartments in 46 towers spread across 140 acres  overlooking Jamaica Bay in Brooklyn —on the auction block at the height of the real estate boom in 2006, hoping to sell it for at least $1.2 billion. But prices have plummeted since then.

Along the way, the potential sale ran into widespread opposition from tenant groups and elected officials who feared that a high price would force a new owner to oust longtime residents in favor of higher-paying tenants, or defer maintenance at what is a highly regarded complex.

Their fears were heightened by a sudden buyers’ frenzy in which private equity firms bought dozens of brick tenements in Harlem, the South Bronx and East New York with plans to profit by converting rent-regulated apartments to market rents.

In a statement Monday afternoon, the owners said that Starrett City was no longer for sale, and indicated that they did not plan to pull out of the state’s Mitchell-Lama program, which subsidizes middle-class housing, as they had once threatened.

“We plan to continue working with government to operate Starrett City as an affordable housing complex into the future,” said Martin J. McLaughlin, a spokesman for the owners, Starrett City Associates.

The efforts to sell Starrett City had unsettled many of its 14,000 tenants. But now with the sale canceled, residents expressed mixed emotions, with some saying they feel the complex’s future remains uncertain.

“We’re stuck in limbo,” said Rebecca Caraballo, 58, a retired medical assistant and a member of the Starrett City tenant association.

The owners have told public officials that they were exploring their options, including a possible refinancing of the complex, which has a relatively small $234.4 million interest-free mortgage.

Senator Charles E. Schumer and other public officials want the owners to abide by an agreement both sides signed last year intended to ensure that the complex remains affordable for the next generation of tenants.

“If the owners of Starrett City want to retain the property, then they must continue to follow a long-term affordability plan that preserves the complex and lives up to the Memorandum of  Understanding we agreed to last year,” Mr. Schumer said in a statement Monday.

Starrett City, situated between Canarsie and East New York, is something of a rarity, a large housing complex that works, according to tenants and housing advocates. Its racially and ethnically mixed population of 14,000 residents have their own shopping center, post office, houses of worship and power plant.The current owners got extensive tax breaks when they invested in Starrett City in the 1970s and annual rent subsidies from federal,state and city governments in return for rent regulation and restrictions limiting the annual return to 6 percent.

In 2007, their attempt to sell the complex to a real estate developer, David Bistricer, for $1.3 billion was blocked by tenant groups and local officials, who protested the escalating loss of moderately priced housing.

Starrett City Associates, which had initially barred bidders from talking to government officials, then worked out an agreement with Senator Schumer and state and city housing officials ensuring that the complex would remain a haven for poor, working and middleclass families.

A second effort to sell brought offers, albeit far smaller, from six separate groups that included both nonprofit housing operators and developers.

With the decision to end the sale, some real estate executives say the owners may seek legislative changes to the regulations restricting the annual profit and the amount of debt on the property.

If they are successful, the owners could do perhaps a $500 million refinancing, enabling them to pay off the old mortgage and distribute hundreds of millions of dollars to investors without having to pay taxes on capital gains. The owners could later sell the complex when the market improves.

Posted in The Cogsville Group News