Blackstone dealt a lesson in politics

It took a court in New York until last week to deliver a ruling that could deprive private equity firm Blackstone of millions of dollars that it might otherwise have earned from its deal in 2015 to acquire Stuyvesant Town, one of America’s biggest rental apartment complexes.

Yet if you watch the press conference to announce the acquisition nearly a decade ago, it is tempting to believe that you can spot the exact moment when billionaire Blackstone boss Jon Gray realised that the 80 acres of Manhattan he had just bought for $5.3bn might be worth less than he thought.

When Democratic state legislator Brian Kavanagh took the podium and delivered a speech about wanting to repeal the laws that allowed landlords to eliminate rent regulation at thousands of New York apartments, Gray’s pursed lips seemed to betray a flicker of concern that now looks well-founded.

Blackstone’s acquisition of Stuy Town had once looked like a masterstroke, demonstrating that the Wall Street firm could take over huge tracts of housing while making friends with tenants and earning applause from public officials.

Such political deftness has been a winning trait for the firm behind one of the biggest US real estate empires. In the past three years alone, Blackstone has spent billions of dollars on housing from suburban homes to student rooms. But last week’s legal ruling underscores how a single election can alter the economics of such deals beyond recognition. It not only highlights the risks for investors, but shows how executives who are major donors to US political parties can still find themselves on the wrong side of new legislation.

When Blackstone bought Stuy Town, it was picking up the pieces from one of New York’s most spectacular real estate debacles. The previous owners had bought the complex in 2006 for a notoriously high price, and spent much of the following decade trying to earn that money back by spending even more. Under New York’s byzantine real estate law, renovations could be used to justify a small increase in the rent. Eventually, monthly payments would hit a magic threshold, meaning that when the apartment became vacant, rent regulation would no longer apply.

That plan did not suit Stuy Town’s longstanding residents, who objected to being replaced by higher-paying tenants. The community turned out to be an immovable obstacle. Overburdened by debt and with their plans to raise rents thwarted by a decade-long tenants’ revolt, the owners of the complex were ultimately forced to hand back the keys.

In the previous investors’ defeat, Gray spied a chance to claim magnanimous victory. He promised to set aside 5,000 units to lease to low-income families at modest rates. Those apartments would be kept affordable for at least 20 years. But under the law as it then stood, as many as 6,000 apartments were expected to fall out of rent regulation in 2020, potentially giving Blackstone a boost to returns.

After announcing the deal at an outdoor press conference, Gray looked on in satisfaction as tenants’ groups and public officials lined up to endorse the Blackstone deal. Bill de Blasio, then in his first term as New York City mayor, said: “This is literally the largest city-led preservation project ever.”

But then, in 2018, Democrats won a majority in the New York state senate for the first time in a decade. A year later they passed a law decreeing that rent regulations that had been scheduled to expire would stay on the books forever. This was a clear blow to the deal’s economic potential but one that might have been on the cards from the start.

“The deal they did with us was the right deal for the city, and they did it in good faith,” says Alicia Glen, New York’s former deputy mayor for housing who led the negotiations with Blackstone. “It wasn’t my job to evaluate for them their real political risk, which was that the politics of New York state could change.”

Blackstone had argued that the new law did not affect Stuy Town, where rent regulations had been scheduled to expire in 2020. But last week a judge rejected that argument, and if his decision withstands a possible appeal, Blackstone could be stuck charging below-market rents for decades to come.

The firm says the rents it charges at the complex have always been consistent with the ruling, so the court decision has no immediate impact on tenants’ rental bills. Despite the new cap on future rent increases, Blackstone said the deal was “a win-win for our investors and the residents, and any implication otherwise is categorically false”.

All the same, the fallout could dent the firm’s reputation as one of Wall Street’s most politically savvy firms. “If they assumed that Republicans were going to continue to be elected to the New York state senate forever and the law would never change,” says Kavanagh, “then in a democracy that’s generally a poor assumption.”

mark.vandevelde@ft.com