#250 What happened to the Chrysler Building?

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The Chrysler Building is set to sell for $150 million despite being purchased in 2008 for $800 million. The real estate bubble is a big reason for why the huge drop in value but another reason is that the ground is owned by a private school called the Cooper Union school in NYC.



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The Chrysler Building is set to sell for $150 million despite being purchased in 2008 for $800 million.

The real estate bubble is a big reason for why the huge drop in value but another reason is that the ground is owned by a private school called the Cooper Union school in NYC.

The school has recently upped the ground lease from $7.75 million to $32.5 million and set to go as high as $55 million in 2038.

The most interesting part about this (to me) is that the owners of the Chrysler Building do not pay taxes on the building to NYC and instead pay the ground lease to the Cooper Union school which is owned by their endowment.

The school has an endowment of $738 million which is pretty large considering that they have 927 students.

For context, The University of Buffalo (a public NYS school) has an endowment of $659 million BUT with 29,850 students (so $22 grand per student compared to $796 grand per Cooper Union student).

If you’re wondering Harvard has the largest endowment at $38 billion as of 2015.

But Cooper Union is a unique school in that they provide free tuition for the majority of their history (currently it’s half tuition but they’re working back to full tuition).

Resources Mentioned in this Episode

https://www.bloomberg.com/news/articles/2019-03-08/rfr-is-said-to-be-serious-bidder-for-nyc-s-chrysler-building

Largest School Endowments:
https://nces.ed.gov/fastfacts/display.asp?id=73

Cooper Union History:
https://en.wikipedia.org/wiki/Cooper_Union

How do University Endowments work:
https://www.investopedia.com/ask/answers/how-do-university-endowments-work/

Excellent Podcast on why donating to large school endowments is a waste of philanthropy:
http://revisionisthistory.com/episodes/06-my-little-hundred-million

Show Transcription:

00:03 Hey everybody. Welcome back to another episode of rentprep for landlords. I’m your host, Eric Worral. And this is episode number 250 and in today’s episode we’re going to talk about what happened to the Chrysler building in New York City

00:17 1,2,3,4 ya ya ya…. Welcome to the RentPrep for landlords podcast. And now your host, Steven White and Eric Worral.

00:23 So I thought it would be interesting this week to talk about a recent news story and has been all over the news. But I’m reading an article from Bloomberg by Lily Katz on March 8th and said that the Chrysler building is set to sell for $150 million, which sounds like a lot of money, maybe especially if you’d have from New York City. Uh, you know, you’re from a smaller town like I am in Buffalo, New York. But that same building was purchased in 2008 for 800 million by the Abu Dhabi investment counsel.

00:50 That’s a pretty steep drop in price to go from 800 million to 150 million while you hear 2008 and you’re like, wow, they, they bought this at the peak of the real estate markets. So that certainly played into it. But there’s other factors that are creating some of the issues of why the Chrysler building is worth so much less. And this episode is going to kind of take some weird twists and turns. Uh, we’re going to be talking about endowments and how those work for schools and why that affected the price of the Chrysler building. So as we go further into this article from Bloomberg, uh, it talks about the fact that the tower was completed in 1930 and is one of the most recognizable symbols of Manhattan skyline. Said for a short time, it was the tallest building in the world. And this is a real kick in the pants, but, uh, they said that it was surpassed by the empire state building, which opened the following year. I’m just thinking, you imagine just to having, owning the tallest building in the world. It’s your prized jewel. And then it’s not like on the other side of the planet, there’s a taller building. No, it’s, you can see it from your building. There’s a taller building. It’s funny how that happens, but, uh, it’s one of the issues that the building is facing though is that the interior is aging, which is not surprising for 1930 building. Uh, but that New York tenants had been favoring new glassy skyscrapers at Hudson Yard on the far west side, uh, and the World Trade Center downtown. So another factor that brokers say then the value of the Chrysler building is the increasing expenses tied to its ground lease. Yeah. So the land under the tower is owned by the Cooper Union school, which raised the annual fee to 32 and a half million dollars last year from 7.7 5 million in 2017.

02:36 So I read that paragraph and was like, wait a minute, what? Like, and this article kind of just glosses over it. I wasn’t familiar with, you know, how exactly it ground lease would work with the Cooper Union school, what the Cooper Union school is. And how they jacked up the price. Essentially what, like four or five x date, uh, to a 32 and a half million in one year. So what I want to talk about today is this interesting case with the Chrysler building and why a school owns the property underneath it and they’re leasing it. So I looked up the Cooper union school to learn a little bit about it for a little context. The Cooper Union school, according to Wikipedia, is a privately held a school which is located in Cooper Square in Manhattan, New York City. Uh, it was built in 1858, uh, established in 1859 and there are currently roughly 927 students at the school. So 853 are undergrads, 74 graduates. So pretty small school. Uh, it was founded by Peter Cooper, uh, who learned about government supported schools in France. And when he established the school, he wanted to go on this new radical model that all education should be free and open and accessible to people regardless of their race, religion, sex, wealth, or social status. So a kind of an interesting school. Uh, the fact that they have this, uh, this free tuition model, but that was, uh, challenged, uh, recently, uh, where they ended up going to half tuition. So just for a little context, uh, starting around October 29th, 2011, uh, rumors are circulating, the school was in serious financial trouble. Uh, and what they decided to do was lower the tuition, so they were no longer going to give free tuition to all students. Uh, they decided that they were going to do half tuition, uh, which accounted for about $22,000 per student. And the cost then to the school annually was going to be about just over $20 million if they’re doing this half tuition now that they wouldn’t be on the hook for. Now, the school itself has an endowment as of 2015, of $738 million. So if you’re not familiar with endowments with schools, these are for public schools, private schools, and this is essentially their, uh, their investment fund. They have people who manage this for them. Uh, one of the interesting things about these investment funds, which I didn’t know about was that they are not taxed in any way. Uh, these are tax free investment funds. And one of the issues that you see is it’s definitely a rich get richer type scenario. If you want to talk about the top 1%, it really applies when you’re looking at schools and their endowment funds. So for context, uh, this school has a pretty large endowment fund and it’s 738 million, uh, given how few students they have, they have 927 students. That endowment fund is equal to $796,000 per student. I went to University of Buffalo, which is a state funded school and there are 29,850 students at UB , but an endowment fund of $659 million, which equals $22,000 per student, roughly. So $796,000 endowment per student at the Cooper Union school versus 22,000 at my Alma Mater. Now, if you look at that are, um, leading the endowment fund race, uh, you’re looking at Harvard, Yale, Princeton, Stanford, uh, University of Texas system. They range from 38 billion down to 22 billion, uh, at the schools. And part of the reason is the people who graduate from here have a lot of money. And, uh, instead of using that money for things such as, you know, investing in their own communities, they give that money back to these schools, which use that money, uh, and do not get taxed on it and grow that money. And it’s just a case where the rich get richer with the schools where they have massive, massive endowments. And it’s a really interesting, um, issue of these really rich schools getting richer. Uh, if you’re interested in learning more about it, I learned a lot about this from the podcast revisionist history, by Malcolm Gladwell. Season one, episode six, my little hundred million as a really great episode, I’ll put that in the show notes.

06:52 So it’s really interesting though, because this Cooper union school, part of their endowment and major piece of it is the Chrysler building. So they actually own the property that the Chrysler building is built upon, which is pretty interesting, right? They don’t own the building, but they own the property. So it is a huge piece of their endowment. And what they did was in 2009 they were receiving $7 million per year from this personnel, but under a really unusual arrangement, New York City real estate taxes assessed against the Chrysler lease held by Tishman Speyer at the time are paid to Cooper Union, not the city. So there’s no tax paid on the building. And instead that money is paid directly to Cooper Union school. So it said that the arraignment will be voided if Cooper Union sold the real estate. But in 2006, Tishman Speyer signed a deal with the school to pay rent that has escalated to 32 and a half million dollars in 2018 and will increase to 41,000,0 in 2028 and 55,000,0 in 2038. So they signed this during the national real estate crash in 2009 and it’s pretty crazy story though when you think about it that this Chrysler building, yes, there’s a lot of issues. Um, the three major issues really are that people are not as interested to live there. Um, it was, uh, purchased during the financial crisis, uh, is hard to do renovations on it because it’s a landmark building, so you’re going to go through a lot of barriers to get any kind of updates done on it. But the fact that the land and the lease of it is jumping from seven and a half million up to a 55,000,0 in 2038 because it’s owned by a private school, which has less than a thousand students and has over a $700 million endowment. And I just thought it was such an interesting story. I don’t really have necessarily my own opinion on if this is right or wrong because I feel like in some ways it’s a little bit of both. I, it’s cool that the school, uh, is being funded by this piece of real estate that they own and I guess it’s up to them that they made a really good investment at some point and owned that property. Um, that the Chrysler building sits on, at the same time, I think it’s really odd that this private school with, uh, just, uh, over 900 students, uh, is robbing the city of these taxes that would normally be paid, a pretty substantial amount of taxes that can be used for public facilities and different avenues for the city itself. So it’s this weird like robbing Peter to pay Paul situation where the union school is essentially, uh, robbing the city of taxes that it would be getting on the Chrysler building. And also it’s signed this incredible, uh, contract, uh, with the buyers of the Chrysler building in 2009 to really jack up the prices.

09:49 If you’re familiar with the, uh, Bobby Binya agreement that was reached by the mets. Uh, it kind of sounds something like that. If you’re not familiar, look up Bobby Bunia. Hopefully I’m saying that right. He was a player. I’m not a big baseball fan, but I find the contract amazing. He was a baseball player for the New York mets who, uh, was given the most ludicrous contract and like all the sports history, basically they paid him not to play for them for the next 25 years. The genesis of the story, I’m jumping around a little bit, but I think the story is really interesting was that the owner of the New York mets at the time was investing heavily with Bernie Madoff, who I’m sure you’re familiar with. So he was thinking, I’m getting like crazy return on my money over here. Like, if I’m going to get 20, 30% over here, uh, I don’t care how much it costs to buy this guy out of his contract and just give him money. I’ll pay him tons of money over the next, you know, two decades, or I forgot what the actual number of years were. And because I’m getting such great return over here. Well, of course Bernie Madoff had a pyramid scheme that wasn’t true. Uh, and I should say Ponzi scheme and the, uh, so to this day, Bobby Binya is still getting paid on a contract and he hasn’t played baseball and like over a decade. So, uh, it seems like there’s that kind of deal going on with the Chrysler building and the Union school, or this union school just signed a massive contract at the peak of the real estate market and now it’s hurting the actual, uh, profitability of the Chrysler building. And that’s why Abu Dhabi, uh, bought it for 800 million. And that’s part of the reason that they sold it for 150 million, uh, just a decade later.

11:23 So, uh, hopefully I didn’t jump around too much on you, but I did kind of went down a rabbit hole here at the office today here at rentprep. And I just wanted to share with you guys in the podcast why the Chrysler building is valued so low, uh, as it was compared to 10 years ago. And it’s not just because of the real estate boom and bust a, but there’s a lot of other things going on, including having to fund the endowment of a private university with less than a thousand students. So, uh, yeah, it’s a pretty interesting stuff to learn about. Uh, you can look up your own school’s endowment. If you went to, you know, a different school, you just Google it. I had never knew what mine was. It University of Buffalo, uh, it’s interesting to kind of know what that is per student and how some schools, a per student endowment is so large. Uh, one of the things I did learn about endowments is that typically 5% is the number that, uh, the, uh, endowment is allowed to spend per year. So if a school has a hundred million dollar endowment, they can spend 5 million out of that endowment per year. And that’s probably because they figure, you know, that’s a safe spending rate where those still be able to increase the portfolio of the endowment without running it dry, especially since there’s no taxes or any kind of, uh, a government hand taking their cut out of an endowment for a school. So really interesting stuff. And like I said, a checkout that Malcolm Gladwell podcast on revisionist history, it’s super interesting as far as how the rich get richer with the really wealthy schools and why people should consider not giving back to their wealthy alma maters and doing something else with that, that money, if they’re, you know, feeling philanthropic.

13:01 So, uh, yeah, I guess if you want to check out in the resources mentioned in today’s episode, and you can always check it out on the website of rentprep.com under the resources section, you’ll find our podcasts. And if you have any questions, don’t hesitate to reach out to us either by email, live chat, phone, or in the Facebook group. All right guys, until next week, take care and have a great week.