The Surreal Estate

Perspectives on Tenant Organizing from the Urban Homesteading Assistance Board

Flipped Again: More Private Equity Groups Speculate on The Three Borough Pool Portfolio

PHOTO: JOHN TAGGART FOR THE WALL STREET JOURNAL

PHOTO: JOHN TAGGART FOR THE WALL STREET JOURNAL

On Saturday, the Wall Street Journal reported on the most recent update in the saga of the Three Borough Pool, a group of 42 buildings which over the last 8 years have been packaged together in one mortgage, speculated on, foreclosed on, refinanced and is currently being broken up and flipped again. This group of buildings is another example of the continuing cycle of predatory equity and is further proof that we have yet to come up with a solution to the problem of speculation in the rent regulated housing market.

UHAB has been tracking and organizing in this portfolio for several years. It is one of the classic examples of predatory equity. Three private equity companies (Normandy Real Estate Partners, Westbrook Partners, and Vantage Properties) partnered up with David Kramer, the president of Colonial Management, to package 42 buildings spread across the Bronx, Brooklyn and Manhattan. The investment group took out a mortgage with Barclays who then packaged the note into a Commercial Mortgage Backed Security (CMBS.) Securities like this were a common tool that many believe contributed to the 2008 financial crisis and are disastrous for affordable housing. In the Three Borough Pool, like other CMBS portfolios (Stuyvesant TownRiverton, Fordham Towers/Robert Fulton Terrace, and the Milbank portfolio) the owners eventually defaulted on their mortgages and the buildings fell into foreclosure. In 2013, UHAB and other housing advocates began working with tenants in the buildings to push for a responsible sale of the properties. However, two of the private equity companies that led the building to foreclosure were able to refinance and pull the buildings out of foreclosure. It is these companies who are now once again selling the buildings.

This weekend’s WSJ piece focuses on 8 of the 42 buildings; these 8 properties were recently sold to a real estate investment company called Black Spruce Management. According to Normandy & Westbrook, prior to the sale they made a lot of repairs to the buildings. This assertion comes as a surprise to the tenants who are facing major condition concerns on a daily basis. HPD code violations have actually increased over the past year, but the problem is actually deeper than that. These buildings have a long history of neglect and failing conditions, and they need more than patch work that could clear violations. The night before this story came out, one of my co-organizers received a call from a tenant in one of these buildings who was in tears because she found a rat in her living room in the apartment she shares with her grandchildren. Tenants in these buildings have suffered from systematic leaks, mold and lack of heat and hot water. These problems are deeper than code violation repair, they are problems which demand more extensive renovation, which would require a large financial commitment. Considering the amount that Black Spruce paid for these buildings, it is unclear if there is financing for this type of deep repair work.

The WSJ story claims that the new debt on these properties is considered low. First of all, the new mortgage of these buildings is an average of about $83,000/unit. This is the same average debt level as when the owners defaulted on the CMBS mortgage. Second, the mortgage does not tell the whole story. The full purchase price on the 8 buildings was over $57 million, or about $110,000/unit. This means about 25% of the financing is equity investment. As Black Spruce mentioned from the article, they are backed by investors: investors who are presumably seeking a return on the millions of dollars they gave to Black Spruce to purchase these buildings. Having a “lower” mortgage at the expense of putting more off the books equity into the deal does not solve the underlying problem: these are rent regulated buildings with low-income tenants and limited ability for rent increases. If the financial stability of the buildings is contingent on large rent increases, this portfolio will fail. Unless, of course, the plan is to either push the current low income residents out of their homes in order to raise rents, or to starve the buildings of money needed for maintenance in an attempt to keep costs down. This is not a new practice. This is Predatory Equity 2.0, the same kind of speculative financial venture that landed these buildings in foreclosure in the first place.

This type of speculation is particularly relevant as we approach June 15th, when the current rent regulations are set to expire. The current rent regulations are not strong enough. Advocates and tenants know that it is impossible for landlords to achieve their financial expectations when they over pay for buildings by continuing to rent to the low and moderate income families who have lived in these buildings for years. Predatory equity, like in the Three Borough Pool, makes rent regulated tenants the victims of harassment as landlords aim to push them out to achieve higher rent increases. It is vital that our legislators in Albany recognize the importance of strengthening the rent regulation laws. It has become a business practice for landlords to buy buildings with the intention of violating our laws and we shouldn’t allow it to continue. The only way we will be able to put a stop to these illegal practices is for our elected officials to reinforce the original intentions of the stabilization laws: to protect tenants in these buildings from being held hostage by greedy landlords who seek to make a profit off the suffering of our neighbors and our communities.

Crown Heights Residents, State Assemblymember Walter T. Mosley, and Affordable Housing Advocates Call on Crown Heights Landlord to End Displacement

Crown Heights residents rally in front of BCB Property's office

Crown Heights residents rally in front of BCB Property’s office

“My stove was not working for many months,” said Donna Mossman, tenant leader and resident of one of the rent-regulated buildings that BCB Property Management has recently purchased in Crown Heights, Brooklyn. “Three times BCB brought me a new stove, and three times I had to call the fire department because of carbon monoxide leaks. I finally gave up and bought my own stove.” Faced with this type of harassment or enticed by cash offers, many other low-income residents, however, have been giving up and moving out.

Tenants, advocates, and elected officials claim that BCB is systematically displacing long-term residents from their buildings in order to deregulate these affordable apartments or illegally rent them at much higher market rates. Since BCB acquired more than 100 units of rent-regulated housing in Crown Heights, tenants have been complaining about severely deteriorating conditions in their homes and unrelenting pressure to leave. The real estate firm’s response? A deafening silence.

So yesterday tenants and affordable housing advocates, including New York State Assemblymember Walter T. Mosley—armed with letters dating back a year requesting meetings with BCB—attempted to visit the firm’s Manhattan office to schedule a discussion. As Mosley led a group of tenant representatives up to the BCB office, demonstrators gathered outside the building chanting, “Don’t displace us! Come out and face us!” However, when Mosley rejoined them, he announced, “They refused to talk to us today.” But he added, “We’re not giving up. This is a fight for the long haul.”

The Urban Homesteading Assistance Board (UHAB) has supported the Crown Heights Tenant Union since its founding in October 2013. The CHTU is now comprised of tenant associations of some 40 buildings. These neighborhood residents have come together to bring about stricter enforcement of existing tenants’ rights as well as new, stronger protections against the down side of rampant gentrification.

As the New York Daily News reports, residents content that their buildings have become construction sites—with continual renovations to upgrade vacated apartments—yet existing tenants are hard-pressed to have basic repairs done. When problems are addressed, the results are often subpar and sometimes even life-threatening, as Donna Mossman discovered.

“This harassment and rapid displacement of long-term, low-income tenants is a systemic problem and it has to stop,” Assemblymember Mosley told the crowd of tenants and advocates. He noted that in 2015, New York rent regulations will be up for renewal and he will be exploring how laws can be adjusted to curtail the predatory practices that are fueling this displacement.

“I’m not against gentrification,” Patricia Jackson, tenant leader with the Crown Heights Tenant Union, said. “But hard-working people should not be driven out of their homes in the process.”

For further information about UHAB’s affordable housing efforts, contact Kerri White, Director, Organizing and Policy, UHAB: 212-479-3371 or kwhite@uhab.org.

Putnam Portfolio and Stuy Town: Preservation Opportunities for Affordable Housing Once Lost to Speculation

Metro North Residents at Putnam Rally, photo courtesy of Tenants & Neighbors

In recent years, speculation in the affordable housing market is an accepted fact. Real estate investment targets the homes of low income families with the express intent to make financial profit from exploiting the residents who live in these buildings. This practice has failed. Over and over again. However, this hasn’t stopped the perception that massive profits can be gained by gambling on NYC’s affordable housing stock. The question in front of our policy makers now is how will we respond to this continuing and destabilizing crisis?

Stuyvesant Town is likely the most famous affordable housing complex that was victim to the overleveraging crisis of the early to mid-2000s. This is because both it is the largest housing complex with over 11,000 apartments and the fact that in 2006 it was purchased for an astronomical price of over $6 billion. This deal was in default within 3 years. Due to the complex nature of the financing, the buildings have been in limbo since 2009, but as was reported by the New York Times, the properties are back on their way to auction, and unfortunately, there are already willing bidders preparing to speculate on the buildings again.

Although, Stuy Town is the largest and most recognizable portfolio, it is hardly the only large complex on the edge of another critical moment. The Urban American Putnam Portfolio is a group of five former Mitchell Lama projects in upper Manhattan and Roosevelt Island that comprises nearly 4,000 units of what used to be protected, affordable housing. This portfolio is, similar to Stuy Town, at risk of being flipped again. Last week, Bloomberg News rendered an accurate and clear explanation of the history of the properties and the risk the portfolio is currently facing.

To give a brief history, in the height of the housing boom the portfolio was flipped twice under business plans to remove the affordability from the project, push out lower income residents and raise rents as high as possible. Urban American purchased the buildings for $918 million, taking out an $800 million mortgage financed by Fannie Mae. Fannie Mae also took the opportunity to invest at least $60 million in equity in the portfolio (although they won’t admit it) something which seems to be in direct conflict with their mission to protect affordable housing. It should come as no surprise that this isn’t the only time they’ve invested in these types of deals. To complicate matters further, it was discovered that the City Investment Fund partnered with Urban American in this predatory deal. The City Investment Fund includes money from the New York City and New York State retirement systems; a bitter irony considering many of the residents in these Mitchell Lama projects were public workers.

This $800 million mortgage is now due, which has inspired a flurry of activity around the portfolio. Urban American is looking for a new investment partner that would help them refinance. Brookfield Properties has expressed interest in buying a stake in a $1.1 billion refinancing. This is a $182 million increase over the last purchase price, which has stretched the rents to the highest level and allowed the conditions of the properties to decline. In the event of this refinancing both the City Investment Fund and Fannie Mae would be paid off, fulfilling their fiduciary responsibility at the expense of thousands of New Yorkers’ having an affordable place to live.

It DOESN’T have to be this way. We as a City can decide that we are going to fight to preserve these homes, as well as other buildings that are victims of this crisis. We can do this without creating diminution in value to the bondholders. Here’s what we need to do:

Fannie Mae: The mortgage was due in early May. As a deal has still not been completed, Fannie Mae is in a position as holder of the defaulted debt to push for a quicker preservation deal. Fannie Mae could also commit to finance a preservation deal that would protect the affordability and commit to improving the conditions. Additionally, Fannie Mae should take responsibility for the fact it invested in this portfolio and use its equity stake as additional leverage to push for a better outcome.

City Investment Fund/Comptroller Scott Stringer: The Comptroller should support the tenants and the preservation of affordable housing by taking a stance that doesn’t ignore the impact of his predecessor’s actions. Pension funds should never have been used in a deal that puts low and moderate income tenants at risk of losing their homes. However, there is no reason why the City Investment Fund couldn’t explore the opportunity to remain invested in these properties as long as an owner steps in who commits to affordability and decent housing.

HPD and other City Agencies: This portfolio represents a substantial amount of affordable housing in Upper Manhattan and Roosevelt island, and it should have never been allowed to lose its affordability protections. HPD and the other City Agencies should explore ways to once again tie rent restrictions to these buildings through the use of tax abatements or subsidy that would (a) provide much needed capital towards repairs and (b) add regulatory agreements that would keep the buildings affordable for the residents who call them home.

Mayor de Blasio and other Elected Officials: Mayor de Blasio, Speaker Melissa Mark-Viverito and the other Elected Officials should support the residents of these properties and the need to protect these units of affordable housing, a much needed resource of affordable housing in upper Manhattan and Roosevelt Island. They also could call all the above mentioned parties to the table with the tenants to negotiate how to preserve these properties.
This is not an easy task, in fact it will be difficult and tedious and with no assurances that we can win. However, the tenants are ready to stand up and take on this fight, the only question is who will stand with them?

This is not an easy task, in fact it will be difficult and tedious and with no assurances that we can win. However, the tenants are ready to stand up and take on this fight, the only question is who will stand beside them?

Predatory Equity fails again…and no one is surprised.

Today the Wall Street Journal published an article about yet another Predatory Equity deal that has fallen into foreclosure. This huge 42 building portfolio of affordable housing spread over the Bronx, Brooklyn and Manhattan is known as the Three Borough Pool. UHAB along with out allies have been expressing concern for these buildings for years. We began organizing

The portfolio is a classic Predatory Equity deal: a group of well known private equity groups including Normandy Real Estate, Vantage Properties, Westbrook Management and David Kramer, purchased the properties with an inflated mortgage from Wachovia Bank, who quickly sold the debt into a commercial mortgage backed security. Several of the owners are now notorious in NYC for tenant harassment in other properties. According to Normandy’s website their business strategy is to “target value-add and distressed asset and debt opportunities in high-quality locations… We identify assets that are underutilized, have operational inefficiencies, or have below-market rents.

“Under-utilized assets” is landlord-speak for “home to low income families who we think can easily be evicted.” This was certainly their plan in the Three Borough portfolio. As with most Predatory Equity deals, the tenants began facing harassment and building conditions began to decline. Rents continued to rise, leases citing MCI increases on elevators that continued to break down and roofs with reoccurring leaks. Default rumors began spreading as early as 2010, and when the mortgage became due in full in 2012, LNR partners stepped in as special servicer for the CMBS to deal with the fall out.

UHAB began organizing some of the buildings in 2009, and CASA has had an established tenant association in one of the largest buildings in the portfolio for many years. According to security documents, the buildings were 94% occupied at the time of purchase. And tenants did not bend to their landlord’s harassment tactics — they refused to be displaced — directly leading to the portfolio’s failure.

UHAB is working with organizers from CASA, New York Communities for Change, Mothers on the Move, Banana Kelly and PACC to engage tenants across the portfolio.  Our efforts have been met with extreme harassment from Colonial Management, who manages the entire portfolio. David Kramer, one of the owners in the deal, is a partner at Colonial Management. Supers and property managers have attempted to lie to tenants about meetings being cancelled, tried to impede on tenants rights to have a meeting in the lobby and have even out-right lied by passing out flyers that denied the buildings are in foreclosure:

Colonial notice not in foreclosure

This only intensifies the frustrations of tenants who have been suffering from problems with management for some time.  Neglect of the buildings have caused serious problems for the families who live in them.  Conditions like mold, leaks and vermin are not uncommon in the buildings. The WSJ article published a map along side the article which highlighted the code violations across the properties:

WSJ Violation Map

The WSJ article also mentions a possible deal on the table to end the foreclosure, although their source is anonymous. Considering that the portfolio has been in default for almost three years, we happen to think that any investor would be mad to refinance this portfolio without a significant mortgage write down. Ultimately, this is what the tenants need. Any refinancing should not be negotiated behind closed doors with sources that refuse to be named in the press. Tenants deserve (and demand) a voice at the negotiating table.

LNR Partners’ decision on how to deal with this portfolio will affect over 1,500 families. Working with tenants, they could transfer the buildings to a housing developer who will work alongside residents to respect their rights, ensure good repairs, and keep the buildings affordable. However, LNR could also work with the current management and transfer our buildings to another speculator with the same, unsustainable mortgage. This would cause tenants to live through another round of harassment and neglect. Tenants are joining together to fight LNR and Colonial Management because they have no other choice: the buildings are an important source of affordable housing, and losing these 1500 units to another speculator would be devastating for New York City. Join UHAB and our allies in standing with the tenants of the Three Borough Pool and demanding a better deal! 

Fighting for the Future: Lessons from 1520 Sedgwick

This is a video from a few days ago when we celebrated the return of 1520 Sedgwick to well-maintained affordable housing for low to moderate income residents in the Bronx. This was the culmination of a long, hard-fought campaign started by the tenants with the assistance of UHAB in 2007.

I wasn’t the organizer in the 1520 Sedgwick campaign, since I joined UHAB in 2008. But because of the importance of the campaign my formation as a tenant organizer was shaped through the lens of 1520 Sedgwick.

In 2007, residents of 1520 Sedgwick reached out to UHAB and Tenants & Neighbors because they had learned that their building had been sold to a landlord who intended to remove affordability restrictions and attract higher paying tenants to make up for the fact that he over paid for the building in the first place.

Sedgwick was the iconic predatory equity campaign: strong tenants stood up to fight for their homes in a historic building known as the “Birthplace of Hip-Hop.”   Tenants, with UHAB’s support, began pushing back against their landlord. Our earliest campaign goals at 1520 Sedgwick were to keep the buildings in the Mitchell Lama program and prevent a sale to real estate speculator Mark Karasick. Help came flooding in, starting with DJ Kool Herc, the father of hip-hop who started the cultural trend in the community room of 1520 forty years ago, but soon city leaders like Senator Schumer and Congressman Serrano, to name a few, joined the fight.

It was an emotional and impressive campaign. And, despite everyone’s best efforts, we failed. Big business profiteering off affordable housing won the fight. The building was sold to Mark Karasick, who bought it with a $7.2 million mortgage from Sovereign Bank, shortly thereafter it was removed from the Mitchel Lama program. Predictably, the building began to fall in to disrepair. However, rather than becoming discouraged, the tenants remained organized and continued to fight for what they knew their buildings could be.

That’s when Workforce Housing Advisors entered the scene, with an unconventional plan to purchase the mortgage and foreclosure on the owner. The tenants were ready to pick up the fight once again, and the second time around it was not difficult to find the support of city agencies and elected officials to help with this preservation option, and the building was recovered.

This recent celebration was the official ribbon cutting, post renovation of the building. The tenants and all their supporters who helped win this campaign came out to see what all the work was for, a beautiful affordable housing complex for the residents who fought so hard for their community.

While we are grateful for the support from all the organizations and agencies, we need to take a moment and specifically thank the tenants. Their struggle and their victory has taught UHAB’s Organizing and Policy Department so much over the past five years. When they reached out to us in 2007, we were in the early stages of predatory equity and were just discovering how financial malfeasance and mortgage over-leveraging based on speculation and gentrification, impacts tenants and their homes. Now, it defines our work. We learned about foreclosure at 1520 Sedgwick; Workforce Housing’s plan to purchase the mortgage and foreclose on the owner provided the inspiration for our campaign against New York Community Bank and created the framework for the First Look Program that came out of it.

Currently, while we continue to face the fallout of the previous housing bust, at the same time we see buildings being re-overleveraged. It’s disheartening to feel that real estate hasn’t learned from the failures of speculators like Karasic. Still, I look at the 1520 Sedgwick campaign and remember the resiliency of the tenants, their refusal to give up, and it reminds me that while it’s easy to be discouraged, the present isn’t permanent and the future is worth fighting for.

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