February 4, 2013 1 Comment
In 2009, CHPC released “Debt Threat,” a report that detailed the “wildly overoptimistic expectations of income” in commercial mortgage market and the implications nationwide. Particularly, it focused on the affects in the rental housing market. At the time, many of the CMBS-secured mortgages were in default or even foreclosure. Now that the economy has begun to recover, lenders are once again working with landlords to saddle buildings with debt using the complicated CMBS model. Some people define “insane” as doing the same time over and over again and expecting different results. Over-mortgaging was devastating for tenants as well as buildings (not to mention the whole economy) in 2009, and we expect that it will be devastating for them once again. So, are investment bankers insane?
Over the past year, Finkelstein Timberger Real Estate and Cantor Fitzgerald Commercial Real Estate have worked together to refinance, repackage, and increase the debt burden on 34 large multifamily buildings in the Bronx. Many of these buildings are in sub-par shape (as the pictures above and below illustrate). With the recent explosion in their debt per unit, the landlord will scrimp on heat and services to pay the inflated mortgage. Such actions will cause building conditions to worsen. Moreover, we have no reason to trust these folks at Cantor Commercial and at FTRE. Here’s some highlights of the portfolio which we have both surveyed and researched extensively.
- Building conditions vary wildly between long term tenants and recently moved-in residents. So far, we’ve noticed a pattern: long term, low-rent tenants are denied services, while higher paying residents generally get more prompt repairs.
- Heat is low and often turned off. We suspect that FTRE is doing the bare minimum in this department, something that is particularly dangerous for very young and very old tenants in the middle of a cold snap.
- According to our research, the underwriting doesn’t line up. Building income and expenses are made public record at the Department of Finance in order to determine property taxes every year. Thanks to this, we know that CCRE and FTRE underwrote new mortgages for 34 buildings based on income that differs widely from public record. While FTRE reports $5M in income to the Department of Finance, but underwrote the mortgages for the buildings assuming income of nearly $10M. This assumes nearly a 100% increase in income — something that can only be done through eviction.
- We have reason to expect that CCRE securities are not performing well, indicating that the highly over-leveraged properties are already beginning to falter. According to this article, released in earlier January, nearly 41% of CCRE’s staff has been let go as a response to under-performance. Needless to say, this doesn’t bode well for tenants for building conditions.
- 9 of these buildings are in what we call the “Milbank Portfolio,” buildings which Mayor Bloomberg once called the worst in New York City. These buildings deteriorated while in an over-leveraged CMBS, which was managed by Wells Fargo. The new CCRE debt far exceeds the debt level under Wells Fargo.
Starting this week, we’re going out to buildings in the portfolio to set up tenant associations with the goal of helping tenants use their collective power to prevent conditions from getting as bad as they got in the Milbank portfolio. But, conditions are already not great.
Do you live in a building owned by Finkelstein Timberger Real Estate? Are you interested in forming a tenants’ association? If so, let us know at firstname.lastname@example.org. Join us in breaking the cycle of predatory equity!