A Scarsdale-based landlord took a major step towards completing a nearly $28 million deal to buy 10 rundown Bronx buildings, agreeing in principle with tenants to forgive all back rent and cap rent increases, and with the city to put up a $1.75 million personal guarantee to ensure desperately needed repairs are made.
The deals pave the way for the landlord, Steve Finkelstein, to pay $26 million to Florida-based LNR Property for the mortgage on the buildings and an additional $1.75 million to Los Angeles-based Milbank Real Estate for the properties’ deeds. The city recently obtained the buildings’ mezzanine debt, which has a face value of $3 million, from Deutsche Bank for $1, and will forgive it in exchange for Mr. Finkelstein’s $1.75 million personal guarantee.
Tenants and their advocates applauded some aspects of the agreement, but expressed lingering concerns that Mr. Finkelstein was paying too much for the properties and would not be able to afford needed repairs on properties that Housing Preservation and Development Commissioner Rafael Cestero last year called the worst he has seen in his career.
“We have won a lot of protections and a hook through HPD to enforce them, and we have tenants who are hyper vigilant and lawyers who are going to be watching this closely,” said Dina Levy, organizing and policy director at the Urban Homesteading Assistance Board. “But we still have doubts about his numbers, and that’s a really hard thing to look past.”
Mr. Finkelstein, who has amassed 31 other buildings in the Bronx over a 40-year career in real estate, has said that tenants’ concerns are overblown and that he knows what it will take to make repairs on the rent-stabilized properties. He recently estimated a cost of $7 million to $10 million.
“I think we’re all satisfied with the way things are going,” Mr. Finkelstein said. “Hopefully, once I come in and do the work I’m going to do everyone will be very happy.”
But an architects’ report done for the City Council called for $26 million in work.
“Tenants were between a rock and a hard place,” said City Council Speaker Christine Quinn. “They were afraid that if they waited, there wouldn’t be another offer or there would be a lesser offer. This deal being the best deal underscores what a dangerous situation we’re in right now as it relates to multi-family overleveraged, foreclosed property.”
Mr. Finkelstein reached one deal with the tenants and another with the city, though neither has been signed yet. He agreed with the tenants to forgive all rent arrears, reversing a strong stance he had taken early on in negotiations. The status of rent arrears was a pivotal issue for tenants, who worried that a new owner would move to evict residents who owed money.
Mr. Finkelstein also agreed to cap all rent increases tied to major capital improvements to $20 or $30 a month, depending on apartment size, for two years. The cap was considered important to tenants because of the substantial repairs that need to be made and the ability of landlords of rent-stabilized apartments to pass those increases on to tenants via rent increases.
Mr. Finkelstein also agreed with the city to produce a scope of work for housing officials to approve within 30 days. He promised to correct 80% of code violations within nine months. And the deal calls for him to not just correct the violations—which numbered 4,355 as of late last year—but to fix the underlying conditions causing the violations. Six of the 10 buildings are in the city’s Alternative Enforcement Program, which provides mechanisms to fix the worst properties in the five boroughs.
Mr. Finkelstein also gave HPD the right to approve the buyer for two of the buildings that he plans to immediately flip because they lie in an area of the borough he is not used to servicing. And he agreed to put up $1.75 million that would have to be paid to HPD should he not comply with the deal.
City housing officials have for months tried to come up with a solution for the 1920s buildings and their 548 units, which were in such a state of disrepair that Housing Commissioner Rafael Cestero last year said he had “never been more shocked, angered and frustrated” by conditions facing tenants.
An HPD spokesman called the agreement a “fair” one. “As always our main concern is that any agreement provides for the long-term affordability and rehabilitation of the properties, and that keeps the best interests of the tenants at the forefront,” he said. “What we have seen throughout this process from the prospective purchaser, the tenants and advocates is very encouraging.”
Like many buyers at the height of the housing bubble, Milbank in 2007 miscalculated that it could raise rents to help pay off its $35 million mortgage, and the properties quickly fell into foreclosure. LNR Property, a special servicer that took over the buildings via foreclosure on behalf of senior lenders, had been reluctant to take a loss on the loan to allow a preservation buyer to step in and fix up the buildings. Legal action by tenants and an aggressive campaign for repairs by advocates and elected officials scared off at least one prospective buyer.
Jonathan Levy, a lawyer for the tenants, said they were cautiously optimistic about the deal with Mr. Finkelstein and especially happy to have won the caps on increases tied to major capital improvements, and forgiveness of rent arrears, rare concessions on the part of landlords.
“Walking out of a tenant leadership meeting last week, a woman said she had been renting all her life and it never occurred to her she’d have any say in who owned her building,” he recalled. “This is a victory for tenants because they’ve shown that by using the courts and their organizing power, they can have a say in how their buildings are owned.”
Juan Nunez, who lives in one of the buildings deemed in the worst condition and who helped organize Milbank tenants with the Northwest Bronx Community and Clergy Coalition, said tenants needed help as soon as possible. They are “living under such horrible conditions” that they were reluctant to chase Mr. Finkelstein away and have to begin the process all over again, he added.
“I don’t want to say it’s a victory without knowing what’s going to happen,” Mr. Nunez said. “Six months from now, call me back and I’ll tell you if things worked out fine or if they didn’t.”
February 14, 2011