Steve Finkelstein, a Westchester-based real estate investor, has reached a deal to purchase ten troubled residential rental buildings in the Bronx, known as the Milbank portfolio, for $27.75 million.
The deal had been closely watched by city officials and tenant advocates who have sought to assure that a sale will lead to repairs at the properties, which the city has hit with hundreds of violations.
In a conversation with Real Estate Weekly, Finkelstein said that he would address 80 percent of those violations within the first few months of his ownership. According to written reports and people familiar with the portfolio, many of the properties are in dismal condition and are plagued by leaks, vandalism, crumbling walls and ceilings, and broken down or malfunctioning elevators and boilers.
Finkelstein, who owns a number of properties in the Bronx, has estimated that it will take between $7-10 million to renovate the portfolio, an amount that some tenant advocates have said is insufficient considering the scope of the work.
“He’s going to have to put in substantial amounts of money,” said Jonathan Levy, deputy director of Housing Legal Services NYC, who is representing tenants in the 531-apartment portfolio in their efforts to see the problems at the buildings addressed and also assure that the properties remain affordable after the sale.
“We’re skeptical,” Levy said of the $7-10 million figure. “But we’re cautiously optimistic.”
As part of the deal to take over the properties, Finkelstein agreed to cap what charges he passes along to tenants in order to pay for the repairs. Even in rent stabilized units, which constitute two thirds of the Milbank portfolio, owners are allowed to levy rental increases to pay for capital improvements to a property. In this acquisition however, the tenants’ lawyer Levy said that Finkelstein agreed to add no more than $20 a month to the rent for one bedroom apartments and $30 a month for larger apartments during the first two years of his ownership. For the roughly one third of apartments that are vacant and market rate, Finkelstein will be allowed to assess higher charges.
“It binds me to some degree but it was a compromise to make both of us happy,” Finkelstein said, adding that he would make all the repairs that were necessary even if he couldn’t recoup the cost quickly from the buildings’ rent rolls. “It makes it a little less economically fruitful.”
The city holds a key card in assuring that conditions are improved at the buildings, which are located in Kingsbridge and other sections of the Bronx. Last year the city purchased $3 million of mezzanine debt on the properties from Deutsche Bank for the symbolic sum of $1. Finkelstein agreed to be personally liable for over $1 million of that debt as part of the deal, but if he resolves the violations, the city will cancel theloan.
“I’ve put my money where my mouth is,” Finkelstein said, saying that he felt the city would hand over the mezzanine loan within two or three months because he would have the bulk of violations cleared up by that point.
“We’re going to go in and do a lot of painting, tile work, cleaning,” Finkelstein said, indicating that the bulk of the problems at the properties were not as egregious as the near-unlivable conditions
depicted in media reports and could be corrected with basic maintenance and renovation work. Finkelstein said that serious problems did exist and that he would fix those as well.
As part of the deal with tenants, Finkelstein also agreed to forgive unpaid back rent that many of the building’s residents owe, what had been a contentious issue in the possible sale.
“We want to have this be a fresh start for these properties and residents,” Finkelstein said.
Milbank, a Los Angeles real estate investment firm whose name the trouble portfolio became synonymous with, purchased the buildings at the height of the real estate boom in 2007. Although the ensuing bust swept over the entire city during the recession, in outer boroughs like the Bronx, optimistic projections fell especially hard.
In the case of the ten buildings, Milbank had put on at least $35 million of debt to secure the acquisition even though two thirds of the portfolio’s apartments are rent stabilized and fail to produce enough cash flow to carry that level of leverage, let alone cover the millions of dollars in repairs on top of it.
The portfolio quickly went into default and LNR, a special servicer for the loan, which was securitized, hired the real estate brokerage firm Massey Knakal to market the debt. Bob Knakal, a chief executive at Massey Knakal who led a company team that brokered the deal with Finkelstein, couldn’t be reached for comment.
As part of the deal, Finkelstein agreed to pay Milbank $1.75 million to hand over the deeds for the properties, an aspect of the transaction that the tenants’ lawyer Levy found “infuriating” since the firm’s over-leveraged purchase was what mired the portfolio in dereliction for
the past few years. Finkelstein said it was necessary in order to prevent a lengthy foreclosure suit.
New York City officials, including the Council Speaker Christine Quinn, called for the city to intervene at the properties after descriptions of the disturbing living conditions surfaced in media reports. The Department of Housing Preservation and Development spent $80,000 on emergency repairs last year according to reports and filed commensurate liens against the property that could have potentially interfered with LNR’s efforts to sell the property. Eventually in October, Jonathan Levy, the attorney from Housing Legal Services NYC, won an order in Bronx Supreme Court requiring LNR to pay $2.5 million in repairs at the properties, what was believed to be one of the first rulings requiring a lender who hadn’t yet foreclosed to tend to a property it had provided debt against. LNR appealed the ruling, tying the case up in court. Because the servicer has now sold the properties, it no longer will have to pay the charge.
Levy said that he is currently fighting a similar case for residents in another rundown Bronx portfolio of eight apartment buildings in an effort to get the lender for those properties, New York Community Bank, to shell out cash for maintenance and repairs.
March 23, 2011