Accomplices in Predatory Equity

There are a lot of players in the predatory equity market. We tend to focus on the banks and landlords since, in many ways, they seem to be the most accountable for the current situation. However, there are other parties, such as investors, bank regulators and brokers who have contributed to normalizing the trend of overleveraging buildings. I was reminded of this when browsing through some articles on Huffington Post.

I came across this story about Massy Knakal, where the company seems to suggest buyers should be willing to base their acquisition price not on the actual income of the building, but on the potential income the building could make if the current low-paying tenants somehow “vacated” the building.

This is classic predatory equity behavior. In a rent regulated building such as the one mentioned in the Huffington Post article, apartments with tenants who have lived in the building a long time are often seen as a possible income source, because if the apartment is vacated, the owner can get a much larger rent increase.  Speculators base purchase prices partly on the assumption that the owner can simply get people to move out of their building. This assumption has, in many cases, proved false as tenants exercise their legal rights and fight to remain in their homes.

Brokers such as Massy Knakal play an interesting role in the ups and downs of predatory equity because as these owners default, or decide they don’t want to continue their investment, the buildings need to be sold again and guess who gets to meet that demand. Massey Knakal has been tapped to lead several predatory equity re-dos, such as Milbank, Robert Fulton Terrace, Fordom Towers, and Pinnacle and Praedium.

As a broker, Massey Knakal isn’t negatively affected if a building fails, and judging by their behavior, it seems unlikely they will stifle their messaging about “upside potential” investments anytime soon. I just wonder how many tenants will have to suffer through this.

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