What Happens During a Multi-Family Foreclosure in NYC?

What happens when a building goes into foreclosure? Will tenants be evicted? Who should tenants pay? What rights do tenants have during the process? As organizers working mainly in multi-family, rent-stabilized buildings, we get these questions all the time. This is why we made a flow chart and Q+A fact sheet for tenants and advocates to better understand the foreclosure process and possible outcomes.  (The flow chart is located in our “resources tab” on the top right side of this page.)

Of course, there is no set formula as to how exactly a foreclosure will play out.  Some buildings will go through the process within a couple of months, and others will languish in foreclosure for years and years.  Court-appointed receivers are placed in buildings during the foreclosure process to collect rents, make repairs, issue new leases, and rent out apartments.  Sometimes, buildings are never appointed receivers and tenants continue to pay their landlord until the case is completed.  All to often, the court appoints a receiver who simply never shows up.

Foreclosure can be difficult for tenants, particularly because it is often paired with confusion about who to pay, who is responsible for repairs, and more often than not, tenants see a decline in services.  Still, if tenants know their rights and work together, they not only increase their chances of improving building conditions, but also can have a voice in the final outcome.  Tenants are the ones who live in the building, so shouldn’t they be the ones with the most decision-making power regarding what happens to their home?

At UHAB, we believe a successful final outcome of a multi-family foreclosure as one that the tenants choose. Tenants deserve to have a say in who the next owner of their building is, whether it be a tenant-approved developer or the tenants themselves.  On the other hand, a poor outcome in the foreclosure would be a new landlord sweeping in, raising the debt  to an unsustainable level, and with no interest in working with tenants.  Our goal as organizers is to work with tenants to ensure this doesn’t happen.  We hope that as tenants continue to form strong tenant associations and have a voice in the foreclosure process, they will contribute to the preservation of high-quality, permanently affordable buildings.

-To check out our brochure about what happens during a multi-family foreclosure, click here. The brochure is in both English and Spanish.

PLUS, here is Legal Aid Society’s booklet outlining tenant’s rights during a foreclosure.

If your building is in foreclosure, or you have any questions, please contact us at thesurrealestate@gmail.com.

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Debt Threat!

Yesterday, Crain’s New York published a story on the 10 buildings purchased by Steve Finkelstein last spring. Loyal readers of our blog should be very familiar with these buildings – the Milbank buildings – as we were deeply involved with the preservation campaign and tenants associations in the properties. For those who aren’t in the know: these buildings, which fell into foreclosure in 2009, were so dilapidated that HPD Commissioner Raphael Cestero called them the worst buildings he had ever seen. HPD was so shocked by how conditions had deteriorated that they were moved to create a new program – Proactive Enforcement – to ensure that no buildings in the City of New York ever got as bad as the Milbank buildings. This is all to say that tenants in the Milbank portfolio have been through hell and back again, and they deserve a great landlord.

When Steve Finkelstein bought the buildings, we were concerned that he had paid far too much money for the portfolio. However, we were satisfied that tenants and HPD had successfully executed a deal with the buyer that protected existing tenants from MCIs and guaranteed repairs of underlying conditions issues. Even though we believed that the price he paid was too high, we hoped that Finkelstein would successfully bring these tenants’ homes back from the horrible conditions they were in. He swore his financing was sound and that he had done enough underwriting to make this deal work. We were happy about the deal he struck with tenants and with HPD.

Last week, however – as the Crain’s story notes – we noticed that landlord Steve Finkelstein has been refinancing these properties and increasing the debt level by $14M dollars. The new lender is Cantor Fitzgerald Real Estate Investments. Finkelstein tells Crain’s that he took out this debt to cover the cost of repairs – so we guess his initial underwriting wasn’t as solid as he first indicated.

We believe that this level of debt – which is higher than the Milbank mortgages that went into foreclosure – is highly unsustainable. Even if vacancies are filled, as Finkelstein claims, market level rent in the Bronx is still far to low to cover mortgage payments on the more than $100,000 worth of debt-per-unit that some of the buildings carry.

Something else fishy is going on. Steve Finkelstein has Contracts of Sale on four of the Milbank properties to A.M. Feurman and Marc Winston of MJA Financial. These deeds of sale take place in the future: September 2013. We have never seen a future-dated deed before, so we’re not quite sure what it means. But we have seen A.M. Feurman before, lending on properties in the Bronx since the 1980s. These properties generally have one thing in common: they are related to notorious “phantom landlord” Frank Palazzolo.

While violations have certainly gone down and vacant units are nearly all renovated and rented, long-time tenants aren’t thrilled with their new landlord. It’s been typically much more difficult for old tenants – who are paying less rent – to get their landlord to address their concerns. And violations aren’t LOW either – as of today, 1576 Taylor has 229 open violations (on 73 units) and 3215 Holland (52 units) has 226.

Finkelstein has not only refinanced and added debt with Cantor Fitzgerald at the Milbank buildings, he has done it on many others as well, including 1055 Grand Concourse. So, to put it mildly, we’re suspicious. We know that the Milbank tenants have fought long and hard for their homes, and that whatever happens they have the stamina to keep the fight going. But this indication that the building is headed for another round of predatory equity is distressing — tenants could certainly use a break. As the buildings have just recently come back from the brink and the memory of the Milbank foreclosure is still fresh, we’re fear they may begin to slip back again. We hope we’re wrong.

What Kind of Recovery Do We Want?

Across the country, crowed homeless shelters and dilapidated neighborhoods are testimony to just how painful years of the foreclosure crisis has been for families. The foreclosure crisis has been as persistent as it has been terrible: At six years, the housing market has been in its longest slide since the Great Depression.  However, in the past couple weeks housing experts have been reporting that the worst may be over. This cautiously optimistic talk of recovery is couched in phrases such as “prices are up,” or “sold for more than asking.”

Before we jump back into the feverish fray of home-buying (and mortgage-signing), it is important to think about what kind of “recovery” there has been so far, and what kind we really want. The foreclosure crisis – as terrible as it has been – has also been an opportunity to reject the practices that brought us to our knees in 2008, and to restart the housing market in a more sustainable, more responsible and more socially just way. Here’s what we’re warning against:

Multifamily Rent-Regulated Housing
Raising rents in the multifamily housing market have led some to believe that the rental market is booming. Demand for housing is high, and in New York City, the apartment vacancy level is very low. At the same time, buildings languish in foreclosure across the Bronx and Brooklyn, leading to condition deterioration and impact tenants’ quality of life. As banks seek to resolve these foreclosures, it is essential that they sell this housing stock at reduced prices that reflect actual conditions in the building. The renewed interest in multifamily housing investment could lead to a second round of Predatory Equity, which would be detrimental for tenants in rent-regulated buildings. In order to have the housing recovery that New York City tenants desperately need, this speculative cycle must be broken! This means that banks must take real rents and housing conditions into account when selling and making new loans.

Single-Family Housing
The past few years have seen an increase in our desire to live in high density neighborhoods, close to mass transit, and in neighborhoods with high walkability scores. This is a progressive step away from what Kaid Benfield of The Atlantic Cities calls the “Ponzi Scheme” of suburban sprawl. As the housing market recovers, there is increased growth on the edges of cities, so as the Wall Street Journal poignantly puts it:  “What’s Next for Housing? More Sprawl.” While the housing market recovers, familiar patterns of suburban growth at the edges of cities will reemerge. This movement away from more sustainable living is bad news for housing activists and for environmentalists alike.

Of course, this isn’t the first time that the media has prematurely heralded in a housing market recovery, so it could be just hot air. If it is true it, however, it’s important to think about the lessons we’ve learned – or should have learned – from the last six years of crisis. Like the fact that rent regulated multifamily housing is not an “under-performing asset.” Apartment buildings have real values that can’t be inflated without deferring services or evicting tenants (i.e. predatory equity). Or the knowledge that irresponsible lending fuels a speculative housing market that can lead to crisis, and that the burden of that crisis falls primarily on low income individuals.

A building in foreclosure is in limbo, between crisis and opportunity. When we organize in these buildings, we tell tenants that it is the optimal time to form a tenants association and demand a say in the kind of housing that they want. That’s why we believe that there is possibility, right now, to reclaim all of this distressed housing – single family and multifamily alike – in a way that preserves affordability and stabilizes neighborhoods.

Many of the buildings that remain in foreclosure in New York City are small and far apart. This represents a massive management and preservation challenge. That’s why the solution is for multifamily and single family housing advocates to work together to development one facility that has the capacity to buy distressed notes in bulk, with the intention of preservation outcomes. This bulk note sale must be done, before private equity groups swoop in and do it first — turning the buildings back into “investments” that don’t have residents’ interest at heart.

What we need is an interim facility.  We need to be able to scoop up the distressed, affordable housing stock, stabilize it, and allow tenants the time and space to make their own choices and have those choices be real options on the table. It’s their home; shouldn’t they be the ones making the decisions?  To learn more about our vision of a NYC interim facility, click here.

Time for Receiver Reform

It’s hard to pin down a 100% accurate number of multifamily buildings in New York City in foreclosure. Our system of collecting data is far from perfect, and the status of many of these cases can change overnight. That being said, we estimate that about 400 multifamily buildings fell into foreclosure in the two year period between January 1st, 2010 and December 31st, 2011. (The single family number is far greater. We don’t collect data on that, but The Furman Center is an excellent resource for more information.) This unprecedented level of foreclosure has inevitably led to a tiresome backlog at county Supreme Courts, where foreclosure cases in New York State are all held. Right now, it is not unusual for a foreclosure case to drag out for over two years.

As many of our readers know, court-appointed receivers are supposed to collect rents and make repairs during the foreclosure process. You can read more about the problems tenants experience working with building receivers in our earlier post, “Receiver Reality.” Perhaps because receivers are temporary agents or perhaps because even the best receivers have a limited ability to provide lasting repairs, we have never thrown our weight behind an effort to reform the often corrupt receiver appointment process. But between the increase in the number of foreclosures and the subsequent increase in the length of time of the foreclosure process, the universe of buildings with court-appointed receivers has multiplied in size. We know some tenants who have moved into a building and moved out of it, all during the tenure of a receiver, never knowing a “real” owner. And we’re rethinking our decision to set this issue aside.

Currently, receivers are regulated by court rules 22NYCRR Part 36, which governs all judicial appointments, from building receivers to legal guardians to attorneys for incapacitated persons. Part 36 establishes of a list of qualified applicants for each category of appointment, of which receivers are one. It is under judges’ legal authority to establish education and training requirements for appointments, but this power is not exercised in practice. For building receivers, judges typically only consider issues of compensation and reasons for disqualification (conflicts of interest.) You can read more about Part 36 here and here.

We’re currently working with several of our allies to recommend that judges additionally consider potential receivers’ demonstrated level of competence at managing distressed properties as a requirement for qualification. Because they often manage the most troubled buildings in New York City, possibly for several years at a time, it has become essential that receivers have the skills to at least stabilize buildings while working with tenants in respectful ways. One idea involves recommending that receiver qualifications look similar to HPD’s qualifications to become a 7A administrator. Both officers are temporary appointees that ideally have the capability to stabilize extremely distressed housing.

We are working with allies on formulating a way to approach this issue, but we’re still in the early stages of this process. We remain hopeful: it is in the interest of tenants, advocates and lenders that properties be as best maintained as possible throughout the duration of foreclosure. Some banks have indicated to us that they often request specific receivers who they know will be responsible property managers; tenants can attest to the fact that a good receiver can be an improvement on a bad landlord.  It’s not often that we’re on the same side of the table as lenders. We’re hoping that this unusual collaboration will be helpful in moving this issue forward.

Opportunities for Large Scale Preservation: The Interim Facility

Negotiating a note sale on a distressed multifamily building is a long and complicated process and is associated with a significant amount of risk for note buyers. By the time a responsible developer has become a note holder, they have already completed months of work: of due diligence, of negotiating the originating lender down on price, of securing subsidy and financing from HPD.  Up until this point, we have only been successful in completing building-by-building preservation through note sales, and only in a very few number of cases. But a portfolio by portfolio approach does not take into adequate account the severity of the foreclosure crisis, and a programmatic response is needed to secure large-scale preservation. In order for the New York City affordable housing community to accomplish this, we will need to greatly enhance our development capacity. We believe we have developed a tool to do just that.

We now believe that this can be done through the creation of an “Interim Facility” that would have the capacity to conduct a bulk note sale, manage properties in the interim of the foreclosure, and secure permanent, community minded disposition for the buildings. In some cases, the Interim Facility would work with tenants to develop a limited equity cooperative. In all cases, the entity would practice the tenant-choice model of ownership and engage residents in final disposition.

Click here to view the Interim Facility, a graphic we developed to demonstrate one way we have envisioned such a entity capable of bulk note purchases. We are also playing with other ideas, such as a joint venture between several neighborhood groups. Stay tuned for how this exciting idea plays out, as it represents a real opportunity to exit the foreclosure crisis with a strong tool for preservation and the possibility for long term affordability for NYC tenants.

NYC Foreclosure Story Misrepresented in The Village Voice

Ben Sin, a journalist with The Village Voice, has been featuring the foreclosure crisis several times a week in order to highlight the persistent problem facing our country and city.  In a city like New York, where the majority of residents rent, foreclosure is complex, complicated, and not always black and white. The media often portrays foreclosure as a battle between defaulter (innocent) and bank (evil) are not useful in all cases, as it show little awareness of tenants’ rights and the myriad of options foreclosure can present.

First and foremost, tenants in rent regulated units cannot be forced to leave their home as a result of their landlord defaulting on his or her mortgage. For New York City tenants, foreclosure does not go hand and hand with eviction and this basic right needs to be understood by those who claim to tell the story of New York City foreclosures. Furthermore, because of a process known as predatory equity, by the time a multifamily building falls into foreclosure it is usually in terrible condition. A landlord struggling to cover inflated mortgage payments based on a speculative loan is unlikely to make repairs. In cases like this, tenants widely see foreclosure as an opportunity to kick their slumlord to the curb (with the help of the bank) and bring in a more responsible actor, or perhaps even buy the building themselves and convert it to a low-equity co-op.

We do not want to represent that foreclosure is an easy opportunity to NYC renters. Banks are eager to get as much money back for their non-performing assets as possible and in doing so overlook tenants’ interests. Rather than allowing speculative private equity groups to buy buildings, banks should be pushed to negotiate fair prices and responsible sales with tenants and allies. This is the story that Mr. Sin and other journalists writing about foreclosure should be pushing. This is the action that Occupy Wall Street should support. Stopping foreclosure auctions is not necessarily what is important in multifamily foreclosures, though stalling the auction could potentially allow tenants more room to insert their voice into the process. Alternatively, it could leave them suffering in poor conditions under a receiver for many more years. Saving buildings from predatory developers who will run the building deeper into the ground and removing the option of long-term affordability is what we should be talking about.

Ben Sin’s beat on foreclosure demonstrates a simplified understanding about what foreclosure means in New York City.  By ignoring crucial pieces of information and real communication with tenants, stories being told in The Village Voice are misleading.  For example, in his article “Singing Protesters Strike Again; New School Students Interrupt Foreclosure Sale,” Sin writes:

The tenants of 556 Evergreen Avenue in Bushwick, which was one of nine properties set to be sold at the auction, did not show up to the auction. But when told of the blockade, Luis Mendoza, a handyman who lives on the second floor, were obviously relieved.

“So some kids saved our building from being sold today?” he answered. “I wish I was there, I would have played guitar to the song.

The building highlighted, 556 Evergreen Ave., is in HPD’s Alternative Enforcement Program, meaning it has very high code violation and has been flagged as one of the 200 worst buildings in the city.  This shows that the property owner, Moody Amar, is probably not a very responsible landlord.  Why should we block the transfer of this building to a new owner? What happens when the building switches hands? Will the new owner clear code violations with patchwork repairs, or will tenants fight to correct the underlying conditions and fix code violations behind the walls? What opportunity do tenants have to support a good, HPD-and-tenant vetted buyer to win the building at auction? This is the story Mr. Sin should tell in his foreclosure beat behind the buying and selling of distressed, foreclosed buildings.

The foreclosure process in New York City takes an unreasonably long time, adding to already difficult living conditions for tenants.  Court appointed receivers are often placed in buildings and have little or no concern for tenants, and rarely have the energy or funds to make necessary repairs.  When thinking about the multifamily foreclosure in New York City, the question is not how to prevent the foreclosure process from taking place, but rather how to finish the process quicker while simultaneously pressuring banks into doing the right thing.

Speculative Buyers, Stay Away! This round is “Tenant’s Choice”

"Don't Buy Here" signs in English and Spanish in the Ocelot Portfolio, where the Tenant-Choice model was used to force lender Fannie Mae into a preservation deal with tenants preferred owner, Omni Management.

The work we do at UHAB is unique because, in some ways, we see foreclosure as a good thing. What we mean by that is that when a building falls into foreclosure, we believe it is an opportunity for tenants to assert a stronger position in determining the future of their building. When a renter-occupied building falls into foreclosure, ownership often changes hands. This change provides an opening for tenants to insert themselves into the negotiating process and determine for themselves who should be the next owners of their building. We call this model “Tenant Choice.”

At UHAB, we see four main methods of building ownership, each with benefits and shortcomings. We provide tenants with information on these different models of ownership and encourage them to have serious debates about which model they envision for their homes. We believe that we can empower whole buildings and communities by increasing tenant participation in planning for the future of their building. The four methods are described below, in order of least-to-most tenant responsibility.

  • Continue as a Rental: Tenants may decide that their responsibility is to pay rent and receive services. If tenants choose this model, UHAB organizers may help tenants identify responsible developers who will be long-term landlords that invest in the building and maintain affordability.
  • Joint – Venture: In a joint venture, tenants sit on a board alongside representatives from the building owner. The board has decision power on the day-to-day management and maintenance of their building that also includes representatives from the landlord and from the community.
  • Mutual Housing: In this model, multiple buildings are grouped together to form a community or city wide association. Tenants volunteer to sit on a board, alongside ownership, and make management decisions over their building, as well as other buildings in the association. Tenants keep costs down by agreeing to manage certain aspects of maintenance on their own, for example, taking out trash and sweeping hallways.
  • Limited-Equity Cooperative: In this model, tenants form a corporation for their building and then buy shares to become permanent owners of their apartment units. Tenants who decide they want their building to become a co-op are required to take on a great deal of responsibility, and commit time and energy towards the building and the community. Tenants have the most control over the way that their building is run, and may as well have the opportunity to pass the apartment on to their children.

We have a few big picture objectives for our tenant choice models of ownership training: tenant empowerment, and as always, asset preservation. We hope encourage tenants to talk as a community about what kind of relationship they would like to have with their landlord and to begin to see themselves as powerful decision makers in their buildings future. As the foreclosure crisis continues we hope to use the tenant choice model to as part of an innovative ownership strategy to stabilize distressed buildings and neighborhoods. We hope to involve tenant participation as part of a long term strategy of distressed asset preservation. With these four models of ownership in mind, we are thinking of creative ways to solve the foreclosure crisis and break the cycle of Predatory Equity.

(Don’t forget to check out our new Resources tab, where you can get copies of our Models of Ownership training packet.)