Flipped Again: More Private Equity Groups Speculate on The Three Borough Pool Portfolio

PHOTO: JOHN TAGGART FOR THE WALL STREET JOURNAL
PHOTO: JOHN TAGGART FOR THE WALL STREET JOURNAL

On Saturday, the Wall Street Journal reported on the most recent update in the saga of the Three Borough Pool, a group of 42 buildings which over the last 8 years have been packaged together in one mortgage, speculated on, foreclosed on, refinanced and is currently being broken up and flipped again. This group of buildings is another example of the continuing cycle of predatory equity and is further proof that we have yet to come up with a solution to the problem of speculation in the rent regulated housing market.

UHAB has been tracking and organizing in this portfolio for several years. It is one of the classic examples of predatory equity. Three private equity companies (Normandy Real Estate Partners, Westbrook Partners, and Vantage Properties) partnered up with David Kramer, the president of Colonial Management, to package 42 buildings spread across the Bronx, Brooklyn and Manhattan. The investment group took out a mortgage with Barclays who then packaged the note into a Commercial Mortgage Backed Security (CMBS.) Securities like this were a common tool that many believe contributed to the 2008 financial crisis and are disastrous for affordable housing. In the Three Borough Pool, like other CMBS portfolios (Stuyvesant TownRiverton, Fordham Towers/Robert Fulton Terrace, and the Milbank portfolio) the owners eventually defaulted on their mortgages and the buildings fell into foreclosure. In 2013, UHAB and other housing advocates began working with tenants in the buildings to push for a responsible sale of the properties. However, two of the private equity companies that led the building to foreclosure were able to refinance and pull the buildings out of foreclosure. It is these companies who are now once again selling the buildings.

This weekend’s WSJ piece focuses on 8 of the 42 buildings; these 8 properties were recently sold to a real estate investment company called Black Spruce Management. According to Normandy & Westbrook, prior to the sale they made a lot of repairs to the buildings. This assertion comes as a surprise to the tenants who are facing major condition concerns on a daily basis. HPD code violations have actually increased over the past year, but the problem is actually deeper than that. These buildings have a long history of neglect and failing conditions, and they need more than patch work that could clear violations. The night before this story came out, one of my co-organizers received a call from a tenant in one of these buildings who was in tears because she found a rat in her living room in the apartment she shares with her grandchildren. Tenants in these buildings have suffered from systematic leaks, mold and lack of heat and hot water. These problems are deeper than code violation repair, they are problems which demand more extensive renovation, which would require a large financial commitment. Considering the amount that Black Spruce paid for these buildings, it is unclear if there is financing for this type of deep repair work.

The WSJ story claims that the new debt on these properties is considered low. First of all, the new mortgage of these buildings is an average of about $83,000/unit. This is the same average debt level as when the owners defaulted on the CMBS mortgage. Second, the mortgage does not tell the whole story. The full purchase price on the 8 buildings was over $57 million, or about $110,000/unit. This means about 25% of the financing is equity investment. As Black Spruce mentioned from the article, they are backed by investors: investors who are presumably seeking a return on the millions of dollars they gave to Black Spruce to purchase these buildings. Having a “lower” mortgage at the expense of putting more off the books equity into the deal does not solve the underlying problem: these are rent regulated buildings with low-income tenants and limited ability for rent increases. If the financial stability of the buildings is contingent on large rent increases, this portfolio will fail. Unless, of course, the plan is to either push the current low income residents out of their homes in order to raise rents, or to starve the buildings of money needed for maintenance in an attempt to keep costs down. This is not a new practice. This is Predatory Equity 2.0, the same kind of speculative financial venture that landed these buildings in foreclosure in the first place.

This type of speculation is particularly relevant as we approach June 15th, when the current rent regulations are set to expire. The current rent regulations are not strong enough. Advocates and tenants know that it is impossible for landlords to achieve their financial expectations when they over pay for buildings by continuing to rent to the low and moderate income families who have lived in these buildings for years. Predatory equity, like in the Three Borough Pool, makes rent regulated tenants the victims of harassment as landlords aim to push them out to achieve higher rent increases. It is vital that our legislators in Albany recognize the importance of strengthening the rent regulation laws. It has become a business practice for landlords to buy buildings with the intention of violating our laws and we shouldn’t allow it to continue. The only way we will be able to put a stop to these illegal practices is for our elected officials to reinforce the original intentions of the stabilization laws: to protect tenants in these buildings from being held hostage by greedy landlords who seek to make a profit off the suffering of our neighbors and our communities.

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VIDEOS: June 2 Protest Against NYCB

Wondering what it looks like to protest New York Community Bank? One week ago, tenants from all over New York City showed up outside of the NYCB annual shareholders meeting. They demanded that the bank practice more responsible lending. One tenant who was in attendance lives with her husband and two daughters in a NYCB building that was recently destroyed by an electrical fire. NYCB is demanding $1.1M for the incredibly distressed property.  “I’m here because this is our life,” she said.

While we took this video and chanted with tenants outside, our allies at Northwest Bronx Community & Clergy Coalition and National People’s Action brought tenants inside the shareholder’s meeting to directly appeal to the NYCB executives and shareholders. They were denied the opportunity to speak at the meeting. Thanks to Amanda, we have a video of what happened inside.

Tenants Speak Out at the NYCB Shareholder Meeting!

By 10 AM this morning, at least 80 tenants and advocates from distressed buildings all over New York were already blue in the face, protesting New York Community Bank’s irresponsible lending practices at their annual shareholder meeting in Queens.

We asked shareholders to intervene, and tell NYCB to stop selling loans to irresponsible landlords, adhere to sound underwriting standards, and sell loans to responsible landlords who promise to maintain buildings in safe and decent condition.

Shareholder’s got this flyer:

Despite the fact that the police were out in full force, and the hotel tried to create a wall of vehicles between the tenants and the shareholders, the tenants prevailed. Not only did a group of us interrupt the shareholder’s meeting to discuss the issue and say a prayer (before we were escorted outside), but we chanted outside the hotel  for almost two hours – causing a very peaceful raucous. This is what it looked like:

Let’s hope that as the weekend approaches, NYCB reconsiders its lending practices and decides to proceed in a responsible way. If not, I guess we’ll be back soon.

Many thanks to all of the wonderful tenants and activists who came out today. Big ups to all the folks at: ANHD, Tenants and Neighbors, Pratt Area Community Council, North West Bronx Community and Clergy Coalition, and Community Action for Safe Apartments!