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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NY Times: “A Landlord’s Uphill Fight to Ease Rent Restrictions”

James D. Harmon Jr. learned the value of a house as a child, shoveling coal into the furnace of one of two Upper West Side buildings owned by his grandfather, a French immigrant who worked as a waiter. “Jimmy, you take care of your building and your building will take care of you,” his grandfather told him.  “But the word he used in French wasn’t building” Mr. Harmon recalled the other day. “The word he used in French was ‘maison,’ which means home.”

Now Mr. Harmon, 68, who grew up in one of those buildings — a bow-fronted town house on West 76th Street near Central Park — has gone to the United States Supreme Court contending that New York City’s rent laws constitute a “taking” of his property without just compensation, a violation of his constitutional rights.

The regulations are meant to support the government’s goal of maintaining affordable housing for its citizens. Instead, he says, the laws have forced him and his family to shoulder the government’s burden and extend what is essentially “privatized welfare” to rent-stabilized tenants who are paying rent 59 percent below market rates and who have rights of succession to their lodgings in his house.

“Put yourself in our position,” Mr. Harmon, a former federal prosecutor, said of himself and his wife, Jeanne. “Suppose somebody told you, you’ve got an extra bedroom, we’d like to put someone in there for as long as they want to stay, and you have to take care of them for the rest of their lives and the rest of your life. That’s really what this is like.”

The city’s rent regulations have been challenged many times going back decades, making this case an uphill battle. Mr. Harmon has lost twice in lower courts, most recently in September, when the United States Court of Appeals for the Second Circuit, in Manhattan, ruled that the rent-stabilization law did not constitute a “taking” because it did not stop him from using the building as a rental property and did not stop him from living there himself.

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Wall Street Journal: “Legislature Lets Rent Laws Expire, for Now “

With an agreement on rent regulations elusive in Albany, New York’s rent laws expired late Wednesday night, after a short-term extension of the laws failed in the Republican-controlled state Senate.

In recent days, lawmakers had been making limited progress in negotiations on a multiyear extension of the laws, with Assembly Democrats pushing to expand existing regulations while Senate Republicans had resisted any changes from the laws. The rent laws limit rent increases and other regulations on about one million apartments in New York City.

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