Housing advocates these days are worried about a new affordability crisis—not just tenants who can't afford their rent, but residential building owners who can't afford the purchase prices they're paying. After learning that the city's own pension funds were investing in properties that were bought at unsustainable prices, advocates called for a stop in the practice. Last week, City Comptroller William Thompson promised to avoid such deals in the future.

Meanwhile, Senator Charles Schumer announced on Monday that the city's Department of Housing Preservation and Development had blocked a buyer's bid to purchase a building on Sedgwick Avenue in the Bronx that is widely regarded as the birthplace of hip-hop. HPD says it disallowed the deal to buy the building, whose renters were protected under the Mitchell-Lama program, because of the sales price.

Around the city, a new kind of apartment building buyer is scooping up property in moderate- and low-income neighborhoods and taking on massive mortgages that the current rental income can't pay. One measure of the pressure this puts on the market: University Neighborhood Housing Program, a Bronx-based non-profit, says the price of apartment units in the Bronx has soared from $12,000 per unit in 1996 to about $37,000 per unit in 2000 to $74,000 per unit in 2006.

Groups like the Urban Homesteaders Assistance Board (UHAB) and Tenants & Neighbors—who have dubbed these investments "predatory equity"—fear that over-leveraged owners will have to dislodge current tenants in favor of richer ones in order to generate more rental income. Some owners won't even be able to do that, as housing regulations or market realities prevent them from pushing out or cashing in; among these owners, the lucky ones will sell out before the crunch comes, but others will be left holding buildings they can't afford and could cut corners on services and maintenance.

Private equity funds, which aren't traded publicly and offer well-heeled investors the opportunity to engage in high risk investments for potentially higher rewards, are behind a growing number of these questionable deals—including the bid for the building on Sedgwick Avenue.

When UHAB discovered that city pension money was involved in a recent $950 million deal for five buildings in Manhattan, the organization told the comptroller that the deal didn't add up—unless, of course, the owners subtracted the present moderate-income renters from the picture.

Last Thursday, Thompson—who oversees the city's five pension funds (one each for firefighters, police officers, teachers, other education employees and all other city employees) and their $110 billion in combined assets—announced that in future real estate investments, the city will insist on an "opt out" clause so it can pull its money from real estate purchases where the financials don't add up. Thompson also agreed to seek more affordable housing investments for the pension funds.

"We must all work together to maximize protection and affordability for tenants in both existing and future investments,” Thompson said in a statement. “With today’s announcement we are strengthening our commitment to invest in affordable housing by creating an opportunity to decline investments that could negatively affect affordability.”

Thompson's announcement only affects future private equity (and other real estate) deals. Existing real estate investments won't change because of the new policy—one reason is that pulling out the city's money after a deal is done could only harm tenants, says UHAB organizer Dina Levy.

But even in future deals, steering city money away from specific projects could be tricky.

The city's pension funds in 2007 had $1.8 billion in private equity real estate investments. While the city's pension funds are big players, the private equity world is a huge pond: There were $335 billion in new private equity commitments worldwide in 2006, according to the Federal Reserve. With so much investment capital for private equity funds to choose from,such funds could simply decline city investments that come with an "opt out" clause attached.

Thompson frequently engages in shareholder activism on behalf of the pension funds, calling so far this year for companies to disclose political contributions, respect human rights in Northern Ireland and protect lesbian, gay, bisexual and transgender workers. Those efforts don't always bear fruit, and the opt-out effort might be particularly challenging. "This is really brave and really bold by Thompson, to do the right thing," says Levy, "it is novel."

Thompson's office is confident it will be able to make its case, saying in response to questions: "Since the inception of the program, the city has successfully negotiated certain policy rights that are unique among its peers. The current size of the program is clear evidence that most investment managers will accept our terms."

- Jarrett Murphy