Foreclosure Fears Lead
To Tenants' Conundrum

When investors paid exorbitant prices to buy affordable-rent apartment complexes during the city's real estate boom, tenants and housing advocates suspected the new owners would have to raise rents, kick out rent-stabilized tenants or sharply curtail services in order to make their mortgage payments.

But as the economic crisis wears on, concerns about whether tenants could resist those feared evictions and service cuts are giving way to deeper worries about what happens when tenants win or avoid those fights. If owners can't cut costs or raise revenue, the combination of massive mortgages and modest rent rolls makes foreclosure a real and present threat.

Preliminary numbers from a forthcoming report by the Association for Neighborhood and Housing Development (ANHD)—which scrutinizes the underwriting data of 10 private equity firms that made these high-priced investments—paint a dark picture for the future of affordable housing, suggesting a possible landslide of foreclosures.

Using the term "predatory equity" to refer to firms that bought buildings with modest rent rolls for high prices, a draft of the report states: "As of June 2009, a remarkable 10 out of 10 predatory equity loans that we are closely tracking were either on a finance industry watch list as in danger of default, in workout with a finance industry loan servicer for being in danger of default, or actually in default."

Hard math

ANHD's draft report derived its findings from service reports written about loans that were packaged into commercial mortgage-backed securities. These loans cover about 30 percent of the 100,000 units of affordable housing in the city estimated to have been purchased by private equity-backed developers in the past four years.

As of December 2008, the report puts the average debt service coverage ratio of the private equity buildings it examined at 55 cents for each dollar of debt owed. No amount of revenue generated through tenant harassment on the part of owners or lack of building maintenance could make up the difference, says Benjamin Dulchin, the executive director of ANHD.

"The underwriting was so spurious and so frothy that even with the harassment the buildings are grossly overleveraged," he says. "This is all really stressed financing. And when a building goes into foreclosure there is very often a prolonged period of lack of physical attention to the building. These things are so concentrated in these neighborhoods that it could have quite a significant impact."

The owners named by ANHD often deny that they are trying to drive out low-income tenants or make service cuts. They also usually insist that they are financially sound.

The specter of mass foreclosures of multifamily buildings became palpable, however, on October 22 when New York State's highest court ruled that Tishman Speyer Properties had illegally taken apartments out of New York City's rent stabilization programs at Peter Cooper Village and Stuyvesant Town, two giant complexes in Manhattan comprising 11,227 apartments. In 2006, Tishman Speyer spent $5.4 billion for the two complexes in a deal that boggled housing advocates throughout the city.

With the ruling, Tishman Speyer lost its only tool for the massive rent hike it needed to cover the cost of the biggest real estate deal in American history. On November 8, Tishman Speyer released a statement reading: "We [have] requested that the joint venture's loan be moved to special servicer in order to facilitate negotiations on a restructuring of the debt load."