Nearly 10%, or 100,000 units, of the city's affordable housing stock were overleveraged by predatory equity investors, and several of them are heading toward financial default, according to a recent report from a housing advocacy group.
According to the 30-page report, dubbed "Predatory Equity: Evolution of a Crisis" , these predatory equity investors “used tenant harassment as a business model to drive out rent-regulated tenants on a wholesale level by evicting and replacing them with market-rate renters.” The report, compiled by the nonprofit Association for Neighborhood and Housing Development, also found that many property portfolios are operating on equity loans that earn only 55 cents for every dollar in debt, which is classified as predatory.
It also highlighted the default risk of 10 major portfolio loans in the city that have used speculative underwriting practices. The report is based on industry loan servicer filings between 2005 and 2009, according to Benjamin Dulchin, executive director of the association.
“It is bad. There is already a lot of money lost and affordable housing destroyed,” said Mr. Dulchin. “It is an important issue and we will actively pressure banks to preserve and deleverage these properties.”
The report's predatory equity default risk list includes a number of high-profile troubled properties such as Tishman Speyer's Peter Cooper Village & Stuyvesant Town. Since the court ruled last month against landlord Tishman Speyer for illegally deregulating apartments while receiving tax breaks, the $3 billion mortgage that financed the purchase of the complex has been transferred to a special servicing firm, a sign that the borrowers are likely to default.
The list also includes developer Lawrence Gluck's Riverton Houses, a rent-regulated apartment complex in Harlem with 1,230 units, which is “rumored to be near default,” according to the report.
In addition, a 1,142 apartment complex in East Harlem owned by now defunct Darnay Day, a British investment firm, is in default and in the hands of a special servicer Centerline Servicing, according to the report.
The findings were released last week, shortly after the city announced that a real estate development company led by former New York Met first baseman Maurice “Mo” Vaughn bought a collection of 14 deteriorating South Bronx apartment buildings owned by the Ocelot Capital Group, which let the properties fall into disrepair and eventually defaulted on their mortgage.
Last week, the City Council also announced the creation of the Predatory Equity Task Force, which will track buildings that are financially or physically at risk and pressure owners and lenders to either maintain these properties or sell them.
“This is an issue that is important,” said Mr. Dulchin. “There needs to be movement by government, community groups and tenants to push banks to engage in preservation deals.”
Correction: Nearly 100,000 units of the city's affordable housing stock were overleveraged by predatory equity investors. The number of units was misstated in the original article published Dec. 7, 2009.
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