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Kai Ryssdal:
Back in the boom days of real estate, investors saw potential profits
almost every place they looked. Forget houses and commercial real
estate. Even apartment buildings where rents were regulated looked like
gold mines. Developers paid luxury prices for those buildings, hoping
to turn them into cash cows. Now though, those properties aren't worth
near what they sold for, which is a problem for investors. But it's
worse for the people who live in them. Marketplace's Alisa Roth reports
from New York.
ALISA ROTH:
For a long time, rent-regulated housing was considered a boring
investment. The income was steady. But it was never very big because
the city limits the rents and so they're often well below market rates.
Benjamin
Dulchin is the director of the Association for Neighborhood and Housing
Development, it's an advocacy group in New York. And he says the
real-estate boom really changed that.
BENJAMIN DULCHIN:
Starting at about 2005 is that these private equity funds began to
notice rent-regulated real estate as an undervalued potential
investment.
He
says in New York alone developers backed by private equity firms bought
up about 100,000 units. That's about 10 percent of the city's
rent-regulated housing stock. The idea was to make more money from the
buildings by raising the rents dramatically.
Emily Youssof is a housing consultant. She says this is how the developers planned to do it...
EMILY YOUSSOF:
In the future, three or four years down the road, the new owner would
be able to turn over the tenants and make these buildings into more
luxury buildings, as opposed to middle class, working class or even
lower-income units.
The
prices the developers paid for the buildings were based on much higher
rents than the apartments had been getting. And the developers took out
big mortgages to pay for them.
But
they haven't been able to get low-paying tenants out of the building
fast enough, and they underestimated how much it cost to operate these
buildings. So the developers just aren't getting the income they need
to pay their expenses.
Youssof says the money problems are starting to show.
YOUSSOF:
In a number of buildings, you're beginning to see the owners milking
the building for the money that is there. They're not paying their
mortgages, the maintenance of the building is going down, the
violations are going up.
I
went to visit Yolanda Naba-Juarez. She's lives in a rent-regulated
building in Upper Manhattan with her husband and their two teenagers.
The
building is owned by a developer called Vantage Properties, which got
backing from a private equity firm to buy it. Vantage paid about $15
million for it in 2007. It was part of a whole real-estate portfolio.
The mortgages were then securitized, and they were sold off as
investments.
Naba-Juarez
comes from Mexico; she doesn't speak English. She doesn't really know
anything about her landlord, except that she can't get the company to
fix things, like the hole in her bathroom ceiling or the broken
refrigerator.
But
she and her family may have much bigger problems to deal with: Benjamin
Dulchin's advocacy group has been analyzing data from the SEC and from
loan servicers. And they found that many of the developers of
rent-regulated buildings in New York -- including Vantage -- just
aren't making enough money to keep paying their mortgages.
DULCHIN:
This is sort of not just a disaster in the making. This is a disaster
that has already happened. And it clearly shows that these buildings
are really grossly distressed.
Neil
Rubler is the CEO of Vantage. He wouldn't talk to me about the
specifics. But he did say all of his buildings are already profitable.
He
says these buildings were meant to be long-term investments. And his
plan is to use technology and economies of scale to make them more
profitable.
NEIL RUBLER:
We believe that by operating our business more efficiently, we can
provide a better quality product, and higher quality services to our
consumer and therefore raise their standard of living while at the same
time keeping the product ultimately affordable to them.
But
the mortgages on a lot of these buildings are starting to come due. The
developers can't afford to pay the loans off. And the banks won't
refinance because they think the investments are just too risky.
Youssof, the housing consultant, says this is starting to happen all over the country.
YOUSSOF:
Anywhere where you have a high concentration of renters, you'll see
issues like this. And, of course, California, Florida, Illinois,
Chicago, New York, D.C.
She's
been talking to lenders and government officials to get them to work
with building owners. Because she says entire neighborhoods are at
stake.
In New York, I'm Alisa Roth for Marketplace.
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