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Ever since it was purchased in 2007, tenants of the hulking old
apartment building on University Avenue in the Bronx have endured
cockroaches, leaking pipes, electricity outages and myriad other
deprivations and indignities. But the low point probably came last
winter, when the boiler ran out of oil.
"For two weeks, we had
no heat. This room right here? Icicles coming from the ceiling. That's
how cold it was," says Luis Correa, 33, standing in the back bedroom of
the apartment where he has lived his entire life.
The building
was long owned by a small landlord who did a good job of maintaining
it, Correa and his neighbors say. But one day in 2007, they awoke to
find it had been purchased by Ocelot Capital Group, along with 24 other
buildings, for the staggering sum of $36 million.
Later, when
the real estate crash left the owners unable to pay the debt service
and keep up the property, the new owners abandoned it.
'Cash Flows Have Deteriorated'
Anywhere from 70,000 to 100,000 New York City apartment units are in
foreclosure or at risk of it right now, including both small buildings
and mega-complexes like Riverton Houses in Harlem, which went into
default a year ago.
The foreclosures are a hangover from the
real estate boom, when developers paid hefty sums for New York real
estate. Because the city has been gradually phasing out its rent
subsidy laws, more and more landlords were able to charge market rents
for their apartments, and developers saw dollar signs.
"The plan
was to turn them into luxury rentals and condos," says Emily Youssouf,
former head of the New York Housing Development Corporation. "There
were hardly any neighborhoods where you couldn't see gentrification
happening, and a lot of neighborhoods that used to be terrible weren't
anymore, because they were moving up, and everything was moving, moving
ahead."
In the heady days of the credit boom, developers hoping
to cash in had no trouble persuading banks and other lenders to give
them money to acquire the buildings. But rent-regulated tenants have
proven harder to dislodge than many expected, and in the aftermath of
the real estate crash, rent projections turned out to be wildly
overblown.
"What you see embedded in the underwriting of the
loans is an expectation that cash flow will grow significantly, and
where we find ourselves now is in a situation where, rather than that
being the case, the cash flows have deteriorated," says Sam Chandan,
president and chief economist at Real Estate Econometrics, a
forecasting firm.
Today, many developers are saddled with
apartment buildings that bring in far less than they need to pay off
the enormous loans they took out. Perhaps the most prominent examples
are Stuyvesant Town and Peter Cooper Village in Manhattan, two
sprawling sister complexes built by Metropolitan Life after World War
II and purchased by private equity firms in 2006 for $5.4 billion, in
what was called the largest real estate deal in U.S. history.
In
most cases, developers are holding on, trying to refinance their loans
while they wait for the market to turn around. For the most part, they
have continued to maintain the buildings, and cases of outright
abandonment, like the Ocelot Group, have been few, Youssouf says.
But time is running out, leaving the future of many buildings in jeopardy.
One problem is that lenders are generally reluctant to write off bad
loans, since doing so hurts their bottom line and forces them to set
aside more money to beef up their capital levels, something that's
especially painful in a credit crunch like this one.
Instead,
lenders look for new developers to assume troubled mortgages, something
the industry calls "extend and pretend." But the new owners are often
no more able to make the building's finances work than their
predecessors.
"They're just kicking it down the road, and hoping
it gets better and the economy comes back," says Youssouf, who has been
hired by the Rockefeller Foundation and the Partnership for the City of
New York to develop a new model for restructuring bad loans.
A
former investment banker, Youssouf says federal and state programs
exist that could be leveraged to mitigate lenders' losses, like the
Troubled Asset Relief Fund, but lenders will almost certainly have to
take a big hit as well.
"Part of what has to happen there is we
need to understand what are going to be some of the mechanism or
channels for sharing the very costly write-downs that will have to be
taken, to get these loans to a position where they're performing where
the properties are well-maintained and where people have places to
live," Chandan says.
The Return Of Urban Blight?
The longer the juggling act continues and lenders delay writing off bad
loans, the greater the temptation will be to stop maintaining and
repairing buildings, like the one on University Avenue in the Bronx,
say Kerri White, an organizer with the Urban Housing Assistance Board,
an advocacy group.
When one apartment building falls into
disrepair and abandonment, it can have a corrosive effect on
surrounding buildings and on a street as a whole, White says. Many New
York neighborhoods have undergone a dramatic renewal in recent decades,
becoming much safer and more livable, and the return of urban blight is
a scary prospect to residents, White says.
"I definitely think
that if this goes unchecked, then we're going to go back to where the
Bronx was burning in the early '70s," she says, sitting in Miriam
Maldonado's living room in the University Avenue building.
"Already, if you talk to tenants here, they will say many tenants have
moved out. People get frustrated, and eventually people will just
leave, because nothing is getting done and your apartment becomes
uninhabitable. So already we're seeing high vacancy rates in these
buildings."
The fact that tenants are having to pay the price
for excesses of developers and lenders seems especially unfair to
Youssouf.
Tenants are "the only people in this whole mess who
never borrowed any money, who never put their name on anything. They're
tenants who pay their rent and just expect a clean decent place to live
in return.
"And it's ironic in a way that there is this large
population of renters that either are being hurt currently or at risk
of being hurt, where they didn't taken on any debt. They weren't
subprime. They didn't do anything wrong."
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