Sale of Troubled Buildings May Not Mean Rescue

Editor’s Note: Among the common myths being played out is that tired song about how market forces (a/k/a God) will provide. All corrections will come in good time and the system will be fixed. Not true — at least not this time. Whether it is a residential home, a neighborhood, an apartment building or commercial building, the fact is that there isn’t enough money in the world to fix this problem. The fact is that many people who “buy” these crumbling homes, neighborhoods and buildings have no intent of throwing good money after bad. They intend to take the property for a steal, milk it as long as they can and leave — unless something miraculous happens to real estate prices.
August 5, 2010

Sale of Troubled Buildings May Not Mean Rescue


“Bronx portfolio,” the Web posting read. “These distressed properties fetches prices that are much below its market value.”

The grammatically sloppy advertisement for 10 troubled buildings in the Bronx appeared this spring on eBay classifieds, not a forum known for attracting the kinds of investors who can afford to rescue the properties, which are plagued with crumbling ceilings, roaches and unsustainable debt piled on during the speculative boom of the previous decade.

But with scores of such buildings in foreclosure and many others in disrepair, city officials and housing advocates say a new wave of investors has already begun to swoop in. And the actions of some of the new buyers — one was recently jailed for contempt of court, another has already clashed with tenants — have raised fears that conditions in timeworn buildings could get even worse.

Rafael E. Cestero, the commissioner of the city’s Department of Housing Preservation and Development, said he had seen a number of distressed properties around the city sold to buyers who were not acting “in the best interests of the city, the neighborhood or tenants.”

Mr. Cestero said that city officials, seeking ways to intervene, had little recourse, since most of the deals were private. “This is probably the most difficult thing we’re doing at H.P.D. right now,” he said. “We don’t have a clear and obvious way to insert ourselves.”

While the buyers are often paying less than the previous owners did, tenant advocates maintain that some of the prices are still too high for the amount of rental income the buildings generate and the repairs they need.

So the new owners, the advocates say, have already revived old tactics of tenant harassment, including bringing trumped-up lawsuits against tenants in rent-regulated apartments, hoping to evict them and then raise the rents under the state’s so-called vacancy decontrol rules.

One landlord, Meyer Orbach, paid $70 million in June 2008 for 13 buildings with 250 apartments on West 49th Street; about half of the apartments were rent regulated. Last year, he bought 22 buildings with 384 apartments on West 109th Street.

The latter portfolio cost $45 million, or about 60 percent of what was owed by the previous owners, the Pinnacle and the Praedium Group, which had begun eviction proceedings against 5,000 of the 21,000 tenants it had in New York City. Mr. Orbach’s strategy, many tenants say, is no different. He has filed dozens of cases against tenants in housing court, and some tenants complain that private investigators posing as repairmen have been poking around their apartments.

Rosa Hernandez, 71, said she and her husband have lived in their two-bedroom fifth-floor apartment at 204 West 109th Street for 32 years. They raised four children in the apartment, where they pay $563 a month in rent. Mr. Orbach’s lawyers say in court papers that she now lives in her native country, Ecuador, and in Florida, where some of her children now live; she denies the claim.

Bennett Baumer, a tenant organizer at Housing Conservation Coordinators who is working with tenants on 49th Street, said of Mr. Orbach, “He’s part of a second wave of predatory investors using vacancy decontrol to evict tenants and jack up rents at the expense of affordable housing.”

Mr. Orbach’s lawyer, Ken Fisher, rejected that notion, calling Mr. Orbach a “small potatoes” investor, not a Wall Street speculator. He said Mr. Orbach was merely trying to get rid of tenants who had no right to rent-regulated apartments, because they were illegally subletting or had a primary residence elsewhere.

“It is an unfortunate fact,” Mr. Fisher said, “that tenants in New York sometimes resort to illegal tactics in order to hold on to rent-regulated apartments.”

One tenant currently in court with Mr. Orbach is Felipe Fernandez, who said he has lived in his family’s four-bedroom apartment on West 109th Street since 1974. His parents have since left the neighborhood but he remains, the sole occupant, with an $800-a-month rent. Given the apartment’s four bedrooms, it is easy to see why a landlord would want to remove him. But, Mr. Fernandez said, that does not give Mr. Orbach the right to toss him out of his home.

“I grew up around here,” said Mr. Fernandez, 50. “I know the neighborhood and everybody knows me. My daughter went to the school down the street.”

Mr. Orbach’s lawyer said his firm’s investigation had indicated that Mr. Fernandez lived somewhere else most of the time; Mr. Fernandez denied that.

City officials said they were keeping an eye on Mr. Orbach’s buildings.

Although he initially rebuffed their efforts, the City Council speaker, Christine C. Quinn, credited Mr. Orbach for evicting an illegal hotel that had been operating in one of his buildings. But, she said, “I still have concerns about whether there is or was harassment going on.”

The downturn in the housing market foiled many plans to gentrify buildings in far-flung neighborhoods. Many new landlords were stuck paying mortgages that the buildings’ rent rolls could not support, and some walked away from the buildings, while tenants languished in apartments badly in need of maintenance.

“The real culprits,” said Dina Levy of the Urban Homesteading Assistance Board, a tenant advocacy group, “are the banks who, eyes wide open, overleveraged these buildings when they should have known better.”

But there is still interest among investors for rent-regulated buildings, said Robert A. Knakal, a principal at Massey Knakal, the real estate broker that sold Mr. Orbach the 109th Street buildings. “The artificially low rents lead to a lot of upside,” he said. “If they’re paying below-market rents, it’s a positive thing if the tenant leaves.”

Many tenants in rent-regulated apartments, he said, are “abusing the system.” Legitimate tenants, he said, have nothing to worry about because they cannot be legally displaced.

Tenant advocates have had some success. Last year, the city helped broker a deal that allowed the former baseball star Mo Vaughn and his real estate company, the Omni Group, which has had success turning around neglected properties, to take over and begin to fix 14 of the city’s most troubled buildings that had been owned by the Ocelot Capital Group.

But rather than serve as a model, the Omni deal has started to look like an exception. City officials have so far not had success replicating the arrangement.

One real estate manager, Sam Suzuki, represented a group that bought six other Ocelot buildings in May 2009, raising hopes that conditions would improve. They did not. The number of violations grew under Mr. Suzuki’s watch, and the tenant group of a building at 1585 East 172nd Street filed suit against him.

Mr. Suzuki failed to correct violations, show up in court or reveal the names of the owners of the properties, and this summer he served three weeks in jail for civil contempt, a rare penalty in housing court.

Mr. Suzuki, in an interview on Thursday, blamed the buildings’ problems on tenants who failed to pay the rent. “There has to be a balance with the landlord and the tenant,” he said. “The tenants have to pay the rent.”

A real estate investment company, the Bluestone Group, bought the debt on Mr. Suzuki’s buildings from Dime Savings Bank, making it, in effect, the third time the troubled housing stock changed hands.

Eli Tabak, a principal in the company, said the deal was in line with Bluestone’s business model, which he said involved “buying distressed debt at a discount, turning the asset around and turning it into a cash-flowing proposition.”

Ten buildings owned by Milbank Real Estate, a Los Angeles company, went into foreclosure last year — and showed up on the eBay classifieds with the name of a Yonkers real estate company on March 30.

Housing advocates said these listings on eBay, where sellers may list items but do not put them up for auction, represented a new low, signaling levels of desperation that spelled only more pain for the tenants. The buildings that were owned by Milbank have 547 apartments and more than 3,200 housing code violations.

Milbank did not return calls for comment. A new buyer is currently negotiating to take over the portfolio, said Jen Brown, a spokeswoman for LNR Property, the special servicer handling the troubled loan. LNR has declined to disclose the name of the buyer, drawing concerns from Ms. Quinn, whose office has reviewed the portfolio’s finances and fears the new owners are ill-prepared to repair and maintain the buildings.

Ms. Quinn took part in a rally on Tuesday in front of one of the Bronx buildings calling for more transparency and accountability.

“We believe that this sale is just going to rearrange the deck chairs on the Titanic,” Ms. Quinn said in an interview. “I’m very concerned that this is déjà vu all over again.”

One Response

  1. Also see below – the government is having the same problem.

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