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The luck of Gluck

After nearly defaulting on his 1,230-unit Riverton Houses complex in Harlem, landlord Larry Gluck is fighting to prevent foreclosure.

Larry Gluck — one of the city's most successful and experienced landlords — shocked the real estate world in August by informing his lenders that he was about to default on a $225 million loan at the storied Riverton Houses complex in Harlem.

Gluck had purchased the 1,230-unit Goliath of an apartment complex, built in 1947 as Harlem's answer to Stuyvesant Town and Peter Cooper Village, in 2005, when the lending pipeline was flowing forcefully.

But now, even as he and his company, Stellar Management, fight to stave off foreclosure at the rent-controlled towers, the breathtaking speed of Riverton's near-collapse has served as a wakeup call to rental buildings all over the city, many of which have pro forma loans similar to Riverton's.

And ironically, Riverton, which has burned through a $19 million reserve fund, may be better positioned than others to survive the financial rollercoaster ride.

According to Gluck, Stellar recently made a handshake agreement with its lenders to modify the terms of the loan.

"We have an agreement with the mortgagee; we're just working it out," Gluck told The Real Deal during a phone interview. He declined to give further details.

Agreement or no agreement, Gluck was not alone in his shopping spree for rental buildings at the giddy heights of the real estate boom. Throughout the city, apartment complexes were snatched up by buyers at exorbitant prices, financed by lenders salivating at the prospect of getting a piece of the commercial mortgage-backed securities market. Much like the Riverton, rental buildings all over the city received loans based on speculative figures, as banks competed with each other to finance lucrative deals in a seemingly unstoppable real estate market. They weren't prepared for the music to stop.

Riverton's financial demise was "a real shock," said Manus Clancy, a senior managing director at Trepp, a data company that tracks the commercial real estate finance market. "Nobody had focused on the burn rate of the reserves," he said referring to the $19 million fund. "It hit people like an anvil how fast the money could burn out."

Now a bevy of other buildings, including Savoy Park, Meyberry House and others, are poised on the brink of collapse. By some estimates, the number of overleveraged units in the city could be near 60,000.

It stands to reason then that Riverton — and Stellar Management with it — would go down as the first in a long line of spectacular failures. But as more details emerge, it's becoming clear that's not necessarily the case.

For Gluck, an enigmatic figure who is equal parts reviled and revered, the project has already been a cash cow. Even if the lenders foreclose on Riverton — an unlikely scenario if, in fact, the deal is finalized between Gluck and the mortgagee — Stellar still stands to pocket millions, though investors who bought pieces of the debt may be wiped out.

Also, being the first of these projects to fail could be a twisted stroke of good luck, if it allows the owner and the lenders to agree on more favorable terms. Thus far, foreclosures of large multifamily buildings have been avoided as lenders try to work with borrowers. But projects that fail later on may find that lenders are no longer willing or able to take the writedowns necessary to negotiate.

"From a business perspective [Stellar is] absolutely doing the most prudent thing for their pocketbook and their investors," said a source familiar with Riverton. "By defaulting sooner rather than later, they are likely to fare better than those who wait."


The road to default
If anyone should have known better than to get involved in a building as spectacularly overleveraged as the Riverton, it was Larry Gluck.

By the time the easy money of the early 2000s was luring a flood of rookie developers into the market, Gluck was already one of the city's most established moguls. He had gotten started in the business two decades earlier, when he and developer Steve Witkoff were real estate lawyers at Dreyer & Traub. According to industry lore, they cruised around Washington Heights in a beat-up Buick, searching for their first piece of property. In 1985, with $25,000 down, they bought a five-story walk-up apartment building at 164 Sherman Avenue.

By 1996, the wunderkind partners had formed Stellar Management and accumulated a $400 million portfolio of more than 5,000 apartments. A buying spree that year included 1 Broadway for $9 million and the Daily News Building on 42nd Street for over $103 million, and established the duo as a force to be reckoned with in New York's commercial real estate world. The two went their separate ways in the late 1990s, with Witkoff buying the Woolworth Building and Gluck continuing at Stellar Management, where he soon found a niche: subsidized and rent-regulated housing.

In addition to Independence Plaza, Central Park Gardens on the Upper West Side and a number of other Mitchell-Lama and rent-regulated buildings, he is now trying to buy two more: Castleton Park on Staten Island and Tivoli Towers in Crown Heights, Brooklyn. Tenants and politicians, including Senator Charles Schumer, are resisting his efforts.

Indeed, Gluck is perhaps best-known for removing Tribeca's 1,300-unit Independence Plaza from the rent-regulated Mitchell-Lama program, despite ongoing legal battles with tenants. Rents in the complex at 40 Harrison Street now top $5,000 a month, more than five times what tenants paid just a few years ago.

Stellar's other recent acquisitions include 450 West 16th Street, which borders the High Line, for $161 million, and 405 Park Avenue, which Gluck bought for $180 million with Witkoff.

Gluck's success has earned him envy and respect from his colleagues and venom from his tenants and community organizers.

He's been "the number-one enemy of Mitchell-Lama in this city for a long time," said Dina Levy, director of policy for the Urban Homesteading Assistance Board, a housing advocacy group.

In 2006, while Gluck was receiving the developer of the year award from the Associated Builders and Owners of Greater New York at the Marriott Marquis, tenants protesting outside coined their own moniker for him: "community destroyer of the year."

But in real estate circles, Stellar Management is viewed as a runaway success. "Independence Plaza was an absolute homerun," said one industry source, adding, "I think Larry is a very humble, very nice guy. He's unlike a lot of the other guys out there."

Gluck has gone out of his way to cultivate a good-guy image. At a tenants' meeting shortly after purchasing Riverton, building residents said he was pleasant and affable, emphasizing his Bronx roots.

"He talked a really good game," Cynthia Allen, the president of the tenants' association, recalled. "He wanted everyone to think he was this wonderful, great guy. He wasn't going to say, 'Look, my plan is to get rid of 50 percent of you.'"

However, that's exactly what Riverton's financing called for.

Stellar purchased Riverton for $131 million in August of 2005, with a $105 million loan and $26 million in equity. In December of 2006, Stellar and its equity partner, the Boston-based Rockpoint Group, refinanced the complex with $225 million of mortgage debt, as well as $25 million in mezzanine debt, according to SEC filings.

At the time, Riverton had 1,143 rent-stabilized apartments, making up 92.9 percent of the complex, with an average monthly rent of $894. The terms of the financing projected that by December 2011, only 47 percent of the units in the complex would remain rent-stabilized. The remaining 53 percent would be renovated with stainless-steel appliances and granite countertops, and rented at fair market value for an average of $2,261 per month.

The terms of the loan projected a stunning 349 percent increase in net operating income in only five years, from $5.2 million to $23.6 million, according to an analysis compiled by the Association for Neighborhood and Housing Development, a non-profit group that tracks what it labels as "predatory equity" at developments in the city.

Though monthly debt-service payments exceeded the complex's income, an interest reserve of $19 million was intended to tide the owners over until more units could be destabilized. A $29.3 million capital expenditure reserve was also set aside for improvements like an electrical upgrade, a renovated lobby and a new security fence.

Like many other loans made at the time, the mortgage was bundled with other loans by the lender, Deutsche Bank subsidiary German American Capital Corp., and placed in a commercial mortgage trust in March of 2007. It was little more than a year later that Stellar warned of an impending default, saying it would not be able to make a $1.1 million monthly loan payment.


Living in 'fantasyland'
That outcome doesn't come as a surprise to the observers who have closely monitored Riverton since Stellar stepped in.

"This should have been unbelievably obvious to the banks that underwrote this," said Benjamin Dulchin, deputy director of the Association for Neighborhood and Housing Development. "The projected [net operating income] increase is fantasyland. It's as bad as any subprime that you could imagine."

Riverton's financing was, by all accounts, based on the optimistic assumption that the real estate market in Harlem would continue its upward trajectory indefinitely, and that wealthy New Yorkers would want to move to the area.

"Given where the Riverton is, which is not the highest-income area in the world, the expectation that they could have gotten $2,200, even at the height of the market, was probably wildly unrealistic," said Harold Shultz, former senior counsel for the city's Department of Housing Preservation and Development, and now a senior fellow at the Citizens Housing and Planning Council, a nonpartisan policy research organization.

Even more unrealistic was the plan to remove more than half of Riverton's well-entrenched tenants in five years, Shultz said.

"We know from the industry that typical yearly turnovers are more in the nature of 2 percent, especially at a place like Riverton, where nobody wants to leave," he said.

Riverton's longstanding community of residents did prove difficult to dislodge.

The complex, spanning 135th to 138th streets between Fifth Avenue and the Harlem River Drive, was built after World War II by MetLife. It was intended as an alternative to Peter Cooper Village and Stuyvesant Town, since African-Americans were banned from living in those developments at the time.

Over the years, Riverton became an iconic bastion of middle-class Harlem, housing such luminaries as former Mayor David Dinkins, State Supreme Court Justice Bruce Wright and jazz musician Billy Taylor.

When Stellar took over, roughly 97 percent of the units were occupied, many by residents who had spent their whole lives in the complex.

"A lot of these folks have been here for generations," said Judge Wright's son, state Assemblyman Keith Wright, who said he pays about $900 a month for the three-bedroom apartment he's lived in since childhood. "They're not going anywhere. There's such a dearth of affordable housing around here — no one's income is going up."

Stellar's attempts to entice the tenants to give up their rent-controlled apartments — so that it could renovate them and turn a large profit — were met with scorn, said Allen, the head of the tenants' association.

Allen said tenants were put on notice that if they vacated their apartments, they'd get $10,000, plus a year of subsidized rent if they moved into one of the newly renovated, market-rate apartments in the complex. "Ten thousand dollars? Please. That's a joke," she said. "I presented it at a tenant's meeting and they cracked up." She said only one resident took the deal.

Gluck had a different account of things. He said there was never an organized relocation program, but that attempts were made to relocate tenants individually. Nobody but Gluck knows exactly how many units Stellar managed to deregulate, but one thing is certain — it's much less than the projections anticipated.

"He hasn't done 10 percent yet," Allen said. "I would think he has maybe done 7 percent, if that."

So how did Stellar, with a bevy of profitable projects under its belt and a three decade-long track record, find itself in this predicament? Sources say it's possible that Gluck simply underestimated the difficulty of removing tenants from rent-controlled apartments. After all, his specialty is Mitchell-Lama, which enables tenants in deregulated apartments to receive government vouchers continuing their subsidies.

Still, many say it's more likely the Gluck was willing to roll the dice on Riverton because he didn't have skin in the game. Stellar and its equity partners took out approximately $72 million when they refinanced the Riverton loan — enough to cover their original investment, with a tidy profit left over.

"The bank let them take an enormous amount of cash out so the owners no longer had anything at risk," said Tom Waters, a housing policy analyst at Community Service Society, a non-profit that focuses on fighting poverty. "The mood of the time was that real estate values always go up."

Banks, hungry for the attractive rates offered by commercial mortgage-backed securities, were falling over each other to finance projects like Riverton, and then to securitize the loans quickly, so that they barely touched the lenders' balance sheets.

"The developers and owners in many cases were being wined and dined by loan offers who wanted them to accept attractive financing packaging," said Scott Mollen, a real estate attorney and partner at Herrick, Feinstein, who is not affiliated with Riverton but has served as a mediator on several Mitchell-Lama conversions. "When money was plentiful and the economic expectations optimistic, the terms of financing offered were very generous. New York housing was viewed as stable and attractive, and banks were competing with each other to invest."

Riverton, in particular, was seen as a rare investment opportunity, said Cushman & Wakefield's Richard Baxter, one of the brokers who represented the owner in the sale.

"It's really unusual to have that type of asset offered for sale in the city of Manhattan," said Baxter, adding that there were several rounds of bids. "There was a real opportunity to go in there and renovate existing units and increase the rent roll."

Some brokers say they sensed that the kind of financing being offered at the time was too good to be true, but it was hard to resist. "We were pushing a lot of this property through the market at prices that seemed unbelievable," said one broker, who asked to remain anonymous. "Intuitively, you knew that things were amiss."

But Stellar and other companies like it had virtually nothing to lose. Gluck faces tax implications if Riverton is foreclosed on because the government will view the unpaid balance on the loan as income, but he is not personally liable for the debt. "If they failed, there was no downside," Trepp's Clancy said. "Why not go for it?"

No one knows exactly how much Riverton is worth today. Estimates range from $100 to $170 million, far less than the $250 million in loans taken out on the property.

According to Clancy, there are 15 or 20 rental buildings in situations similar to Riverton in the city, a fact that could have stunning consequences for the city's housing stock.

"What's happening at Riverton is a microcosm of what's happening across the city," said Levy of the Urban Homesteading Assistance Board. She estimates that there are some 60,000 overleveraged units in the five boroughs.

Riverton's default, she said, signaled the beginning of the end. "It was the moment when people were like, 'Okay, this is crazy.'"

Threatening default, however, may have been an extremely savvy bargaining chip on Riverton's part. "In order to set the table for a renegotiation on an existing loan, you pretty much have to go into default," an industry source said. "I would expect that you'll see more and more of these loans default just to get the conversation going with the lender to recast the loan."

Where Riverton is concerned, it's likely that its trust will place some part of the debt in forbearance and allow Stellar to pay interest on the rest, said Shultz of the Citizens Housing and Planning Council. That could mean the complex will be starved for capital for years, since the trust will be unlikely to load any more debt on the property in the event that the building needs improvements.

Still, Stellar has a good chance of working out more favorable terms with its lenders, since it's one of the first of its kind to warn of default. As the financial crisis continues, lenders' ability to negotiate will likely be more compromised.

Foreclosure is also more of a threat because the majority of these loans have been securitized and are held by trusts rather than individual banks.

Commercial mortgage-backed securities "were not tested under the level of economic pressure we're now experiencing," Shultz said. "Their structures can handle a couple of defaults, but it's not clear what happens if there are massive and multiple defaults."

Still, even as the market crumbles around him, Gluck seems positioned to come out on top. "He's not playing with his own money," Levy said. "He can win a little, or he can win a lot, but he's not going to lose."