Focused on quality of life, HPD tracks over-leveraged apartments

By Adam Pincus | April 27, 2009 11:22PM

The city is tracking potentially troubled rent-stabilized apartment buildings with an eye toward influencing how they are transferred following a foreclosure, said Housing Preservation and Development Commissioner Rafael Cestero.

A preliminary analysis undertaken for the first time by HPD would classify many recently purchased rent-stabilized apartment buildings as over-leveraged.

The city wants to keep track of the buildings because financially distressed buildings can bring down the quality of life for tenants and entire neighborhoods, Cestero said in City Council testimony yesterday at a hearing on private equity ownership of rental apartment buildings.

“Buildings that fall into foreclosure or that transfer ownership multiple times also have had the potential to see significant physical distress, which is obviously not good for tenants,” he said.

Cestero added that in his first week in office, in mid-March, he met with federal officials in Washington to discuss how to make sure future property sales are sound.

He met with federal officials to look “at ways in which we could potentially work with the federal government to bring resources to bear that will help us ensure that ownership — when it needs to be transferred — is transferred to responsible owners.”

The preliminary study, using data from the state Department of Housing and Community Renewal and the city Department of Finance, described those with a debt load greater than seven times their rent roll as potentially over-leveraged, while a figure below would identify it as likely more secure financially.

Real estate pros told The Real Deal that many buildings that sold in recent years would be considered over-leveraged using the city standard.

Ronald Cohen, a broker and chief marketing officer at investment sales firm Besen & Associates, said in the last few years most rent-stabilized buildings sold with leverage between 65 percent and 90 percent, and many with debt that would be at a multiple of 10 or higher using the city’s method.

“There would certainly be a large number of properties that traded north of their seven multiple,” he said.

Using the city’s analysis, The Real Deal estimated that Stuyvesant Town, purchased in 2006 with $4.4 billion in debt and with revenues of $248 million in 2007, would have a ratio of 9.1, meaning it was over-leveraged.

Real Estate Board of New York Senior Vice President Michael Slattery said there is reason to pause.

“It is a good screening device to identify a building that is potentially at risk, but I do not think you can necessarily jump to the conclusion that all buildings above that are at risk or are in trouble,” Slattery said. He would not estimate how many apartment buildings in New York City might qualify as over-leveraged using the city’s analysis.

Robert Knakal, chairman of investment sales firm Massey Knakal Realty Services, opposed city influence in the sale of multi-family properties.

“It seems to me that if HPD is seriously considering such a move, it is tantamount to creating a ‘co-op board’ to oversee trading in the multi-family sector. It’s amazing to me that they want to say who a private owner can sell to, who is a ‘responsible’ owner, and what the capital stack can look like,” he wrote in an email.