Mo Vaughn expected to win 14 Bronx apartment buildings at auction today

By Adam Pincus | July 12, 2010 09:16AM

Some real estate insiders question non-profit group that pushed for Vaughn’s purchase

Mo Vaugn and 203 East 175th Street (building photo source: PropertyShark)

Today former New York Mets ballplayer Maurice “Mo” Vaughn’s real estate company Omni New York will likely win the auction for 14 troubled rent-stabilized apartment buildings in the Bronx that have a principal loan balance of about $24 million.

When
Omni bought the notes last year, the move was cheered by housing
advocates and elected officials. But some real estate insiders say they
were shocked to learn that Omni bought the notes from Fannie Mae, in
consultation with Deutsche Bank, at a nearly 80 percent discount, for
about $5 million, according to multiple sources. Critics say the deal
was arrived at through media and political pressure — much of it
publicly from one non-profit group — and the loans could have been
sold at a much higher price.

But the buildings, abandoned by
owner Ocelot Capital Group, were in terrible condition and the city’s
Housing Preservation and Development had placed 11 of them on its list
of the worst maintained buildings in the city. Vaughn’s Omni agreed
last year to put $1 million in emergency repairs, and had spent about
$500,000 by mid-June the city said.

But the transition to new ownership at another package of former Ocelot buildings has not gone as smoothly.

Sam Suzuki,
a landlord and principal of Hunter Property Management bought six other
former Ocelot in the Bronx in May 2009. He remains behind bars in Lower
Manhattan on civil contempt charges for failing to comply with an order
from a Bronx judge to make repairs on one of those buildings, at 1585
East 172nd Street.

One thread connecting today’s auction and
Suzuki’s arrest is an influential non-profit housing organization based
in Manhattan, Urban Homesteading Assistance Board, or UHAB, that worked
hard both publicly and behind the scenes for the sizable discount for
Omni and to punish Suzuki for his slow repair efforts.  

UHAB,
along with other housing advocates and government officials, pushed for
the discount because without it the low rents will not support both the
millions of dollars needed in critical repairs on top of a high debt
level, experts say.

And UHAB was instrumental behind the scenes in the lawsuit that led to Suzuki’s arrest.

Some
real estate insiders are furious with UHAB, saying it is seeking to
push down property values and use housing code violations to put Suzuki
in jail, even as UHAB has high levels of violations in some of its own
buildings.

UHAB was founded in the 1970s with its core mission
to buy or take title to distressed buildings — with the tenants’
consent — and rehabilitate them and convert them to permanently
affordable cooperative housing.

Another part of its mission is
to lobby for changes in affordable housing policy in Washington and New
York. Dina Levy, the organization’s director of organizing and policy,
is a major intellectual force behind crafting such legislation,
insiders said.

UHAB is one of a number of New York City groups,
such as Association for Neighborhood and Housing Development; and
Citizens Housing and Planning Council that do such advocacy. But UHAB
is different from those in that it also owns and manages properties.

Critics
say the $5 million price Omni paid was far below market, and the
lender, Fannie Mae, could have done better. For example, a new real
estate investment firm called Bluestone Group reportedly paid about $10
million for the $13.1 million of debt on Suzuki’s six Ocelot
properties, just a 23 percent discount.

Broker Lazer
Sternhell, CEO of investment firm Cignature Realty, was not familiar
with the properties, but suggested buyers would pay more than $5
million for the 14-building, 416-unit portfolio despite the millions of
dollars needed in estimated repairs because at one time a lender
thought it was worth at least $24 million.

“If [Omni] bought [that note] for $5 million, that is the deal of the century,” he said.

Harold
Shultz, a senior fellow at the Citizens Housing and Planning Council
and former special counsel to HPD, said those buildings together need
perhaps $20 million in rehabilitation work. He said some investors
might be looking to make only minimal repairs and extend the cycle of
deferred maintenance that will ultimately give the bulk of the bill to
city taxpayers.

“I like the free market as much as the next guy,
but we clearly have had problems in the way people have appraised
buildings and evaluated them,” Shultz said.

UHAB’s Levy said the
14 former Ocelot buildings scheduled to be auctioned today, which
include 203 East 175th Street, may not even be worth $5 million,
because they have millions of dollars in necessary repairs to stabilize
them and make them habitable.

City records compiled on real
estate data website PropertyShark.com show 7,979 open violations at the
buildings as of last week for an average of 19 per unit.

Levy was wary of buyers such as Bluestone Group who pay close to par for properties.

“That
is the thing that is driving me so crazy. These [real estate] brokers
are still complaining; meanwhile, there is still a second round of
speculators out there trolling the market place looking to pick these
things up. At again, too much money,” she said.

A half-dozen
real estate insiders including landlords and lenders, who asked not to
be identified, said UHAB should not criticize property owners for a
high number of violations, because it has high violations as well.

“It is like the pot calling the kettle black,” one property owner said.

Some
of UHAB’s apartment buildings have an average of more than five
hazardous violations per unit, one of the measures the city uses, among
several categories, to determine whether it should take over a property.

Of
the 78 buildings with nearly 1,400 units that UHAB is in the midst of
rehabilitating, eight of them have hazardous violations above five per
unit, data from PropertyShark.com shows, including the 61-unit building
at 540-550 West 144th Street in Hamilton Heights with 419 hazardous
violations.

Andrew Reicher, the group’s executive director, said
its policy is to remove violations only when the rehabilitation of the
entire building is complete, so violation counts continue to rise as
new ones are added even as old ones have been repaired. For example the
violations on the Hamilton Heights building are all from 2008 or
earlier and many would have been repaired, he said.

Generally
landlords petition the city to verify the repair of violations as the
repairs are made, so the number of violations falls weekly or monthly
as repairs are made.

However some of UHAB’s violations are new.
For example at 320 Sterling Street, a 113-unit building in the Crown
Heights section of Brooklyn, there are 181 hazardous violations filed,
some as recently as last month, city records show.

Meanwhile
Levy, while defending her organization, said she and others were
frustrated that the process often takes five years or more to turn the
rehabilitated building over to the tenants.

“It is not like we
are perfect and guilt free,” she said, noting that part of the delay is
securing funding and also finding temporary homes for tenants while
their apartments are being rehabilitated. “The process takes longer
than a perfect world would allow.”

Shultz, of Citizens Housing
and Planning Council, said UHAB should not be faulted for advocating
that lenders cut their principals on the overleveraged loans.

And
he believes in coming years, Fannie Mae will not be the only lender to
take steep write-downs on loans in New York City, lent during the boom
between 2004 and 2007. Other lenders and bond holders on securitized
debt as well will have to take their lumps.

“There is going to be a massive haircut in the Bronx, and in the city in general, too,” he said.