Roll the clock back 50 years.
New York City’s housing stock was collapsing. Tenants vacated units by the tens of thousands. Landlords abandoned buildings or burned them for the insurance money. The city teetered on the brink of bankruptcy.
Enter: Community Preservation Corporation, a nonprofit founded by six of the city’s largest banks to pick up the pieces. Rehabilitating rent-stabilized buildings quickly became its bread and butter.
Half a century later, CPC has again been cast as a potential savior in a story of multifamily distress.
The lender and investor, in partnership with Related Fund Management and nonprofit Neighborhood Restore, made the winning bid for a stake in $6 billion of failed Signature Bank’s rent-stabilized debt, a massive loan book some characterized as “toxic waste.”
CPC’s task as loan servicer is finding workouts for owners unable to pay their debt service — of whom there could be many. The nonprofit has some capital and, just as important, experience on its side.
Standing in its way: distress of unknown scope, landlords in various states of desperation and legislation that threatens to unwind any progress.
Different crisis, same strategy
CPC built a reputation in the 1970s bailing out owners facing foreclosure by the city for unpaid property taxes.
“What CPC did during those days was work with private owners to restructure their debt and stabilize the building so they didn’t go into tax foreclosure,” said Rafael Cestero, CEO of the nonprofit.
Things are a bit different this time. The foreclosure threat comes from lenders, not the city. Since a 2019 state law effectively capped rents in rent-stabilized buildings, owners plagued by nonpaying tenants and rising expenses have struggled to cover mortgage payments — or soon will, when their loans expire.
Property taxes, which have been increasing even as buildings’ finances erode, are still a factor. Lenders typically pay property taxes on an owner’s behalf when the landlord pays the mortgage. Any owner with back taxes is also likely delinquent on debt.
Though the circumstances have changed, CPC plans to tap the same strategy it used after its founding in 1974: work out the loans and partner with the government to fund needed repairs.
“That is exactly what we intend to do with the Signature portfolio,” Cestero said.
Fix and forgive
CPC’s strategy centers on bifurcating a building’s debt into A and B notes.
The owner would remain on the hook for the A note, which is a portion of the original mortgage. The B note, though, could be forgiven if the owner fixes up the property and clears violations.
Paying for that work is among the biggest challenges for owners. Thousands of rent-stabilized units — somewhere between 13,000 and 89,000 citywide — sit vacant. In some cases, landlords cannot finance repairs to make them legally re-rentable when a tenant vacates. In others, the regulated rent is less than $1,000 — too low to justify the investment needed to bring the apartment up to code.
CPC and the Federal Deposit Insurance Corporation have built a fund for that. Cestero said it totals about $550 million and can go toward renovation costs or paying off the B note.
In carving out the $6 billion slice of Signature’s stabilized debt, the FDIC maintained a 95 percent interest in the joint venture formed to hold the loans. It ponied up the same percentage of the $550 million fund, Cestero said.
How much is enough?
A question mark floating around the restructuring strategy is how much capital is needed and what the $550 million fund can ultimately cover.
There’s little data on how much of Signature’s rent-stabilized portfolio was underwater, so it’s hard to discern how big the forgivable B notes will be. CPC will service 868 of Signature’s loans, debt backed by 35,000 units, 80 percent of which are rent-stabilized.
An analysis by the University Neighborhood Housing Program found that 3.9 percent of Signature’s multifamily debt was distressed when the bank went under last March. But banks often wait to write off bad loans until they have no choice. In other cases, a building’s owner will take revenue from profitable buildings to keep troubled ones afloat. Both practices obscure the numbers.
Of the loans CPC will service, Cestero said performance varies widely.
“There’s some good, there’s some pretty good,” he said. “Then there is some distress, as you would expect.”
“There is some distress, as you would expect.”
The picture may well get worse as loans mature. Some may be in good standing now because their interest rates are low. But borrowers with loans coming due in the near future will face higher rates at refinancing.
The Federal Reserve has signaled it will make several rate cuts over the next two years, but nothing is set in stone.
On the question of repairs, back-of-the-napkin math suggests the $550 million fund could shore up no more than a few thousand units. Jay Martin, head of landlord group the Community Housing Improvement Program, and others have said a renovation can run about $100,000.
Repairs can cost much less or even more, depending on whether a gut renovation, asbestos removal and lead paint abatement are needed. But if a hundred grand were the average, and all $550 million went to renovations, it would address 5,500 apartments.
“It’s a good start,” Martin said.
Double-edged sword
Constraints and ambiguity aside, city landlords like the looks of the program.
One rent-stabilized owner, who requested anonymity to discuss the FDIC’s closely guarded loan sale, said CPC’s proposed workout plan could buoy some struggling properties.
“Obviously, it’s building-specific,” the owner said. “But in theory, if the A note is low enough and the terms are reasonable enough … you could actually see a return, since some portion of the debt was forgiven.”
Still, owners said some buildings’ values have declined so much that a modification would not bring the property above water.
“If the building were holding its own or just barely, and you could get some relief, that would be fine,” said Barberry Rose Management’s Lewis Barnabel, an owner who recently took a 44 percent haircut on a rent-stabilized sale. “But definitely there are buildings that wouldn’t even make that list.”
Many owners, though, including Barnabel, aren’t looking to hold assets. They just want out.
Some, eyeing the severity of New York state’s rent law and the legislature’s reluctance to change it, could be inclined to hand buildings back to their lenders.
CPC said the third partner in the loan purchase with Related, fellow nonprofit Neighborhood Restore, equips it to handle any foreclosures or deeds-in-lieu of foreclosure. Neighborhood Restore is an intermediary in the city’s third-party transfer program, created in the late 1990s to move abandoned, delinquent buildings to responsible owners.
Through the program, Neighborhood Restore temporarily manages buildings seized by the city for unpaid taxes, addresses any physical distress, then finds a buyer. Third-party transfer is on hold and likely to be overhauled to answer critiques that the city wrongfully seized property without compensating owners.
Taking troubled buildings is tricky for lenders as well. The risk is that they won’t find buyers. Brokers say some rent-stabilized buildings priced to sell have failed to draw offers.
A bill signed by Gov. Kathy Hochul on the Friday before Christmas makes such properties even less desirable. It gives tenants an easier path to proving fraud in rent overcharge cases and collecting large awards from landlords, especially those who cannot document renovations performed long ago by previous owners.
“It goes back to the dawn of time — to the history of the building,” Martin said of the new law. “This is why brokers are saying nobody wants to buy these buildings. If the owner doesn’t have a rent history, you’re buying a building with the potential to be sued.”
History repeats
The worst-case scenario for the distressed portfolio is that the fixes negotiated by CPC don’t endure.
Critics of the 2019 rent law predict some buildings pulled out of distress will fall back into it. Properties require constant maintenance, and each vacancy may demand a significant investment.
Rent hikes are limited to what the Rent Guidelines Board approves each year — adjustments that usually fall short of increases in operating costs — and a meager amount for apartment improvements and building-wide repairs. As a result, landlords expect buildings will continue to deteriorate.
That will require resources, which are a challenge for any nonprofit. Government funding to fix buildings has been especially sporadic.
“There’s only so much public money to do that,” said Jordan Barowitz, founder of an eponymous advisory firm and former Durst Organization spokesperson.
Nonprofits don’t have an endless supply of capital to tap if buildings need another bailout a few years down the road. “They can’t do that with thousands of buildings,” Barowitz said.
Asked about that threat, Cestero reiterated CPC’s plan to work with owners to cure physical distress, then restructure mortgages.
“I think if we do that, then we should be able to manage our way through the ebbs and flows of the Rent Guidelines Board process,” he said.