Go to chart: Troubled NYC portfolios easy to find
Sales, foreclosures, bankruptcies, cash infusions or government-supported workouts top the list of outcomes that may unfold over the next two years for the mostly rent-regulated, residential buildings bought at the height of the housing boom with easy credit.
A handful of the highest-profile rental portfolios purchased over the past three years will burn through their interest reserves by the end of 2009, while others will limp along into 2010, according to an analysis by city housing advocates of data provided by mortgage-loan tracking firm Trepp.
Once the reserves have been spent, the owners of housing developments such as Stuyvesant Town in the East Village and Savoy Park in Harlem will need to find other sources of equity, or cover the payments themselves, because in many instances the properties are not generating enough money to make interest payments on their loans.
“We think there are about 54,000 units of affordable rent-stabilized housing in the city that are coming close to defaulting on their debt,” said Benjamin Dulchin, deputy director of the Association for Neighborhood and Housing Development, which did the analysis.
“It seems to us that most of these portfolios are within a couple of months of depleting their loan reserves, their debt service reserves, or have already depleted them and are dipping into some other source of funds,” he said.
In recent years, some 90,000 apartments in the city, most of them rent stabilized, have been purchased by firms backed by private equity investors such as Apollo Real Estate Advisors and the Praedium Group, with the expectation that the buildings would become more valuable as existing tenants vacated and renovated units were released at higher rents.
There are about 1 million rent-stabilized units in New York City.
The problem for owners and investors is rents have not risen as quickly as anticipated. According to December data from Trepp, in nine high-profile portfolios in Manhattan and Queens, the buildings are not generating enough cash to make debt payments.
Dulchin predicted three Manhattan portfolios owned by Vantage Properties and Apollo would default in 2009, while one covering Queens will stabilize despite burning though three-quarters of its debt reserve.
The East Side apartment building known as Meyberry at 220 East 63rd Street is heading toward default; the Pinnacle Group’s portfolio of 1,083 apartments in East Harlem could default by the end of the year; and Tishman Speyer’s Stuyvesant Town is heading toward restructuring, the housing advocacy group said.
Meanwhile, a 1,142-apartment portfolio in East Harlem purchased by Dawnay Day was allocated to a special servicer, and its finances continue to deteriorate. And the Riverton Houses’ 1,230-unit portfolio in Harlem is earning less than a third of the cash flow needed to pay its debt, the group said.
Real estate experts see several scenarios likely to play out over the next few years as owners run out of money and short-term loans come due.
Once interest reserves are depleted, owners will have to make up the difference either by providing their own cash or finding partners to buy in, said Joseph Forte, a former president of the Commercial Mortgage Securities Association, and now a partner with law firm Alston & Bird.
“That would obviously have to be true equity, because in this market there isn’t any leverage available. You could also bring new money in … as a real equity partner or preferred equity,” Forte said.
Vincent Carrega, executive managing director at real estate services firm Grubb & Ellis, said most loans that are expected to default eventually have not yet failed. But the fallout will depend on the financial backing of the owners.
He said the companies with deep pockets have a better chance of surviving with their holdings intact. “Tishman Speyer is a savvy, well-capitalized, well-regarded entity with very strong staying power,” he said. “They have sources of capital that a large number of troubled owners don’t have.”
According to Vantage Properties, speaking on behalf of Apollo Real Estate Advisors, the two companies had the resources to pay their loans and maintain the portfolio, company president and CEO Neil Rubler said in a written statement.
“These are long-term investments, and we are well positioned to meet today’s challenges and improve our assets for the benefit of our residents,” he said.
Other companies either declined comment or did not return phone calls from The Real Deal, but financial documents outline plans for increasing value over time.
A former special counsel to the city’s department of Housing Preservation and Development and now a senior fellow at Citizens Housing and Planning Council, Harold Shultz, said there are three basic possibilities that would play out as default looms: Loans could either be modified with reduced payments, foreclosed on or the owners could file for bankruptcy.
He noted that any of the three outcomes would be harmful to the buildings’ tenants.
Manus Clancy, senior managing director at Trepp, said to begin the modification or foreclosure process, the loan would be sent to a special servicer, which has more discretion to alter the loan.
“The special servicer faces a fork in the road. Typically they have to decide what is the best path for the bondholders: Is it to foreclose or modify the loan, or sit tight and watch?” he said.
Shultz expected loans would be modified by placing a chunk of the loan in forbearance, meaning that interest on that piece would not have to be paid for some time period, say 10 years, effectively reducing interest payments in the meantime.
In foreclosure, the value of the property is reduced, but owners are reluctant to permit that option because they are liable for income taxes on forgiven mortgage amounts (known as phantom income).
Forte said additionally that a rush to foreclosure would aggravate the already depressed prices by increasing the supply of the portfolios.
“If you do tons of foreclosures, the values will fall,” he said.
One way owners can fight foreclosures and maintain control of the property is to declare bankruptcy. At the same time, that process reduces the value of the portfolio.
Shultz said the loan modification option was the worst from a housing policy perspective because it maintained the high value of the assets, which advocates believe are fundamentally overpriced.
“It keeps a huge debt load on the property, which will basically be starved for capital for years, which translates into worse living conditions,” he said.
The federal government may become involved in the process, adding to its complexity, Shultz said. He noted the Commercial Mortgage Securities Association wants to be included in the government’s Troubled Asset Relief Program, known as TARP.
Local housing advocates, led by an umbrella group called the Partnership to Preserve Affordable Housing, were pushing proposals with the New York congressional delegation to include multi-family housing in future TARP regulations.
The New York delegation is “committed to making sure whatever protections we have for single-family will also be for multi-family,” said Dina Levy, director of organizing and policy for the Urban Homesteading Assistance Board, a group that is a member of the partnership organization.