This Icon portfolio barely breaks even. Why?

Icon Realty Management, which snapped up scores of rent-stabilized buildings before the 2019 rent reform eviscerated their upside, is facing a cash crunch on a $145 million portfolio.

This month, servicers watchlisted $28 million in debt backed by five Icon properties, according to research firm Morningstar: 358 and 362 11th Street, 316 West 14th Street and 808 Lexington in Manhattan, and 42 Sidney Place and 295 Degraw Street in Brooklyn.

The loans are part of a CMBS bundle of 18 Icon loans, 11 of which have been watchlisted for low debt service coverage ratios, meaning their cash flow doesn’t adequately cover debt payments. The firm did not return a request for comment.

The five loans watchlisted are a quarter rent-stabilized, on average; the portfolio on a whole is a little over one-fifth. Heavily market-rate buildings in the city have generally enjoyed strong revenue growth in the past two years, as rents and occupancy have risen to record highs.

Icon, a New York investor, is current on all its loans. Morningstar has yet to post commentary on why most of the recently watchlisted deals were flagged.

But a deeper look at Icon’s loans shows the firm may be facing revenue shortfalls, a problem plaguing rent-stabilized owners across the city because the state’s rent stabilization law severely limits rent increases.

On the portfolio’s $61 million in A-note debt, Icon boasts a healthy debt service coverage ratio of 2.17, according to an April update by Morningstar, indicating the properties securing it were generating more than twice what Icon needed to make the interest payments.

But $84 million of the debt is B-note. Considering the combined balance, the properties’ DSCR clocks in at 1.1, Morningstar’s surveillance team found. That means the buildings’ cash flow was barely covering their debt service.

The distress hitting many multifamily owners right now stems from floating-rate debt, which has become expensive as interest rates have risen. But Icon nabbed its portfolio with fixed-rate mortgages of 5.25 percent. Higher debt service isn’t Icon’s problem; lower revenue is.

The 2019 rent law effectively capped rent increases on stabilized units at what the Rent Guidelines Board approves each year. In 2020 and 2021, the board approved an 18 month freeze. In the year and a half since, it increased rents just 4.75 percent. 

Meanwhile, landlords’ operating expenses have soared.

Icon had surely expected to remove some units from rent stabilization, a strategy made virtually impossible under the 2019 rent law. 

But vacancies at its market-rate units was a factor as well in the loans being watchlisted. The portfolio’s weighted average occupancy was only 90.7 percent last September, down from 96.3 percent nine months earlier. At 42 Sidney Place in Brooklyn Heights, where units typically rent for more than $3,700 a month, occupancy was just 79 percent.

At a 1.1 DSCR, Icon is still meeting the 1.05 minimum Morningstar shows its loan terms require. But it would need to improve that figure to refinance when the debt comes due in January.

Commentary on 42 Sidney Place, one of the freshly watchlisted properties, shows its $3.2 million A-note had a healthy DSCR of 1.62 at the end of 2022. But the B-note is now at just 0.81.

If a borrower can’t maintain a break-even DSCR, it may have to replace the existing note with more costly debt or kick in more capital to refinance, a debt broker said. An owner unwilling or unable to cough up that cash may be forced to sell.

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