Low-income tenants and big money collide
An Express news analysis
By James Bachhuber
When a two-year-old real estate investment firm with extensive holdings bought the four-building apartment complex at 621-623 and 625-627 Manida Street for $7.2 million in 2007, the company’s president boasted that she was “proud that Ocelot Capital will soon be one of the leading local firms with investments in affordable rental properties.”
Two years later, the buildings are a wreck. Ocelot has defaulted on its mortgage. And the future for the tenants who remain in the 112-apartment complex is uncertain.
Tenant advocates blame private equity firms like Ocelot and the banks that made borrowing easy for them with changing the landscape of Bronx real estate and jeopardizing the homes of thousands of low-income renters.
For decades, the advocates say, the affordable housing market was seen as a place for steady investment and low returns. The situation changed, however, when investment banks began to bundle many mortgages together and sell shares of the bundle.
That gave lenders an incentive to take more risks and allowed borrowers to get bigger loans with lower down payments.
When real estate appeared to be on a never-ending climb in value, private investment companies went on a buying spree with the cheap and easy money.
Backed by Deutsche Bank, early in 2007, Ocelot spent $50 million to buy 17 buildings in the Bronx and Manhattan and announced plans to spend another $30 to $40 million, according to Real Estate Weekly, an industry publication.
At about the same time, Highbridge Horizon, the newspaper that serves the area around Yankee Stadium, reported that Blackrock Realty Advisors, Inc. and SG2 Properties, LLC had spent $300,000 to acquire 51 Bronx apartment buildings.
Like the Manida Street tenants, tenants in many of the buildings purchased by those private equity firms complained that they soon had no heat or hot water and that building violations were beginning to pile up.
“They figure if they don’t make repairs, people will get fed up and leave,” Glenda Poe, a tenant at 1475 Sheridan Ave., told the Horizon.
When her firm bought the Manida Street buildings, Rachel Arfa, the president of Ocelot said, “These properties provide stable cash flow and have good long-term profit potential.” But advocates argue that Ocelot and other private investment firms could only hope to make money by forcing rent-stabilized tenants to move out.
According to a report by the Association for Neighborhood and Housing Development, a membership organization of New York City non-profit housing groups, residential real estate in working class neighborhoods generally yields a profit of about 8.5 percent annually. Private equity funds were estimating that they would make 14-20 percent.
“In residential real estate in working class neighborhoods, the major way you increase your rate of return to atypical levels, such as those pledged by private equity funds, is by pushing out low-rent paying tenants,” the report says.
To buttress their conclusion, advocates point to a memorandum that one major firm, Vantage Properties, prepared for potential investors.
Within the first year, Vantage wrote, it planned to empty 20 to 30 percent of its apartments. Each year thereafter, another 10 percent would become vacant. That turnover is far higher than the norm: according to the city’s Rent Guidelines Board 5.6 percent of the city’s rent stabilized apartments fall vacant annually.
As long as real estate values were rising, this strategy looked like a good bet. The private equity firms could either absorb losses for a period of time, confident that when they sold they would make a profit, or they could make their vacated buildings appealing to higher-income tenants, increasing the rent roll.
Either way, low-income tenants would be the losers.
The dilemma now is how to pay for repairs in run-down buildings without raising rents.
“The question that needs to be addressed at this stage is how we can put the buildings caught up in these predatory efforts back on the path of financial viability, which would allow for proper maintenance and building upkeep,” said Rep. Jose Serano at hearings of the House Financial Services Subcommittee.
“We must preserve tenants’ rights and be careful not to provide relief for the speculators and irresponsible lenders who created this mess to begin with.”