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Top 10 New York Multifamily Stories of 2009

10. The death of Kyrah Martin: The 3 year-old girl fell to her death after she wandered up alone, to the roof of her Crown Heights, Brooklyn apartment building. The door to the roof had an alarm. The roof had surveillance cameras, which captured the girl walking alone in the snow. No one heard the alarm. No one who might have seen the tape could have reacted in time. When police went apartment to apartment to determine the dead girl’s identity, Kyrah Martin’s mother still thought all four of her children were safely asleep in her bed. Two lessons bear noting: (A) Many people will blame the girl’s mother. Unfortunately, single motherhood has become so common that no one anymore asks where the father is. Not a single article I read about this tragedy mentioned him, or any attempt to track him down. (B) Somehow, someone will try to hold the owner of the building accountable for this tragedy. This reality stems from the owner having the “deep pocket.” While staircases are statistically the most accident-prone part of an apartment building, some attorney will undoubtedly look to blame the owner for failing to do something that would have somehow prevented this tragedy. Unlike owning a stock, an apartment building requires taking precautions that minimize the likelihood of injury and death. Kyrah Martin’s young and beautiful little face reminds us of that again.

9. Ocelot paves the way to default: Ocelot Capital Group was perhaps New York’s most notorious defaulter of its multifamily portfolio financing. It abandoned 416 units in 14 buildings, leaving its tenants in life-threatening situations. Omni New York purchased the mortgages from Fannie Mae and Deutsche Bank at an unspecified discount. Fannie Mae and New York City (like many other municipalities) were battling over who foots the bill for repairs during the foreclosure period. Expect more such bureaucratic disputes, more defaults in 2010 and 2011, and more endangered tenants.

8. 20 months of shadow housing inventory and the strategic defaulters: At the current rate, it will take almost two years for all the unsold houses in the U.S. to be sold. As the marketplace digests these homes, apartment building rents will continue trending down, and vacancy rates will rise. While Manhattan’s vertical density does not lend itself to single-family homes, 1-4 family homes in the outer boroughs, and the greater NYC metropolitan area are legion. If renting a single family house or condo is significantly cheaper than renting an apartment, look for apartment renters to head for the homes. Moreover, it is estimated that 1 in 5 defaulting homeowners can afford to pay the mortgage, but choose not to. These 20%, however, figure that it is financially imprudent to continue making payments for a property with negative equity. While some speak of the sanctity of contract, others point to corporations having, and taking advantage of, this privilege of walking away (see #4).

7. Uncle Sam’s GSE takeover / (failing to close) the “bid-ask” gap: Now that the government has seized control of Freddie Mac and Fannie Mae, the two largest mortgage finance companies in the world, nearly 90 percent of all new home loans are funded or guaranteed by taxpayers. Without the federal government’s active intervention, multifamily lending would be as rare as time-outs on Lord of the Flies island (or as frequent as public spankings in a Park Slope playground). The outlay has already reached about $1 trillion over the past year and is rising. In order to get financing for a multifamily property, you are most likely turning to Uncle Sam, by way of Freddie and Fannie. Nevertheless, deals “make sense” if financing is at about 55% LTV. At higher percentages, interest rates increase, and little to negative cash flow results. As a result, buyers want prices from 1935, and most sellers are looking for the Sultan of Brunei to offer them prices from 2007. This, and the ongoing bid/ask gap, demonstrate why so few apartment buildings trade.

6. New York’s most famous rent-stabilized tenant: Congressman Charlie Rangel occupies not one, but four rent-stabilized units in his home district of Harlem. In order to have one, let alone four, a tenant is required to keep his household income below $175,000, lest he be ineligible as a hardship case for rent control. He also used one of the apartments as an office in violation of rent-control rules. In order to keep his reported income within these limits, the Chairman of the House Ways & Means Committee — which writes the tax code — underreported his income in several different ways. Luck determines beneficiaries of rent regulation in New York, not economics.

5. Your dying partner personally guarantees the mortgage: A new low even in the shark tank of New York City real estate? Kent Wythe 9th Street paid $42.6 million for a development site at 421-431 Kent Avenue, and 464-474 Wythe Avenue in the Williamsburg section of Brooklyn, with plans to build several apartment buildings there. Alpha Capital, a firm controlled by Kalikow’s Manchester Real Estate and Construction, entered an agreement in October 2007, to lend a $17 million second mortgage to Kent Wythe. Kent Wythe was a firm led by Issac Hager and Chaim Lax. At the time, Lax was suffering from terminal cancer, according to a lawsuit filed November 20, 2009 in New York State Supreme Court. Hager allegedly knew that Lax was terminally ill, and conspired to have his dying partner take the hit.

4. The best and the brightest default: High-powered apartment building developers Kent Swig, Joe Moinian, Lev Leviev, Baruch Singer, Shaya Boymelgreen, once high-ranking luminaries in the constellation of New York City real estate, all got their names in the press for overleveraging and/or failing to repay loans. The music stopped playing before these players were able to complete their projects. What’s the lesson? Past success is no guarantee of future performance. See Icarus.

3. Democrats control all three levers of power in New York: For the first time since 1935, the Democrats control New York’s Governor’s seat, the Assembly, and the Senate. They have the majority to pass a raft of pro-tenant regulations. These would further weaken the economic viability of owning and operating an apartment building. The petty power struggles between Democrats and Republicans, and among Democrats, prevented any legislation from passing. Special shout-outs go to Hiram Monserrate, convicted of a misdemeanor for recklessly assaulting his girlfriend. Security cameras captured the esteemed representative dragging his girlfriend through the lobby of his Jackson Heights coop, after he tried to make a sandwich with her face and a glass. Law-and-order minded Republicans embraced him for the higher purpose of staving off the Democratic agenda. Most special shout out goes to Pedro Espada, who defected to Republicans and went back to Democrats 31 days later. This move had absolutely nothing to do with the fact that Democrats appointed him majority leader. Democrats remain unable to pass any of their pro-tenant agenda, but that failure may only be temporary.

2. Atlantic Yards moves forward: Multifamily Investor supports multifamily development, but also supports fair play. The project moves forward on an unseemly, unwieldy pile of bad and inconsistent law, a lack of transparency, and defiance of applicable regulatory policy. The New York State Court of Appeals ruled that the State of New York was well within its rights in invoking eminent domain doctrine on behalf of a private developer. Since the U.S. Supreme Court decision in Kelo v. New London in 2005, the eminent domain doctrine has stretched the government’s power to confiscate land further than the Octomom’s uterus. “A government big enough to give you everything you want is a government big enough to take from you everything you have,” said Gerald Ford (not Thomas Jefferson). Even if you like that sort of thing (eminent domain or lack of uterine tensility), barely a month later, the Court of Appeals ruled that the State was not within its rights to invoke the same doctrine on behalf of Columbia University. The two cases are factually indistinguishable (though Columbia as an educational institution has a stronger case to advance for “public use”). The Court of Appeals held that the failure of owners in the Atlantic Yards area to build to maximum FAR showed that the property was blighted. Yet, this same “logic” was not applied in the Columbia decision. What else irks opponents of the project? The MTA, a city agency that owned the property, sold it to Forest City Ratner without an open bidding process. This defied the MTA’s own longstanding regulations on such matters, and deprived taxpayers of the maximum price for the property. Such a failure is especially frustrating when the MTA institutes further service cuts in light of budget shortfalls. The cherry on the sundae? The massive taxpayer benefits and downward renegotiaions of the sales price still do not require the developer to build even a single unit of affordable housing. Forest City Ratner is only obligated to apply for funding.

1. Stuyvesant Town: Where to start in this bouillabaisse? Every applicable city agency supported or signed off on the following conclusion: If you receive J-51 tax benefits for improving your apartment building, and your building was rent regulated prior to receiving these benefits, you can remove units from rent regulation once they reached $2000 per month. The New York State Court of Appeals held that the NYC agencies were flat out wrong for about a decade, even though the New York State legislature was silent on this interpretation. The Court had previously ruled that if City agencies interpret legislation in a particular way, and the Legislature stays quiet long after, then the Legislature is deemed to have consented to such an interpretation. End of story. Not so here. The Court of Appeals changed the rules midstream, and will unleash a tidal wave of litigation: owners suing the City, tenants in class action suits suing owners, and a host of unresolved procedural issues stemming from bad law. How do you calculate what a tenant can recover? Will courts extract triple damages from owners? What requirements does an owner have to repay and track down tenants who have since left? Can you ever drink red wine with fish?

The other significant issue is that this purchase epitomized all that was wrong with bad underwriting in the early part of this decade.  What was assumed? Unrealistic vacancy/turnover rates, climbing rents, a continually growing economy, the ability to condo, the insignificance of negative cash flow. And yet, lenders fell all over themselves trying to finance this deal. It is said that sometimes the best deals you do are the ones you don’t do. Every bank that failed to secure the financing, every buyer that failed to clinch the deal, must be thanking their lucky stars every day. Of course, Stuyvesant Town gets the most deserved coverage because of the deal’s size and scope. This is what I call the “Madoff effect.” Other Ponzi schemers’ names have fallen by the wayside because Madoff dwarfed everyone by comparison. Likewise, plenty of real estate neophytes and savvy investors alike made the same fundamental errors of judgment. It will be very interesting to see if investors resume jumping on deals that are not fire sales because other (foreign) investors can sit on their cash no more.

Related posts:

1. If Security Cameras Capture You Dragging Your Bleeding Girlfriend Through Your Apartment Building Lobby, What Kind of Jail Time Will You Get? (Hint: You Are Also A New York State Senator) New York State Senator Hiram Monserrate faced up to...
2. Are New York City Apartment Building Owners Closer To Avoiding Further Rent Regulations From Albany? A special New York Senate committee is recommending either...
3. In NYC, Multifamily Possession A Lot Less Than 9/10 of the Law? If you buy a building in most parts of...
4. Which New York City Multifamily Developer Faces Another Foreclosure? This week, the lender on the Park Columbus Project,...
5. New York City’s Most Famous Rent Stabilized Tenant – Part VI To NYT’s credit, it has been out in front...

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