Garodnick Puts Spotlight on City's Overleveraged Properties

Hoping to advance an issue that could also help Mayor Bill de Blasio meet his goal of creating or preserving 200,000 units of affordable housing in New York City, Councilman Daniel Garodnick released a report this morning on the hazards of predatory equity in housing. 

The report documents a growing epidemic of over-leveraged housing, which it defines as a property carrying a debt load more than seven times its incoming rent. When developers, aided by lenders, purchase rent-regulated apartment buildings at exorbitant prices, many of these loans end up in default, saddling the city with the cost of maintaining properties that are often in disrepair. As a result of over-leveraging, thousands of apartments throughout the city are at risk of foreclosure. 

At a press conference unveiling his report, Garodnick referenced Stuyvesant Town and Peter Cooper Village--two affordable apartment complexes in his district--as prime examples of over-leveraging. Stuyvesant Town and Peter Cooper Village were put up for sale in 2006 and sold for $5.4 billion, a record high for any U.S. residential real estate transaction. Tishman Speyer, the developer that purchased the complex, took out a $3 billion mortgage as well as an additional $1.4 billion in "mezzanine debt" to finance the purchase. In order to maximize profit from the property, Tishman Speyer poured money into apartment renovations in order to shift some of the affordable units up to market rate. The developer ultimately defaulted on its debt, in part because they were on the losing end of a lawsuit challenging Tishman Speyer's right to convert the affordable units. The properties are now being run by a debt servicer. 

"[Tishman Speyer's] entire business model was to evict as many rent stabilized tenants from the property as quickly as they possibly could," Garodnick said. "It has become all too common all around the city. Owners everywhere have done the same thing and in some cases have let their properties completely deteriorate."

Among the deteriorated buildings cited in the report are a 40-building complex with roughly 1,600 units located in the Bronx, Brooklyn, and Manhattan known as the Three Borough Pool. Similar to Stuyvesant Town and Peter Cooper Village, the developers of the Three Borough Pool defaulted on their debt--but in addition to eviction proceedings, many of the properties were left in complete disrepair. 

Garodnick said that abandoned buildings like those found in the Three Borough Pool demand a large share of the city's resources. He cited a study that showed that there were 85,000 foreclosures in New York City from 2008 to 2012, costing the city $1.8 billion. 

To remedy the growing crisis, Garodnick proposed several policy recommendations, one of which would double the number of buildings included in the city's Alternative Enforcement Program (AEP). The AEP allows the Department of Housing Preservation and Development to identify the city's most distressed "multiple dwellings" and ensure that violations and the conditions that caused the violations are corrected. If a building owner resists making those repairs, HPD will do it for them and bill the owner, putting a lien on the property if the bills remain unpaid.

Because of limited resources, however, the AEP only includes the 200 worst buildings in New York City. Garodnick hopes to double the capacity of that program with additional funding from the city. Garodnick notes in his report that as public advocate de Blasio created New York City's Worst Landlord Watch List, which lists over 300 buildings. 

Among Garodnick's other policy recommendations are using the Community Reinvestment Act to encourage banks to lend to responsible homeowners, increased oversight of receivers--the individuals charged with guiding a property through foreclosure--and funding for tenant organizers to work cooperatively to save affordable housing from being overleveraged. 

Garodnick said he has put the issue of predatory equity on the radar screen of de Blasio and Deputy Mayor for Housing and Economic Development Alicia Glen, and that he hopes that it will be addressed when the mayor releases his comprehensive affordable housing plan, which is purportedly set to be released on May 1. 

To read the full report, click here.