Investors in apartments are squeezed

Marketplace Staff Nov 12, 2009
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Investors in apartments are squeezed

Marketplace Staff Nov 12, 2009
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Kai Ryssdal: Back in the boom days of real estate, investors saw potential profits almost every place they looked. Forget houses and commercial real estate. Even apartment buildings where rents were regulated looked like gold mines. Developers paid luxury prices for those buildings, hoping to turn them into cash cows. Now though, those properties aren’t worth near what they sold for, which is a problem for investors. But it’s worse for the people who live in them. Marketplace’s Alisa Roth reports from New York.


ALISA ROTH: For a long time, rent-regulated housing was considered a boring investment. The income was steady. But it was never very big because the city limits the rents and so they’re often well below market rates.

Benjamin Dulchin is the director of the Association for Neighborhood and Housing Development, it’s an advocacy group in New York. And he says the real-estate boom really changed that.

BENJAMIN DULCHIN: Starting at about 2005 is that these private equity funds began to notice rent-regulated real estate as an undervalued potential investment.

He says in New York alone developers backed by private equity firms bought up about 100,000 units. That’s about 10 percent of the city’s rent-regulated housing stock. The idea was to make more money from the buildings by raising the rents dramatically.

Emily Youssof is a housing consultant. She says this is how the developers planned to do it…

EMILY YOUSSOF: In the future, three or four years down the road, the new owner would be able to turn over the tenants and make these buildings into more luxury buildings, as opposed to middle class, working class or even lower-income units.

The prices the developers paid for the buildings were based on much higher rents than the apartments had been getting. And the developers took out big mortgages to pay for them.

But they haven’t been able to get low-paying tenants out of the building fast enough, and they underestimated how much it cost to operate these buildings. So the developers just aren’t getting the income they need to pay their expenses.

Youssof says the money problems are starting to show.

YOUSSOF: In a number of buildings, you’re beginning to see the owners milking the building for the money that is there. They’re not paying their mortgages, the maintenance of the building is going down, the violations are going up.

I went to visit Yolanda Naba-Juarez. She’s lives in a rent-regulated building in Upper Manhattan with her husband and their two teenagers.

The building is owned by a developer called Vantage Properties, which got backing from a private equity firm to buy it. Vantage paid about $15 million for it in 2007. It was part of a whole real-estate portfolio. The mortgages were then securitized, and they were sold off as investments.

Naba-Juarez comes from Mexico; she doesn’t speak English. She doesn’t really know anything about her landlord, except that she can’t get the company to fix things, like the hole in her bathroom ceiling or the broken refrigerator.

But she and her family may have much bigger problems to deal with: Benjamin Dulchin’s advocacy group has been analyzing data from the SEC and from loan servicers. And they found that many of the developers of rent-regulated buildings in New York — including Vantage — just aren’t making enough money to keep paying their mortgages.

DULCHIN: This is sort of not just a disaster in the making. This is a disaster that has already happened. And it clearly shows that these buildings are really grossly distressed.

Neil Rubler is the CEO of Vantage. He wouldn’t talk to me about the specifics. But he did say all of his buildings are already profitable.

He says these buildings were meant to be long-term investments. And his plan is to use technology and economies of scale to make them more profitable.

NEIL RUBLER: We believe that by operating our business more efficiently, we can provide a better quality product, and higher quality services to our consumer and therefore raise their standard of living while at the same time keeping the product ultimately affordable to them.

But the mortgages on a lot of these buildings are starting to come due. The developers can’t afford to pay the loans off. And the banks won’t refinance because they think the investments are just too risky.

Youssof, the housing consultant, says this is starting to happen all over the country.

YOUSSOF: Anywhere where you have a high concentration of renters, you’ll see issues like this. And, of course, California, Florida, Illinois, Chicago, New York, D.C.

She’s been talking to lenders and government officials to get them to work with building owners. Because she says entire neighborhoods are at stake.

In New York, I’m Alisa Roth for Marketplace.

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