Ever since it was purchased in 2007, tenants of the hulking old apartment building on University Avenue in the Bronx have endured cockroaches, leaking pipes, electricity outages and myriad other deprivations and indignities. But the low point probably came last winter, when the boiler ran out of oil.
"For two weeks, we had no heat. This room right here? Icicles coming from the ceiling. That's how cold it was," says Luis Correa, 33, standing in the back bedroom of the apartment where he has lived his entire life.
The building was long owned by a small landlord who did a good job of maintaining it, Correa and his neighbors say. But one day in 2007, they awoke to find it had been purchased by Ocelot Capital Group, along with 24 other buildings, for the staggering sum of $36 million.
Later, when the real estate crash left the owners unable to pay the debt service and keep up the property, the new owners abandoned it.
'Cash Flows Have Deteriorated'
Anywhere from 70,000 to 100,000 New York City apartment units are in foreclosure or at risk of it right now, including both small buildings and mega-complexes like Riverton Houses in Harlem, which went into default a year ago.
The foreclosures are a hangover from the real estate boom, when developers paid hefty sums for New York real estate. Because the city has been gradually phasing out its rent subsidy laws, more and more landlords were able to charge market rents for their apartments, and developers saw dollar signs.
"The plan was to turn them into luxury rentals and condos," says Emily Youssouf, former head of the New York Housing Development Corporation. "There were hardly any neighborhoods where you couldn't see gentrification happening, and a lot of neighborhoods that used to be terrible weren't anymore, because they were moving up, and everything was moving, moving ahead."
In the heady days of the credit boom, developers hoping to cash in had no trouble persuading banks and other lenders to give them money to acquire the buildings. But rent-regulated tenants have proven harder to dislodge than many expected, and in the aftermath of the real estate crash, rent projections turned out to be wildly overblown.
"What you see embedded in the underwriting of the loans is an expectation that cash flow will grow significantly, and where we find ourselves now is in a situation where, rather than that being the case, the cash flows have deteriorated," says Sam Chandan, president and chief economist at Real Estate Econometrics, a forecasting firm.
Today, many developers are saddled with apartment buildings that bring in far less than they need to pay off the enormous loans they took out. Perhaps the most prominent examples are Stuyvesant Town and Peter Cooper Village in Manhattan, two sprawling sister complexes built by Metropolitan Life after World War II and purchased by private equity firms in 2006 for $5.4 billion, in what was called the largest real estate deal in U.S. history.
In most cases, developers are holding on, trying to refinance their loans while they wait for the market to turn around. For the most part, they have continued to maintain the buildings, and cases of outright abandonment, like the Ocelot Group, have been few, Youssouf says.
But time is running out, leaving the future of many buildings in jeopardy.
One problem is that lenders are generally reluctant to write off bad loans, since doing so hurts their bottom line and forces them to set aside more money to beef up their capital levels, something that's especially painful in a credit crunch like this one.
Instead, lenders look for new developers to assume troubled mortgages, something the industry calls "extend and pretend." But the new owners are often no more able to make the building's finances work than their predecessors.
"They're just kicking it down the road, and hoping it gets better and the economy comes back," says Youssouf, who has been hired by the Rockefeller Foundation and the Partnership for the City of New York to develop a new model for restructuring bad loans.
A former investment banker, Youssouf says federal and state programs exist that could be leveraged to mitigate lenders' losses, like the Troubled Asset Relief Fund, but lenders will almost certainly have to take a big hit as well.
"Part of what has to happen there is we need to understand what are going to be some of the mechanism or channels for sharing the very costly write-downs that will have to be taken, to get these loans to a position where they're performing where the properties are well-maintained and where people have places to live," Chandan says.
The Return Of Urban Blight?
The longer the juggling act continues and lenders delay writing off bad loans, the greater the temptation will be to stop maintaining and repairing buildings, like the one on University Avenue in the Bronx, say Kerri White, an organizer with the Urban Housing Assistance Board, an advocacy group.
When one apartment building falls into disrepair and abandonment, it can have a corrosive effect on surrounding buildings and on a street as a whole, White says. Many New York neighborhoods have undergone a dramatic renewal in recent decades, becoming much safer and more livable, and the return of urban blight is a scary prospect to residents, White says.
"I definitely think that if this goes unchecked, then we're going to go back to where the Bronx was burning in the early '70s," she says, sitting in Miriam Maldonado's living room in the University Avenue building.
"Already, if you talk to tenants here, they will say many tenants have moved out. People get frustrated, and eventually people will just leave, because nothing is getting done and your apartment becomes uninhabitable. So already we're seeing high vacancy rates in these buildings."
The fact that tenants are having to pay the price for excesses of developers and lenders seems especially unfair to Youssouf.
Tenants are "the only people in this whole mess who never borrowed any money, who never put their name on anything. They're tenants who pay their rent and just expect a clean decent place to live in return.
"And it's ironic in a way that there is this large population of renters that either are being hurt currently or at risk of being hurt, where they didn't taken on any debt. They weren't subprime. They didn't do anything wrong."
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