Bailout of apartment groups could stop foreclosure wave


– December 9, 2008 –

BE OUR GUEST: DONALD COGSVILLE, real-estate investor

‘Reduced services & fixes will cause suffering.’

Rent-regulated housing is a vital and irreplaceable resource to New York City’s workforce, and appealing and safe affordable rental housing must be preserved for future generations.

While national attention is focused on the surge of foreclosures of single-family homes, New York City has another problem: Thousands of rent-regulated apartment buildings bought by private equity real estate firms now face the consequences of the owners’ overly aggressive financing. Tenants will likely suffer as services and maintenance are reduced to cut costs in the wake of investors’ default and foreclosure.

As a result, private equity firms that bought affordable rental housing have come under fire from tenants and public officials concerned about the long-term survival of rentregulated housing in the five boroughs.But responsible private real estate investors today have a unique opportunity to provide leadership and play a major positive role in finding creative approaches to preserve affordable housing for working families.

Traditionally, small landlords owned the majority of apartment buildings financed with loans from local banks. Recently, large institutional investors have made substantial acquisitions of rent-regulated apartments, including many above 96th St. in Manhattan, and in the outer boroughs. During the past four years, nearly 10% of the entire rentregulated housing stock in New York City was bought by institutional investors, which is the equivalent of housing for one-third of the population of Washington or Boston.

This large scale entry of private equity firms into the city’s affordable rental housing market was made possible by the securitization of mortgages into commercial mortgagebacked securities. Theoretically, combining loans should reduce risks through diversification. But securitization provided a false sense of security and encouraged ever riskier lending. By 2007, loans to investors were being made on the basis of overly optimistic projections of future rent increases and the presumption of wholesale eviction and turnover of rentregulated tenants. That’s when we started hearing the pejorative “predatory equity.”

Unlike traditional loans from a single local banker, investors around the world with no relationship to the borrower buy securitized loans. The structure for these loans is very complicated, involving multiple parties and complex tax rules. These factors inhibit the lender’s ability and willingness to modify troubled loans, and instead favor foreclosure. As a result, nearly a quarter million New Yorkers live in affordable rental buildings whose owners are likely to be foreclosed on over the next five years, bringing the threat of disrepair and decay of this valuable housing stock.

The preservation of affordable workforce housing requires getting back to the basics of sound real estate investing. Financing must be predicated on conservative underwriting and realistic rental growth projections.

Creative and innovative solutions will emerge when private sector investors work together with tenants and their advocates, elected officials and government agencies at all levels to preserve affordable rent-regulated housing for New York City’s families. Let’s use the federal government’s Troubled Asset Relief Program to preserve rental housing. Federal lending on the same terms as the recent bank bailout would provide patient capital to permit the orderly sale of rent-regulated buildings whose owners are facing foreclosure.

The pending sale of Starrett City — the largest government-subsidized affordable housing project in the U.S. — shows what can be accomplished when government and responsible real estate private equity firms collaborate in a commitment to preserve affordable rental housing.

My firm, partnering with The Christian Cultural Center, the Housing Partnership and the Clarett Group, is a bidder for Starrett City. We are among the institutional investors in the city seeking to work together with tenants, public officials and government agencies to seize opportunities to preserve affordable and safe housing for generations of New Yorkers to come.

Donald Cogsville is founder and CEO of The Cogsville Group, a New York City-based real estate investment firm.

Posted in The Cogsville Group News