Predatory Equity

I know it's not nice to gloat -- to say "I told you so" -- but the recent news reports on the financial turmoil at Stuyvesant Town and Peter Cooper Village -- involving over 11,000 apartments in 110 buildings -- is just too good a story of greed and stupidity to let it pass.

The project was purchased in 2008 by Tishman Speyer for over five billion dollars. There was a near universal sentiment in the housing advocacy community, including my organization, the Community Service Society, that given the large number of rent regulated units in the complex, there was no way the rent rolls could come close to meeting the nearly four billion dollars in mortgage-backed debt, far less to provide a return to Tishman Speyer for the $800 million it invested in the deal -- unless -- it was the new owners' intention to push moderate income tenants out and replace them with well-heeled renters willing to pay rents at a much higher price.

This is a classic example of "predatory equity," an advocate's term for the incredibly harmful practice of investing equity and securing bank loans to buy rental apartments at inflated prices. Why would investors and banks do this? Basically because at the height of the housing boom, and even at the beginning of the downturn, there was almost a religious belief that rental housing prices would never fall in the New York real estate market, and there were an unlimited number of affluent people waiting for apartments as soon as you could get rid of low and moderate income tenants.

Hindsight, of course, is 20/20, but literally everything that could go wrong did, not only for high profile projects like Stuyvesant Town, but for hundreds if not thousands of other projects throughout the city and the country. The problem is going to be with us for a long time, lasting well after the recession is declared officially over, as Fed Chairman Ben Bernanke came close to doing.

Naming the full list of people and businesses that are in line for trouble would take a blog in itself, but obviously first in line have to be poor and moderate income tenants, basically minding their own business and paying rent on time, who suddenly find that their nice apartments were bought by real estate developers and investors who thought this was a way to mint money and now are going into default -- losing their overleveraged stake -- but putting people at risk of being thrown out on the street.

The banks of course are at risk here, too. One of the problems facing the Obama administration is figuring out what are on many banks' (think Citibank) balance sheets and what the actual value of properties they hold as security for the mortgage they've given to large residential rental properties. The Stuyvesant Town meltdown wasn't isolated and almost certainly more problems are in the offing for New York banks which hold paper on rental real estate.

Of course, the general public is in line for pain, too. Taxpayers and government regulators will be called upon once again to get the banks out of the situation they've gotten themselves into. Significant disinvestment in the maintenance of rental property is already being discussed as part of the Stuyvesant Town development and, with the unemployment rate almost certainly to exceed 10 percent in New York City, the housing disaster is almost certain to drag the city's recession on well past the rest of the country.

The individual real estate firms and banks that set up these deals can't be allowed to walk away, particularly when even cursory due diligence on many if not most of these deals indicate they weren't sustainable even in good times. They have to be examined legally, by investors, regulators, and legislators, to make sure that tenants are protected, prosecutions are brought if necessary, and taxpayers aren't left holding the bag for the excessive greed of speculators.

Comments

[CaliforniaTenantAdvocate]

Thank you Mr. Jones and Huffington Post for shedding some light on this overlooked issue of predatory equity that is having devastating consequences for tenants across the country. Clearly, predatory equity schemes are bad for investors and bad for the rent-paying tenants who are losing there homes to no fault of their own.

California public employees should know that CalPERS invested $500 million of their retirement funds in Tishman Speyer's risky and unethical predatory investment which was based on a plan to turn a profit by evicting working people from their homes. And CalPERS members should know that $100 million of their retirement funds were also invested in a similar predatory equity scheme in East Palo Alto with Page Mill Properties that resulted in the displacement of hundreds of tenants and has proven to be just as much a financial disaster.

Something is very wrong with the fact that the pension dollars of working people are being invested in schemes that evict working people from their homes. CalPERS needs to recognize the serious financial and ethical problems with these schemes and adopt policies that will screen out future predatory investments that displace working people and lose millions of dollars.

[cplund]

This is a national problem, and unfortunately public pension funds (e.g. CalPERS) were equity partners in many of these deals.

Please visit www.epa-tenants.org for more information an 1800 unit deal in the San Francisco Bay Area that is currently unwinding.

[RightWingMarine]

Are you suggesting that people and firms shouldn't be permitted to invest in something that has an element of risk? regardless of rents in a building there is always the risk that the buildings owners will go into default and everyone may be thrown out.

You want more low income, quality housing built in New York and other areas? Eliminate rent controls. Once land is purchased a developer can build luxury apts that are not subject to rent control or build smaller, cheaper apts that are subject to rent control. There is less profit building the smaller apts so why build them? Remove the rent control and the profit margin for small apts increases and thus the number of units built will increase. You might think it's "unfair" that the rent goes up on small apts but for the people that now have a apt they can rent vs no apt being available which do you think they prefer?

[jhNY]

Rent control is removed from NYC apartments whenever a rent-control tenant moves out and even a modicum of refurbishment is visited on the premises. When this was last a major hot-button political issue here, it became known that a were a mere 20,000 units added to the rental stoxck here that rent control would end, as is dictated by statute. Yet, the units never arrive. Why ? Because the present system is a bonanza for ownership, despite their noisy protestations otherwise. Did you know that NYC is the largest real estate owner in the city? Don't you wonder why so few of the housing units the city owns are actually developed for tenancy?

[DanBest]

With all due respect. Not every problem in the world is solved by deregulation and a tax break. We've beat that horse to death. Time to ride another horse. We all have our socio-political-economic opinions. We need to do what works. Not what ideology dictates. Otherwise we find ourselves screaming at non-existant phantoms like socialism, whereas a "socialist" country like Sweden would claim that they simply do what works and can't understand why Americans are so tied up in ideology right or left. There are no simple solutions to the problems modern humans face. Your specious simplicity is simpy that.

[bmora]

Uh, so what happened?