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Thursday, August 27, 2009

Crain's on Over-Leveraged Bronx Apartment Buildings

Last week's Crain's New York Business had a couple articles related to multifamily foreclosures. The best of these is by Daniel Massey, who covers the issue of over-leveraged Bronx apartment buildings falling into disrepair and eventually foreclosure in the article, Bronx is Burning Over Failed Deals.

He begins by focusing on Robert Fulton Terrace and Fordham Towers, where the owner, Mark Karasick, overpaid for the buildings at the height of the housing boom, immediately cut back dramatically on services and eventually still ended up in foreclosure.

"CIBC lent Mr. Karasick $36.5 million for the deal in 2007 and recently insisted the purchase price was “well justified,” even though a securities filing shows the mortgage approval was based on a monthly operating cost of ...less than half of what the former owners spent... Cuts in service—maintenance staff was slashed from nine to three—had immediately followed the sale."
Massey then discusses how this type of activity is part of larger trend in the Bronx and NYC. For instance, Los Angeles-based Milbank Properties has a portfolio of 10 Bronx buildings, also bought at the peak of the market in 2007, that have gone into foreclosure.
"On its Web site, Milbank says it thought the Bronx buildings were a good investment because of the borough's potential 'to undergo significant gentrification' and the prospect of an 'improved tenant base.'"
Massey cites research and reports by affordable housing nonprofits UHAB and ANHD regarding the scope of the problem. Additionally, he references a report by Deutsche Bank that the crisis may not peak until 2013 when "loans that were made during the boom in 2005, 2006 and 2007 mature and are unlikely to qualify for refinancing without substantial infusions of equity."

Based on our own ACRIS research here at University Neighborhood Housing Program, a large number of buildings that will run into problems with refinancing currently have mortgages with New York Community Bank. The same issue of Crain's has a separate article about NYCB and how it is led by New York's "most conservative banker," Joseph Ficalora. While the article, A Tank of a Bank Hits a Rough Patch, focuses on the internal financial health and stock value of the bank, much of this relates to how well NYCB's multifamily loan portfolio is performing (not as good as it's been in the past).

The article describes this type of lending as historically conservative and New York Community's "bread and butter." Yet many of these loans were made during the recent boom years of 2005-2007, and many of these loans have interest-only periods of 3 or 5 years at the outset of the mortgage. As these mortgages convert to a fully amortizing schedule (meaning the owners will have to pay principal and interest), NYCB's default rate may skyrocket if the owners can't refinance and we may see a spike in multifamily foreclosures in the Bronx.

For instance, Hudson Realty Capital's portfolio of Bronx buildings (which include Botanical Square) all have interest-only periods which end in July 2010. By the fall of next year we may know better about how "conservative" NYCB's lending has actually been by what happens at properties like these.


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