The transfer of a $35 million mortgage on 10 dilapidated, foreclosed-upon Bronx buildings is expected to close next week following the special servicer paying half a million dollars to a Los Angeles-based real estate firm to get it to drop a lawsuit that had held up the deal.

Concern is high among elected officials, tenants and housing activists who worry that the properties—which are saddled with 3,261 code violations—will likely deteriorate further because the new owner is paying too much for the portfolio and won't be able to make needed repairs. The buyer's identity has not yet been publicly revealed though the city knows who it is. After all other attempts to convince special servicer LNR Property Corp. to identify the buyer failed, officials signed a confidentiality agreement with the firm to get it to cough up the information.

Leaks, mold, rats, roaches, collapsed ceilings, missing floorboards and fire damage have made the 548 units virtually uninhabitable, tenants say.

“Without a significant change in the terms of the loan, there's no reason to think we won't be in exactly the same position a year or two or three years from now,” said Jonathan Levy, deputy director of the housing unit for Legal Services NYC-Bronx, who represents the tenants.

Last month, Council Speaker Christine Quinn and Bronx council members Annabel Palma and Fernando Cabrera sent a letter to the Miami Beach, Fla.-based chief executive of LNR, the special servicer overseeing the buildings, stating that they “cannot support” the proposed transfer, which is expected to close next Wednesday.

The transaction doesn't require City Council approval, but that's not stopping some council members from speaking out about their skepticism that the financing of the deal can work unless the new owner skimps on renovations. They're expected to release a report Thursday by Baer Architecture Group detailing and quantifying the extensive repair work the buildings require.

Council members aren't the only ones raising their voices. The Northwest Bronx Community and Clergy Coalition sent a letter to city housing commissioner Rafael Cestero Tuesday, urging him to intervene and block the sale. “The city should entertain new strategies outside of its traditional code enforcement tool kit—for example possibly seeking a restraining order, or suspending the prospective buyer's license to manage real estate, using the agency's subpoena power, etc. to prevent this,” the letter read.

A Housing Preservation and Development spokesman said the city has tried for months to engage LNR about the properties and offer up its varied affordable housing financing tools, but that it has been "constantly stonewalled." Signing the confidentiality agreement was a "last-straw" effort to get the information needed to assess the new buyer.

“We have an inherent responsibility to do our due diligence with the information we now have and figure out exactly who these people are and what they own, so that we can assess whether this transaction is in the best interests of the tenants,” the spokesman said.

It wasn't immediately clear if the city could legally do any of what the coalition was asking. Under state law, the city could conceivably argue that the buildings are "dangerous to life, health, or safety" of tenants and ask a judge to appoint a private administrator to oversee the buildings. Gaining this so-called "7a" status could hold up the sale.

LNR's cash-flow projections for the project show the properties turning a profit by 2012 and a near tripling of revenue by 2021. But an analysis by the speaker's office shows that even the most optimistic of revenue and expense projections for the building would result in a loss at the current level of debt.

The buildings are part of a growing list of financially troubled properties in the city that officials say are being saddled with too much debt a second or even third time around. Lenders are seen as reluctant to write down the value of their loans, and there are still investors willing to take a gamble that they can turn around even the most run-down of New York real estate.

The buildings are part of an 18-unit portfolio purchased by the Los Angeles-based Milbank Real Estate at the height of the housing boom in 2007. But like many buyers at the time, Milbank badly miscalculated that it could raise rents to help pay off its mortgage.

On its website, Milbank states it thought the buildings were a good investment because of the borough's potential “to undergo significant gentrification” and the prospect of an “improved tenant base.” But that plan never panned out; some 24% of the apartments are vacant, and the property quickly fell into foreclosure.

A spokeswoman for LNR did not immediately comment. A source close to the company told Crain's last month that LNR would not consent to the transaction if the firm didn't believe it would be “beneficial to the tenants.”

The deal had been expected to close last month, but LNR could not get a title insurance company to sign off on it because of a lawsuit by Milbank challenging the sale. But court papers show Milbank agreed to drop the suit in exchange for $500,000.

The payment angered tenants, who contend the money would have been better spent on repairs.

“What's interesting is we're in court trying to get LNR to spend more money on the buildings and they won't,” said Dina Levy, director of organizing and policy at the Urban Homesteading Assistance Board, a housing advocacy group. “They could have fixed a lot of toilets with that money.”

by Daniel Massey