Council, administration strike accord on predatory equity bill

"Council, administration strike accord on predatory equity bill"
POLITICO - November 29, 2017
Brendan Cheney

It's a common play in the city's cut-throat real estate game: A private equity firm buys a rent-regulated building with the the hope of driving out protected tenants and driving up rents.
A deal struck recently between the City Department of Housing Preservation and Development and the New York City Council will create a system to track those buildings likely to be targeted by such investors and, they hope, prevent the phenomenon of predatory equity before it's too late for tenants.
Intro. 1210 will track buildings with very low capitalization rates, which estimates return on investment, looking for buildings with very high purchase prices but relatively low income. Advocates and the city say this can be a sign of future tenant harassment and distress.
"When sales prices are inflated, it's a sign of trouble to come," said Council Member Ritchie Torres, the prime sponsor of the bill. "This legislation is aimed at tackling what I call the unholy trilogy of speculation, gentrification and displacement. ... The message to speculators is simple: The city is watching."
He pointed to a report that estimated 100,000 apartments in the city were bought by private-equity purchasers, many of those at inflated prices that ended up in distress or foreclosure with tenants suffering. This includes upper middle-class housing in lower Manhattan like Stuyvesant Town and Peter Cooper Village, as well as apartments in working class and poorer neighborhoods in northern Manhattan, the Bronx and central Brooklyn.
"This issue has been the bane of organizers and advocates and tenants across the city for over a decade now," said Kerri White, the Director of Organizing and Policy at Urban Homesteading Assistance Board, a nonprofit that organizes and supports tenants.
"From an advocate's perspective, we've seen clearly the connection between harassment and physical conditions problems in buildings tied to how owners are purchasing properties, especially in rent stabilized properties," she said.
Predatory equity grew out of the recent housing boom and bust in the city. While the housing crash's effect on single family homes was well documented, the effects on apartment buildings were less publicized and continue long after the recession.
The problem comes from investors buying rent regulated buildings at high prices with the expectation of being able to drive up rental income. However, owners are required to renew leases for rent-regulated tenants and are limited in how much they can increase rents each year. So even as neighborhoods change and become more desirable, rent regulation offers protections to tenants in place and can restrict how fast area incomes can grow.
Advocates and the city have found that in these situations, landlords sometimes resort to harassment of tenants to get them out of the building so they can bring in new tenants paying much higher rents.
In some cases, the buildings have physically deteriorated when owners couldn't raise rents high enough and couldn't afford the mortgage or maintenance. Some of these buildings went into foreclosure, and the building deteriorated further.
Francesc Marti, assistant commissioner of government relations at the city Department of Housing Preservation and Development, said the bill complements their other tenant harassment efforts.
"It provided another tool in our toolkit to flag where harassment might be happening," Marti said in an interview.
The City Council and administration have also agreed on another new bill dealing directly with tenants who are being harassed by landlords. That bill creates a pilot program that requires property owners whose buildings have recurring housing code violations, or recently changed ownership, to acquire a "certificate of no harassment" in neighborhoods undergoing rezonings as well as targeted low-income neighborhoods.
The city currently tracks distress through tenant complaints to 311, or programs like the Alternative Enforcement Program. The program monitors and enforces penalties on the 250 buildings that generally have the worst physical conditions and violations. Another program, the Proactive Preservation Initiative, calls for building-wide inspections and relies on referrals.
The bill will use the capitalization rate of the building, which is the net operating income (the annual income left over after paying operating costs like maintenance, utilities and taxes) divided by the acquisition price. This is a rough estimate of the annual return on investment.
Advocates say that some buildings are showing capitalization rates of 1 percent. For comparison, short term treasury bonds right now are paying roughly 1.5 percent, which means those owners could make more money buying treasury bonds. Such a low return is unlikely to satisfy the investors and so advocates and the city worry that harassment could be on the horizon.
But even with tracking the at-risk buildings before financial distress, advocates and the city don't have ways to penalize buildings until there are code violations. And they can't stop sales even if they know the sale price will yield a very low capitalization rate and make harassment likely.
White said the fight isn't over when this bill passes, as it is expected to do at this week's full stated meeting of the City Council on Thursday.
"Having this information is a huge step forward," she said. "But we have to keep our mind on what we can really put out there to curb behavior."

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