The Housing Chronicles Blog: Private equity money attacks rent-controlled apartments

Friday, May 9, 2008

Private equity money attacks rent-controlled apartments

Having once worked for a company owned by a private equity fund, I personally know the obsession with maximizing profits, often at the expense of ancillary items -- such as long-term brand building or marketing efforts -- that don't easily show up on P&L statements. So it didn't really surprise me to see this story in the New York Times accusing developers backed by private equity money of using questionable tactics to force out long-time residents who currently benefit from rent control laws in order to hike them to market-rate levels:

Private investment firms have been amassing what may seem like unusual stakes in New York real estate: they have bought hundreds of apartment buildings with thousands of rent-regulated units across the city that produce decidedly meager returns. As regulatory filings and promotional materials show, the companies expect to generate higher returns quickly by increasing rents after existing tenants vacate their units. Their success depends upon far higher vacancy rates than are typical in rent-regulated apartments in New York.

Some residents and tenant advocates say that they began seeing what they consider a pattern of harassment of low-income tenants this year and suspect that it is a result of the new owners’ business models. Tenants have been sued repeatedly for unpaid rent that has already been received by the landlords; they have been sent false notices of rent bills, lease terminations and nonrenewals; and they have been accused of illegal sublets.

The companies dispute the charges of harassment and say they are protecting their rights.

Nevertheless, tenants must answer the notices in court, but many have responded by moving out, court documents indicate. When they vacate the apartments, the owners can increase the rents substantially...

Private investment funds have boomed in recent years, buying companies they considered undervalued in industries as diverse as communications, hotels and energy, streamlining operations and then selling them at a profit. For example, private equity firms have bought nursing homes, often slashing expenses and reducing staff to increase their profit.

New York provides an unusual opportunity because it is one of the few cities with a large inventory of apartments whose rental rates are regulated and kept below market levels...

These companies often make clear that raising rents is crucial to their financial goals. On its Web site, Normandy Partners states “the increased institutional appetite for New York City rent-stabilized housing transactions” and adds: “There is a near-term opportunity to increase cash flow by converting rent-stabilized apartments to market rate as tenants vacate units.”

The companies say that they are not harassing tenants and that they are only trying to protect their rights by enforcing legitimate rules governing regulated apartments.

But the New York City Rent Guidelines Board says the vacancy rate on rent-regulated apartments is 5.6 percent each year. Buildings with vacancy rates far higher suggest resident harassment, tenant advocates say.

Vacancy rates have risen above 20 percent in some buildings owned by Vantage Properties; in some Normandy buildings, the rates exceed 30 percent...

When an apartment becomes vacant, rents can climb as much as 20 percent. When that rent rises above $2,000, regulations no longer apply, and tenants must pay market prices.

To generate returns expected by private equity investors and to pay off the debt used for their purchases, tenant advocates say that managers of the properties are intimidating residents in the hopes of forcing them to leave so that rents can be raised...

Rent-regulated apartments account for 57 percent of the total in the Bronx, 42 percent of the apartments in Brooklyn, 59 percent in Manhattan, 43 percent in Queens and 15 percent of those on Staten Island, the Guidelines Board says. Many of the buildings bought by private equity investors are in neighborhoods that are being gentrified..

In a group of buildings in Queens with 2,124 apartments, Vantage has filed almost a thousand cases in housing court against tenants since October 2006, according to Robert McCreanor, director of legal services at the Immigrant Tenant Advocacy Project of the Catholic Migration Office in Sunnyside.

Mr. McCreanor said he searched public records for similar actions by the previous landlord. He found no more than 350 in any year...

Normandy Partners, with almost 2,000 rent-regulated apartments in 42 buildings in the Bronx, East Village and Sunnyside Queens, is another significant landlord backed by private equity. It is a partner with Vantage in 1,650 units in Queens, the Bronx and Brooklyn.

Mr. Dulchin said the Normandy Partners’ buildings have also had high turnover — more than 30 percent — since they were purchased by the investors.

A spokesman for Normandy declined to comment.

Pinnacle Group is a third big developer that has joined forces with a private equity firm, Praedium Capital of Chicago. In December 2006, Pinnacle settled a suit brought by the New York attorney general’s office accusing it of rent-gouging. Pinnacle paid $100,000 without admitting to or denying the accusations. The company did not return a phone call seeking comment.

Responding in part to indications that harassment is systemic, Mayor Michael R. Bloomberg signed legislation in March making it illegal for a landlord to file repeated and baseless court proceedings to force a tenant to vacate an apartment.

No comments: