Questions of Rent Tactics by Private Equity
by Gretchen Morgenson
New York Times, 5/9/08
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=92 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.
=93Predatory equity is undermining the best efforts of New York City and
state elected officials to slow the loss of affordable housing,=94 said
Benjamin Dulchin, deputy director of the Association for Neighborhood
and Housing Development, a nonprofit organization. =93Both the private
equity funders and the lending institutions are aware, or should be
aware, that harassment of tenants is taking place as a result of their
financial models.=94
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 sla****ng expenses and reducing staff to
increase their profit. New York provides an unusual op****tunity
because it is one of the few cities with a large inventory of
apartments whose rental rates are regulated and kept below market
levels.
In the last four years, developers backed by private equity firms have
acquired almost 75,000 rent-regulated apartments, Mr. Dulchin said, or
about 6 percent of the city=92s 1.2 million such units. Major private
equity-backed participants in this market include Vantage Properties,
which has partnered with Apollo Real Estate Advisors; the Pinnacle
Group, a unit of Praedium Capital; and Normandy Real Estate Partners.
These companies often make clear that raising rents is crucial to
their financial goals. On its Web site, Normandy Partners states =93the
increased institutional appetite for New York City rent-stabilized
housing transactions=94 and adds: =93There is a near-term op****tunity to
increase cash flow by converting rent-stabilized apartments to market
rate as tenants vacate units.=94 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.
If an apartment is rent regulated, yearly increases cannot exceed the
amount set annually by the Guidelines Board. Most recently, it was 3
percent on a one-year renewal lease. 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.
Vantage Properties, led by Neil L. Rubler, has paid more than $1
billion in the last two years to buy 9,200 rent-regulated apartments
in Queens and Upper Manhattan. Investing alongside Vantage in many
buildings is Apollo Real Estate Partners, an investment firm founded
by William Mack in partner****p with Apollo Management, a private
equity firm created by Leon D. Black, a former Drexel Burnham Lambert
banker and acolyte of Michael R. Milken.
Last month, Mr. Black announced a plan to sell $500 million worth of
Apollo Management shares to the public. Apollo Real Estate Partners
will not be part of that sale. A spokesman for Mr. Black said it was a
separate company in which he had a stake but exercised no control over
it. 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. =93What=92s
offensive about these business practices is they seek to generate
above-average profits by displacing poor people and people who are
vulnerable,=94 Mr. McCreanor said. A spokeswoman for Apollo Real Estate
declined to comment on the accusations. But Mr. Rubler called them
baseless. =93Any exploration of the way we conduct business would reveal
that we are steadfastly determined to uphold the rights of our
residents and have absolutely no interest in harassing them,=94 he said.
=93They are our valued customers, and we treat them as such.=94
Mr. Rubler said most of his tenants have positive experiences. Claudia
Williams, of Corona, Queens, was asked by Mr. Rubler to talk with a
re****ter. She said that Vantage was allowing her to live in her
mother=92s apartment even though she had not been the primary
leaseholder. Phyllis Miller, a resident of Savoy Park in upper
Manhattan, said she believed that tenants who were unhappy with
Vantage simply disliked change.
But Jose Ricardo Aguaiza, 45, who works as a doorman in Manhattan,
said he has lived in the same apartment in Woodside for 14 years and
never had a problem until Vantage took over in 2006. Since July 2007,
Mr. Aguaiza has been sued by Vantage three times, twice for nonpayment
of rent that he was able to demonstrate the company had received.
=93They refused to give me a renewal contract,=94 Mr. Aguaiza said. =93And
in court, the lawyer from Vantage offered to give me three months=92
free rent for moving out.=94 Mr. Aguaiza said he turned down the offer.
On April 10, Mr. Aguaiza and five other rent-stabilized tenants living
in Queens sued Vantage. The plaintiffs say the company has engaged in
deceptive practices that violate New York=92s consumer protection laws.
Five more tenants are joining the suit.Janice Williams, who works as a
freelance producer in television, has lived in a Vantage building in
Sunnyside since July 2005 and is a plaintiff. When she moved in, the
building was owned by Nathan Katz Realty.
In October 2006, Vantage bought the building. Ms. Williams said the
property managers rejected her request for a lease renewal in April
2007. They said she was not entitled to the rent-regulated unit
because her primary residence was in Greenwich, Conn. But the
Sunnyside apartment has been her primary residence since September
2005, Ms. Williams said, and is on her driver=92s license and her voting
card. She appealed to the New York State division of housing and
community renewal and won. =93Our apartment building is 72 units, and a
little over 20 apartments in the span of a year and a half have turned
over since Vantage bought it,=94 said Ms. Williams, who has organized
tenants.
The turnover Ms. Williams cited is in keeping with a description of
Vantage=92s strategy in a 2007 document filed with the Securities and
Exchange Commission after its purchase of 455 rent-regulated
apartments in Wa****ngton Heights. The filing described the company=92s
business model as a =93recapturing=94 strategy. Under the plan, Vantage
expected in its first year to turn over 20 percent to 30 percent of
the units, five times the typical vacancy rate. Vantage aimed to
recapture 10 percent of the units each year afterward.
Only 5 of the 455 units were empty at the time of the filing. All but
one unit was regulated, with average monthly rent of $752, or 65
percent below market. Once the apartments become vacant, the document
said, Vantage will renovate the units and raise rents =93to market
levels.=94 That will generate enough cash to service the $70 million in
debt that comes due in 2014. Vantage=92s debt service is an estimated
$1,098 monthly on each unit, almost 50 percent more than the average
rent. Mr. Rubler said that the description of the recapture program
was =93not our words,=94 but those of the debt security=92s underwriter,
Credit Suisse Securities. =93I think they overstated significantly the
focus on turnover in the business plan,=94 he said.
When asked about legal actions taken against tenants, Mr. Rubler said
all were mounted solely to protect his company=92s rights. =93Only in
instances where we need to act to protect our own rights do we ever
find ourselves in any litigation with a tenant and it is never with
the intention to harass them,=94 he said. The company is also meeting
with its tenants to improve communications, he said.
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=92 buildings have also had high turnover =97
more than 30 percent =97 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=92s 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. Under previous rules, tenants could
take their landlord to housing court only over the apartment=92s
condition or for a failure to provide essential services.
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