http://www.costar.com/News/Article.aspx?id=F77032D365F8F633E4318444366465F1Threatened Legal Action Over NYC Rent Control Likely to Roil CMBS Market
Hundreds of Millions of Dollars and Multifamily Value Strategies At Risk by NY's Plans To Sue Major Landlord
February 3, 2010
Another half a billion dollars in CMBS debt looks even weaker this week after New York Attorney General Andrew M. Cuomo announced his intent to sue Vantage Properties LLC, a major New York City multifamily landlord.
Cuomo sent a five-day notice letter to Neil Rubler, the president of Vantage Properties, notifying the company of the Attorney General's intent to commence litigation against the firm. The action is an attempt "to stop [Vantage] from harassing tenants in rent-regulated apartments and to obtain monetary damages for tenants who have been victimized," the Attorney General's office said in a prepared release.
Since March 2006, Vantage has purchased more than 125 buildings containing more than 9,500 apartments throughout Queens, Harlem, and Upper Manhattan - almost all of which are rent-regulated. The Attorney General's threatened legal action alleges that Vantage is pursuing a strategy to generate turnover among long-term, rent-regulated tenants, and impose significant rent increases on new tenants in order to increase profits.
The Attorney General said the threatened legal action is part of his office's ongoing efforts to enforce laws that promote access to affordable housing for low and middle income New Yorkers.
In a statement, Vantage Property said: "Vantage is genuinely committed to serving its residents and to the future of affordable housing in New York City. We look forward to demonstrating this to the Attorney General."
The issue of converting controlled rents to market rate rents has been in the spotlight since Tishman Speyer and Blackrock missed loan payments last fall on their jointly owned Peter Cooper Village/Stuyvesant Town, a 56 multi-story building complex in New York City containing 11,200 units. The joint venture gave the keys back to the lender on the property last week.
While the legal action from the Attorney General was widely reported in the major New York media this week, CoStar Group has identified $503 million in loans on more than 2,800 units of Vantage Properties' portfolio that are now held in four commercial mortgage backed securities (CMBS). This information was not previously disclosed in news coverage. In those deals, Vantage Properties financial partner was and still is Apollo Real Estate Advisors, now called AREA Property Partners.
AREA Property Partners issued a statement expressing regret that Vantage had not yet reached an agreement with the Attorney General "incorporating best practices and other tenant protections, which we fully support. We expect that Vantage will work with Attorney General Cuomo's office to get this matter resolved quickly."
According to Cuomo's letter to Rubler, an investigation by the Attorney General's office found that a major component of Vantage's business and management strategy is to generate substantial tenant turnover and commence eviction proceedings against rent-regulated tenants. Once units become vacant, Vantage's business plans call for massive renovations, which allow Vantage to charge substantially higher rents under applicable rent regulations,
"Vantage's business plans refer to this strategy of removing tenants from rent-regulated apartments to convert them to market rate apartments as the company's 'Golub program,'" the New York Attorney General's letter states. "Vantage's business plans highlight its Golub program as a means of generating tenant turnover. As reflected in Vantage's annual reports to investors and business plans, Vantage's business goals are to "generate unit turnover through active management of the Golub program and other legal efforts."
"The investigation revealed that Vantage often failed to exercise due diligence prior to serving tenants with Golub notices or other legal termination notices," the letter continued. "Vantage often commenced Housing Court proceedings seeking to evict tenants from homes in which they had lived for decades based on little more than database reports, which were often incorrect, or contradicted by other evidence in Vantage's possession."
The letter went on to say: "Indeed, the Attorney General's office review of Vantage's tenant files revealed a systemic pattern of harassment."
The announcement of the Attorney General's plan and release of its letter to Vantage has raised some concern in the real estate investment community.
"Any experienced commercial real estate operator in New York would know better than to engage in the practices alleged in the AG's letter," said Charles Cecil, partner and CEO of Opin Partners, a CMBS and real estate investment advisor and investment management firm in New York.
But apart from the allegations against Vantage, Cecil said the action also speaks volumes about the past underwriting standards of CMBS offerings.
"No doubt it reflects another attempt to turn an old Ford into a new Corvette," Cecil said. "The 'Ford' in this case, and in many others throughout New York is typically an old, not very well maintained multifamily building(s) comprised of 75%+ regulated tenancy. A large group of such buildings is really no different than a single building, but such a group may contain sufficient characteristics to render it "suitable" as CMBS collateral."
However, Cecil continued, "it would seem somewhat irresponsible (at best), to treat these the same from a credit/underwriting perspective as a new 'Corvette' such as a typical Glenwood, Moinian, Related or Rockrose multifamily property. Nevertheless, this is what has happened in any number of cases, some of which have loans that are now part of CMBS collateral."
Cecil said the Attorney General's action against Vantage will upend the business plan and value strategy of many owners of such properties, subjecting them to lender reappraisal by special servicers and potential loan losses.
As an example of what can happen to the value of such properties, Cecil noted the Stuyvesant Town and Peter Cooper Village. Tishman Speyer and BlackRock paid $5.4 billion for the 11,200 apartments in 2006.
"If, as reported, the Stuy Town net operating income is $100 million, an argument could be made that a reasonable cap rate of 7% would yield a value of less than $1.5 billion for the property now," Cecil said.
Even before Attorney General Cuomo's announcement this week about Vantage Properties, the CMBS loans backing Vantage's properties have been on the CMBS' servicers 'Watch Lists.' The servicers' statements to CMBS bondholders have pointed out issues with increasing property expenses, deferred maintenance issues and low debt service coverage ratios. (A debt service coverage ratio of 1.00 indicates that the property is generating just enough excess cash to make required loan payments.) In many cases, the amount of excess cash from the Vantage properties has not been enough to cover the annual amount owed for loan repayments, according to the servicers' notes.