PT Barnum would have been proud!

Housing bust; busted housing

Cycle of resales and landlord neglect continues to hurt affordable-housing tenants; city officials and owners skilled at rehabbing take action.

By Daniel Massey
September 18, 2011

Bluestone principals Eli Tabak, Ari Bromberg and Marc Mendelsohn promised they were in it for the long haul at six Bronx buildings, but flipped them to a new buyer for a steep profit a little more than a year after buying the properties' debt. People usually go to their neighbors for a cup of sugar or a stick of butter. Idalina Padilla, 87, makes a more personal request of fellow tenants in her Bronx building: She asks to use their toilets.

"I'm afraid to use my bathroom," she said, "because the ceiling might fall and hurt me."

Her sagging, dripping ceiling is one of many problems faced by residents of her building, a mile north of Yankee Stadium. In July 2010, Manhattan-based investment firm The Bluestone Group purchased the mortgages on the foreclosed property and five others in the Bronx from Dime Savings Bank for $10 million, promising to end a cycle of neglect wrought by two previous landlords. Tenants feared that Bluestone, which had little experience in fixing dilapidated housing, had overpaid and would be forced to skimp on repairs.

Bluestone principals promised to spend $5,000 to $7,000 per unit and prove the skeptics wrong. (Twenty times more is being spent to rehabilitate similarly run-down buildings in the Bronx.) They had some initial work done-painting walls, laying vinyl tile and rewiring, reducing the number of violations on the portfolio to 225 from almost 3,000.

But tenants are still suffering-many of the violations were fixed with patchwork repairs, leaving underlying problems-and the city Department of Housing Preservation and Development reports "little progress" at the properties.

A bedroom window in Rita Vasquez's apartment is duct-taped to the frame. Part of Martha Garcia's bathroom ceiling fell weeks ago, and she can now see her neighbor's bathtub through a hole 3 feet across. Andres Rios said he has "run out of mousetraps" in a never-ending fight to rid his apartment of rodents.

Last week, tenants got notices that the buildings had been sold. They were told to send rent to 3200 Cruger Ave., Suite 201, which is the address of Bronx-based Gazivoda Realty Co. The Real Deal reported the sale price at $17.6 million.

The Bluestone portfolio reflects a larger problem that has dogged city officials and threatens the city's affordable-housing stock. A revolving door of owners intent on making a quick killing are overpaying, underinvesting and condemning hundreds of properties to a pattern of neglect, disrepair and foreclosure. At least 80,000 units are in jeopardy, one industry executive said.

Banks are reluctant to discount the mortgages, so some foreclosed buildings are on their second, third and even fourth round of ownership, as groups of overeager investors outbid companies and nonprofit housing groups with track records of rehabilitating distressed housing.

"[The Bluestone] case is emblematic of our overall concerns about how debt sales on distressed buildings are conducted," said RuthAnne Visnauskas, deputy commissioner for development at HPD. "Banks continue to sell to developers that have no real repair plan and often little understanding of the conditions in the buildings they are purchasing. This merely perpetuates the cycle of distress, which is not a good investment for anybody."

An apartment at 1268 Stratford Ave. in the Bronx last summer, just after Bluestone took over. Similarly run-down apartments are getting $100,000 makeovers elsewhere in the borough. An analysis by the Urban Homesteading Assistance Board, a tenant advocacy group, shows that mortgages on nearly a third of some 250 New York City properties that went into foreclosure in the past 18 months have been resold. Many may now be held by owners ready to improve them; data showing what they spent on the mortgages is not public. But Dina Levy, UHAB's director of organizing and policy, is concerned that some investors are repeating others' mistakes.

"Instead of rescuing overleveraged housing, owners are just trading it from one bad actor to the next," she said.

The city has engaged the state Banking Department and the Federal Deposit Insurance Corp. in the hopes that they will hold banks responsible for the conditions of multi-family properties in their loan portfolios. Sources said the Banking Department is preparing to push lenders to encourage landlords to maintain their buildings. The department would not comment.

City housing officials have urged banks to use HPD-approved buyers, in an effort to deter lenders from selling mortgages to the highest bidders regardless of their expertise.

In a recent 12-month period, New York Community Bancorp sold 36 mortgages on buildings with significant violation counts, prompting HPD Commissioner Mathew Wambua to ask the bank to use city-approved buyers. He wrote to Chairman Joseph Ficalora in June, "It cannot be the responsibility of the City of New York to subsidize irresponsible property owners" whose neglect has led HPD to spend "vast resources" on inspections and emergency repairs, and which lowers property values and increases the need for city services.

A bank spokesman said it "responded by opening dialogue with HPD regarding notes for sale."

The bidding on such notes is higher than many experienced housing executives would have thought.

"At some of these prices being paid, it would be very hard to have an extensive rehab," said Eugene Schneur, managing director of Omni New York, a Manhattan developer that buys and fixes affordable housing. "If you don't do the proper rehab, at some point soon-maybe 10 or 15 years from now, maybe less-people are not going to be able to live in some of this housing."

The alternative: discounts

The violation count at the six Bronx buildings decreased under Bluestone, but underlying problems were never addressed. Officials and advocates point to Mr. Schneur's handling of 14 dilapidated Bronx buildings as a model of what should be done.

In late 2009, Omni bought the $23.8 million mortgage from Fannie Mae and Deutsche Bank for $5 million, and is pouring $100,000 per unit into overhauls. The buildings, which were among the city's most run-down, were once part of the same portfolio as the Bluestone properties, but have gone in a different direction largely because Fannie sold the mortgage at a big discount.

Fannie's position as a government-sponsored enterprise enabled tenant groups to exert political pressure and reduce the sale price so Omni could spend on repairs, too. Commercial banks are unlikely to offer such steep discounts, but even smaller breaks could preserve housing, tenant advocates and officials say.

Workers at the Omni buildings are installing new flooring, windows, appliances, doors and fire escapes. They have replaced leaky roofs and rotted beams, straightened sloping floors and repointed bricks. Energy-efficient gas boilers will bring heat to residents accustomed to frigid winters.

"When your child wakes up in the middle of the night and says, 'Mommy, I'm cold,' that's devastating," said Carmen Rodriguez, an 18-year resident of the building, who is about to move back into her renovated apartment.

"In three weeks, I'll be living in a palace," she said. "Compared to where we came from, yes, it's definitely a palace."