Ten years ago, developer A&E Real Estate bet big on affordable housing in New York.
Over a two-year period the Midtown-based firm acquired 3,500 apartments across the city for nearly $800 million and invested another $130 million fixing up the units, nearly 90% of which were rent-stabilized. In 2015 Mayor Bill de Blasio praised A&E for buying Riverton Square in Harlem and agreeing to keep most apartments affordable after the previous owner lost the 1,229-unit complex to lenders in 2009.
“This is preservation on a grand scale, and it is going to protect the kind of economic diversity that’s always been part of Harlem,” said the mayor, as the city approved $100 million in property-tax breaks and other incentives. A&E founder Douglas Eisenberg thanked city leaders for their tireless work on behalf of Riverton and “their dedication to its bright future.”
Unfortunately, a bright future gave way to a deeply uncertain present. In January lenders moved to foreclose after a $506 million mortgage for the portfolio including Riverton went into default. The properties simply couldn’t keep up with their bills after operating expenses rose three times faster than revenue since 2021, according to a new report from Moody’s. The portfolio swung from generating more than twice the cash needed to pay debts to about two-thirds.
“It might sound like an exceptional situation, but actually it’s not exceptional at all,” said Seth Glasser, a senior managing director of investments at real estate brokerage Marcus & Millichap. “Across the city, rent-regulated buildings are underwater.”
The foreclosure proceeding is pending in New York State Supreme Court and a judge has ordered A&E’s attorneys to respond to the complaint by May 14. A&E, which owns 12,000 apartments citywide, told Crain’s through a spokesman that it continues to make mortgage payments while trying to work out an agreement with lenders. Wells Fargo, the lead plaintiff in the foreclosure action and trustee for mortgage investors, had no immediate comment.
Real estate experts say A&E’s investment went sour for reasons outside its control.
First, revenue produced by the properties is constrained by the mayor-appointed Rent Guidelines Board, which determines rent increases for the city’s regulated apartments. The board allowed landlords to raise rents on one-year leases by just 3% last year by a total of 9.25% since 2018. It’s now considering an increase of 1.75% to 4.75% on one-year leases.
Another source of financial pressure emerged in 2019, when state lawmakers passed the Housing Stability and Tenant Protection Act, which sharply limits how much rents can be raised in regulated units to pay for renovations. The real estate industry has tried to have the law overturned but residents of the city’s 1 million rent-stabilized apartments are a formidable political force.
The third and perhaps most destabilizing force took shape when insurance, maintenance and borrowing costs started to soar three years ago. Glasser said it cost $136,000 last year to insure a 75-unit rent-regulated building in the Bronx, up from $36,000 in 2018. Prevailing wages for elevator constructors have risen to $80.35 an hour from $69.56 in early 2021, according to the New York City Comptroller’s office.
To ease inflationary pressure the Federal Reserve quickly raised interest rates. That medicine was tought to swallow because the mortgage for the A&E’s properties was floating rate. Data from credit-rating agency DBRS Morningstar indicate their loan’s interest rate has tripled, to 6.6%, meaning borrowing costs have risen from less than $12 million a year to nearly $34 million.
When banks moved to foreclose in January, A&E predicted the matter would be resolved in 45 days. A spokesman now says negotiations are continuing. Moody’s said lenders are evaluating “all resolution options.” That means they could seize the portfolio.
Riverton Square, the largest part of the portfolio, has been through this before.
The seven-building complex at the corner of Madison Avenue and East 135th Street was developed in 1947 by the Metropolitan Life Insurance Co., which barred Black and Hispanic tenants from the larger Stuyvesant Town-Peter Cooper Village complex it built downtown, according to the New York City Housing Partnership. Riverton was acquired in 2005 by Stellar Management, which hoped to bring in higher-paying tenants, but Stellar defaulted on the $225 million mortgage and lenders moved to foreclose in 2009.
Stuyvesant Town defaulted around the same time, and that 11,250-unit complex, Manhattan’s largest, is now owned by Blackstone Group and the real estate arm of Canadian pension fund Caisse de dépôt et placement du Québec.
Should Riverton be put on the market again, it would probably sell for considerably less than the $201 million that A&E and a partner paid 10 years ago. Glasser estimates that rent-regulated properties sell for five times their rent roll today, compared to 15 in 2018.
“It’s a different world now,” he said.
