Who's still buying NYC's rent stabilized buildings?

[MUSIC] Hello, everyone. Happy Thursday. Welcome back to Deconstruct. I'm Laila Burke, a commercial reporter at TRD. And I'm Hannah Kramer, the director of content strategy. We've had an incredibly busy news week here at The Real Deal. We have a final verdict in the Alexander Brothers case, several important updates from City Hall and Albany. And then we're going to try to find out who is catching the falling knife that is who is still trying to buy rent stabilized buildings here in New York City. Let's dive in. [MUSIC] First up, we have to close the loop on a story that has dominated the real estate news cycle for almost two years now. Let's remind everyone with the story is. So, hopefully you all tuned in last week to hear our interview with senior editor, Ellen Cranley, and already know it all about it. But just in case you missed it, the Alexander Brothers, Hall, Orrin, and Alon, stood trial for federal charges of sex trafficking here in New York. And early this week, they were found guilty. We broke the story in 2024 about allegations against them. We were watching the story so closely because Tall and Orrin were the top residential brokers in South Florida and New York. So, all of this feels like an enormous fall from grace. The decision came in on Monday afternoon and the jury found them guilty of all 10 charges against them. Now, this story's been all over the news. How has the industry reacted? Well, we've seen a lot of reactions from folks in the industry, especially on social media. A lot of women in the industry, a lot of reactions from their former rivals in the brokerage world as well. And many people have expressed, you know, happiness. People seem to feel they're being brought to task for years of bad behavior both personally and professionally. And what does this mean for the brothers themselves? Well, it means they'll likely go to jail. Their sentence in hearing is in August and each charge carries a minimum of 15 years. Wow. And the story isn't over. First of all, there are a number of civil suits against them, including one from top broker Tracy Tudor. And they'll likely appeal the cases. So we'll be continuing to cover this for some time, but the core story is wrapping up for now. I hear you have a politics update for us. Yes. So there are a couple of pieces of legislation that stand to affect real estate and housing here in New York. The first is that Governor Kathy Hocal has proposed reforming secret. That's SEQRA, which is one of the state's environmental laws. What does that have to do with real estate? Well, when opponents of new development or rezoning suit to stop those projects, they usually rely on this state environmental law, SEQRA. They'll try to argue that the new development didn't go through the proper environmental review. So what does Hocal want to do? So she's proposed exempting projects if they're under 500 or 250 units, depending on the location. All of that would be good for developers and bad for their opponents. Okay. And so let's talk about what's happening at City Hall. Is that also a plus for developers? Well, no. There's a proposal in City Hall right now to basically seize the buildings of negligent owners. This is called third party transfer, where the city basically takes over buildings that have water debt or unpaid tax bills and transfers them to nonprofits. Building owners, as you might expect, not really into that idea. Not surprised. However, Mayor Mumdani did say this week that he would halt a similar but different program called the tax lien sale. What's that? So that's where the city sells the tax debt and water debt of building owners to a trust. And then that trust can try to enforce that debt and try to collect on it with fees and payment schedules. And I've been hearing a lot about the city going through its budget negotiations right now and trying to get more money from Albany. What's the latest on that? So the Mumdani administration has a budget shortfall and they're trying to make up the difference. One idea that's coming out of City Council is to raise the taxes on apartment transfers. This would be specifically for cash deals over $1 million. And the legislature seems like they would go for it, Kathy Hocal, maybe not so much. Okay. Hannah, can you tell us a little bit about the fight at West Park Presbyterian? So West Park Pres is a beautiful church on 86 Namser Dam on the Upper West side with a big problem. It's a landmark, both local landmark and according to the Landmarks Preservation Committee here in New York. And it has a lot of celebrity fans like Mark Ruffalo and Lawrence Fishburn and Matthew Broderick, all of whom have showed up to support the preservation of the church. But the church is in really bad shape. It's congregation only has a handful of members. It hasn't had a pastor since 2017. And it's literally crumbling. So now the Church Administration actually wants to demolish the building, but there's a non-profit standing in the way. Okay, and how did it get so bad? Well, for one, I mean, it's just an old building, things age over time. And its congregation has shrunk over time, which is a problem that many houses of worship in New York are facing. So they just don't have the cash to maintain the building and they haven't for a long time. So what's the plan that the Church Administration and congregation have come up with? Well, back in 2022, the Church struck a deal with developer Ken Horne's alchemy properties to buy the site and build a new condo building there. And in return, build a worship space for the congregation. But there's a contingency on the deal, which is that it needs demolition permits. And remember, this is the deal the congregation did. But there's this other player in the mix, which is the non-profit called the Center at West Park. Okay, and what's the non-profit's deal? It was started at least in part to manage the property and restore that crumbling facade. But it's only raised about a quarter of the money needed to actually do a renovation of the whole church. And the non-profit actually ended up getting into a battle with the church and getting evicted. Wow, okay, but they can still stop the demolition of the building. They can try, since the Church's landmark, it has to apply for the right to be demolished. And that gives its opponents in opening. So, Eric Enquist, who writes a column for us here at the Real Deal, wrote an argument this week that it should be Ken Horan's turn to try and fix what's wrong with this church, even if that means tearing it down. Landmarks preservation had a hearing about this on Tuesday night, but there's no vote yet. So we'll be looking out for that. Hmm, all right. And I hear you have some guanous news. Yes, have you been there recently? I was there this weekend at the Whole Foods, and it is incredible how much construction is happening there. Yes, it is very built up. Lots of rental buildings, sort of a spill over from Borum Hill, Park Slope coming over 3rd and 4th Avenue's. It's been a lot. But what you may not know is that a lot of that new development is from one partnership, that of Tarny Companies and Tovros Capital. And now the two have scored a $125 million dollar refinancing deal on their first building there, which is 2/43rd Avenue. This is basically the final step in wrapping things up on that building, and it's all part of their guanous Worf project, which is where they plan to put 2000 units there in Guanous. We've just been talking about how hard it is to build in New York. So tell me how they've made all of these huge projects happen. So they've been taking advantage of a neighborhood rezoning in Guanous that allows developers to build high-density housing in this area that was a formerly industrially contaminated superfund site. And as part of the rezoning and everything, they're required to set aside some of their units at deeply affordable rates, like $850 per month affordable. Wow. That's called mandatory inclusionary housing. Now, in return, they also get to take advantage of another program that gives them a property tax abatement for decades. That's called 421A. And 421A actually expired, right? Yes. So 421A expired, but some companies have been able to get in under an extension. So they have been building and building. The refinancing is sort of an early look at whether this partnership and this development can be successful. Is it? It seems like it is. Okay. Let's get into our main story for today. A little less than half of New York City apartments are rent stabilized. That means that landlords can only raise the rent by a certain amount dictated by law. In 2019, New York State made it much harder to deregulate an apartment. That is, take it out of rent stabilization. This resulted in the market for rent stabilized apartments taking a huge hit with buildings selling at a fraction of what they once were worth. So here to tell us a little bit about what this market has been like and how these buildings are selling or not, we have Lev Mavashiv, the principal and broker at Alpha Realty, who broker steals on a lot of these rent stabilized buildings. Lev, thanks for joining us. Thanks for having me. All right. So can you tell us a little bit about how this 2019 legislation changed the market for rent stabilized buildings? Yes. So just of this 2019 rent laws basically took away all incentives for landlords and investors to invest and operate in this housing stock. And like you said, it's almost 50% of the housing stock and it's an older housing stock. Most of these are pre-war buildings. Prior to 2019, they had programs like MCI, IAI, they had vacancy allowance increases, and if you invested enough in these buildings and these apartments, they allowed you to destabilize the units, which incentivized these investors and landlords to invest and improve the housing stock. Since then, they took all that away. I mean, they really, really capped and limited the IAI's, which again, there's no incentives for landlords to invest in improving these apartments. They took away the vacancy allowance, meaning that if you had a tenant living there for 45 years, paying $800 runs, that tenant leaves, guess what? You got to now improve that unit and put it back in the market at $800, whatever the last rent was. There's no MCI's, there's no incentives to do major capital improvements, and what resulted was kind of crumble and housing stock, and now, years later, it's getting attention, right? You had a nice piece about it last week. I think Wall Street Journal had a piece about it as well. It's finally getting some national attention, but it took years to get to this point, essentially, essentially, these assets became kind of toxic, and everyone wants them off the books, and investors are unloading them, banks don't want them, they don't want to lend them, and they don't want to hold the loans on these assets. It's terrible what's happening to the, what I consider a beautiful housing stock in New York City here. To the point of Lila's story from last week or maybe a couple weeks ago, at this point, there are people now who are buying some of these apartments, but. There are, yes. These are different folks than we're buying before, so tell us who you saw, who were your normal sort of buyers for rent stabilized apartments pre-2019, and then how that's changed post. Great question, yeah, I mean, pre-2019, it was the private equity backed operators, you had institutional capital, you had foreign capital investing in this housing, and because there was a lot of value out potential with those housing, and it was good, yes, I know there were a lot of complaints with, you know, calling them bad operators, but there's bad operators everywhere, right? But majority of the investors and buyers of those type of buildings wanted to invest in a good asset that they could improve over time and add value to their investment. Today, that's not the case. Today, there's almost no money chasing this type of asset product, let's call it, right? It's a product within the multi-family asset class, you know, other than the big blockbuster deals that we all hear about, the 100-plus million dollar deals, like the pinnacle sale, the related stuff, you know, there's a bunch of 10-20 million dollar deals. The buyers of those are mostly, I would say, your local private families have a building in Brooklyn on Ocean Parkway or Grand Concourse in the Bronx, you know, you'll have a family pick that up. But, you know, that 40-hundred walk-up off the avenue on Bryan Davenue, there's almost no buyers for that type of stuff. And the buyers that are buying today, they're buying high cap rates, good cash flow, you know, for looking at the pinnacle sale, it was an eight cap, and Flexor is providing financing on a very attractive debt there. So they're incentives for that transaction. That's kind of the type of buyers that you have right now, you have your local private investors that already own a couple of hundred, maybe a couple of thousand units in whatever it is Brooklyn, and, you know, they'll pick up another couple of hundred units and just tuck it away into their portfolio. They already have an operation, they've been doing it for decades, so they're buying selectively, they're buying, you know, the right asset has to have good cash flow, well maintain building, nobody wants to buy headaches, good collections for sure. But there's a handful of buyers for that type of stuff right now, but it's not what it was pre-2019. So when you're running a rent stabilized building, your expenses are going up and you can't really raise the rent. I have a lot of people contacting me saying that these buildings are money pits. What do these local operators who are buying these buildings see in them that maybe others don't or what do they have that others may not? So look, you're right, these buildings are money pits, your rents are capped, you know, your expenses are going through the roof, right, insurance, utilities, maintenance, the buildings cost a lot to operate. Like I said, these are older housing stocks. What are they seeing? I mean, look again, primarily it's value, it's cash flow. They are getting cash from them day one for a lot of these investment groups and funds. It's hard to put a value on something that's going to be decreasing, right? How do you value a decreasing cash flow and asset? It's tough, right? But you have these like value investors that are coming in, right? Like some of it who bought the pinnacle stuff, I mean, that traded 40% below value, right? Related, I believe was like 30% below value, right? So you have these sellers, by the way, the sellers almost, they don't want to sell, but they need to sell a lot of times. They need to sell the head enough of it, right? So you have buyers that are seeing value, right? You have your local family that was buying these back in the day, you know, called the 200 unit and now they're buying it at 70, 80 unit, right? Or back in the day we used to the GRM growths run multiple, I used to sell these buildings in Brooklyn at 17, 18 times the rent roll. And now we're selling something on the rents, stabilize building in Manhattan up to a re-side at six times the rent roll, you know? So like multiples have really come down. There's again, they're seeing value, there is value. And I am seeing a lot of investors coming because pricing got so low and attractive enough, we are seeing a lot of investors come in, but I wouldn't say it's like institutional capital chasing these deals right now. It's your local families, maybe they're putting some money together, right? I mean, yes, we had summit and a group from Israel come in and buy the, you know, 50, 500 units here. But again, it's because they saw that 40% drop in value. So you're going to see some of those with majority, it's the local private guys that again find a way to buy a building and just fit it into their portfolio, fit it into their operation. Maybe they already have a local super local mains, a local field guy and they're already operating wherever it is in Brooklyn, Manhattan and they're buying another building and talking it into their operation. Something else we've heard a lot about is this idea of warehousing, right? That landlords are keeping units vacant. Tell us why that happens. Again, there's no incentive for them to fix up these units, right? Let's say you have a unit that was rented out for $1,000, right? It needs a lot of work, right? Somebody that was living there for decades left, you need to put in, you know, whatever it is, $100,000, it's fixing up that unit, right? And it's not just industry standard numbers. I think Nightshell also came out with a number of 120, whatever it is, right? So what incentive is there for landlords to put in $100,000, it's fixing up a unit just to re-run that out at $100. So they're keeping them offline. They're literally shutting the door and just keeping them vacant. Now there is a whole thesis where I keep the pressure on, eventually they'll rent that out, not really because if the tenant comes in and stops paying, you're dealing with much more year. It's basically your, it's not cash flow, you're not improving the care, you're, in fact, you're just going to cost more to have a tenant in there, you know what I mean? Operating maintenance possibly going, you know, possibly having collection issues with that tenant. So landlords are kind of just leaving them vacant and hoping the laws change. They're not sustainable and I think we all know it. The 2019 rents those are definitely not sustainable, it doesn't help the tenants, it's not helping the landlords. So something is going to change. I know they propose some ideas about maybe a one-time rent reset. I think the city had a program that giving out $25,000, which wasn't even enough, right? If you're going to create some policy, let's incentivize, let's make that policy a little more, you know, incentivize the landlords, let's incentivize the private markets to invest in these units and the buildings. But there is no incentives there, but I know they're proposing it. So I think a lot of a lot of the landlord community is just hoping that there's something is going to give and that eventually they will put these units in the market. But again, they need to have, they need to see a return on their investment. And it seems like investors before were sort of looking at the upside of buying these rent stabilize buildings, you know, how much value could you add? Now they're looking a little bit more at cash flow. What's the most or best value add that you've seen in the last series? There is no value, there is no upside in this unit. So that's the challenge with, that's the challenge with these assets. There is no upside, you're buying it, you know, even if you're buying it at an eight, like right in the pinnacle, right, it's sold at an eight cap, the pinnacle deal. You're buying an eight cap, you're getting an eight percent, okay, what's it going to be next year? What's it going to be the year after? Your rents are capped, your expenses are increasing. So are you getting to a what, a six cap, a five cap, maybe even less? Who knows? That's the challenge with these assets. How do you price something like that? And that's why a lot of investors are just staying away from this right now. So then what do you think is the future of this housing stock? That's a great question. The future is, I'll tell you what, you could get the private industry to do what you need them to do, as long as they have the right incentives. I think it's up to the government and the politician to create sound economic housing policies that helps, that helps the tenants and the landlords, okay, because right now it's unsustainable. It's hurting the tenants and it's hurting the landlords. Tenants, I'm sorry, the amount of pressure, the rent, you know this, rents are softening throughout the country except New York, New York. I see you guys having pieces about it every month. New York City rents had record highs, okay? It's because you have this almost 50% of the housing stock, kind of let's call it off-market, offline because the rents, the table, the tenants are not moving anywhere. And if they do move, those units are not going out to the market, all right? So the administration wants to create 200,000 new housing, affordable housing unit. Here's your chance to put 50, 60, by some accounts, even more, right? 50, 60,000 units online on the market. You got to create the right incentives for the landlords to put these units on the market. I think the future is bright if we could all come together, have a conversation, figure out a path for that could incentivize investment into this housing stock. And I think that's important for the city. All right, Lev, thank you so much for joining us on Deconstruct. Thank you. Thank you, ladies. All right, let's get into some national headlines. First, in early March, developer Rishi Kapoor was arrested on fraud charges. Whoa, okay. who is Rishi Kapoor? He's a Miami-based developer and he had a firm called Location Ventures that was really on the up and up just a few years ago. But in December of 2023, the SEC charged him with defrauding investors, alleging he shuffled investors' money between different projects, and that he misappropriated $4.3 million of it for himself. $4.3 million. Okay, what did he do with the money? Allegedly, he bought himself a yacht and a McLaren and a waterfront estate in Cocoa Plum, which is a Ritsey neighborhood in Miami. And so why is he being arrested now? Well, all of that happened under a civil allegation from the SEC and he ultimately settled it with them, although it did all cause his firm to pretty much collapse. These are criminal allegations and much wider ones. The SEC is claiming this is an $85 million fraud and they've hit him with 37 counts including money laundering and bank fraud. He'll make his first appearance in court on Friday, March 13th, and we'll be covering that on the realdeal.com so you can go there for more news. All right. Now out in Denver, we are tracking a developer who has a $570 million chance to fix its downtown. Tell us what was happening in Denver in the first place. Downtown Denver still has a really high office vacancy rate. That's in part because the city became popular with white collar industries in the years leading up to the pandemic. And these workers are outdoorsy people, so the minute they got some flexibility, it was hard for employers to bring them back. It's not that hard to understand in a city where you can go skiing or biking on your lunch break or right after work. State and city employees aren't required back in the office full time. That's left an office vacancy rate of 50% in upper downtown, the traditional central business district. But Denver is making one of the largest public commitments to urban recovery with more than half a billion dollars in tax increment financing. So far, it's purchased the distress pavilions mall and parking lots and put up 45 million dollars into three office to rezzy conversions. A longtime Denver developer, Bill Mosher, came out of retirement to work on this, and there's an early sign that private money will follow. LA-based Luzato Company is buying up a chunk of downtown office space and planning to convert more than 1,000 apartments. We'll have to check back in on the Denver market soon. But until then, thanks for listening. See you next week. Deconstruct was written by Lila Burke and Hannah Kramer. Our script was edited by Mary D'Duc and Kara Eisenpress. Mary D'Duc was also our in-studio producer today and Mila Miller is our post-producer and sound engineer.