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Investment funds accused of intimidating New York tenants
By Gretchen Morgenson
Friday, May 9, 2008
NEW YORK: 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 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' 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.
Tenants must answer these 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.
"Predatory equity is undermining the best efforts of New York City and state elected officials to slow the loss of affordable housing," said Benjamin Dulchin, deputy director of the Association for Neighborhood and Housing Development, a nonprofit organization. "Both 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."
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 sharply reducing expenses and cutting staff to increase their profit.
New York provides an unusual opportunity because it is one of the few American cities with a large inventory of apartments whose rental rates are regulated and kept below market levels.
In the past four years, developers backed by private equity firms have acquired almost 75,000 rent-regulated apartments, Dulchin said, or about 6 percent of the 1.2 million such units in New York. Major private equity-backed participants in this market include Vantage Properties, which has formed a partnership 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 notes "the increased institutional appetite for New York City rent-stabilized housing transactions" and adds: "There is a near-term opportunity to increase cash flow by converting rent-stabilized apartments to market rate as tenants vacate units."
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.
Tenant advocates say that property managers, in order to generate returns expected by private equity investors and to pay off the debt used for their purchases, are intimidating residents in the hopes of pushing them to leave so that rents can be raised. Rent-regulated apartments comprise 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.
Vantage Properties, led by Neil Rubler, has paid more than $1 billion in the last two years to buy 9,200 rent-regulated apartments. Investing alongside Vantage in many buildings is Apollo Real Estate Partners, an investment firm founded by William Mack in partnership with Apollo Management, a private equity firm created by Leon Black, a former Drexel Burnham Lambert banker and acolyte of Michael Milken.
In April, 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 Black said it was a separate company in which he had a stake but exercised no control over it.
In a group of buildings 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 New York.
McCreanor said he searched public records for similar actions by the previous landlord. He found no more than 350 in any year.
"What's offensive about these business practices is they seek to generate above-average profits by displacing poor people and people who are vulnerable," McCreanor said.
A spokeswoman for Apollo Real Estate said the company would not comment on the harassment accusations. But Rubler called them baseless. "Any 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," he said. "They are our valued customers, and we treat them as such."
Rubler said most of his tenants had positive experiences. Claudia Williams, of Corona, Queens, was asked by Rubler to talk with a reporter. She said that Vantage was allowing her to live in her mother's apartment even though she was not 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 had lived in the same Woodside, Queens, apartment for 14 years and had never had a problem until Vantage took over in 2006. Since July 2007, Aguaiza has been sued by Vantage three times, twice for nonpayment of rent that he was able to demonstrate the company had in fact received.
"They refused to give me a renewal contract," Aguaiza said. "And in court, the lawyer from Vantage offered to give me three months' free rent for moving out." Aguaiza said he turned down the offer.
On April 10, Aguaiza and five other rent-stabilized tenants living in the Woodside, Jackson Heights and Sunnyside neighborhoods of Queens sued Vantage. The plaintiffs say the company has engaged in deceptive practices that violate New York's consumer protection laws. Five more tenants are joining the suit.
Posted by Queens Vantage Tenants Council at Saturday, May 17, 2008