Rent stabilized buildings get a lift... thanks to nonprofits?

CPC and FDIC announce a $550M investment into the buildings that back the loan portfolio they just purchased from Signature Bank.

We do not know that many details yet. Here’s what we do know:

• The $550M will be used for repairs and maintenance.

• CPC will service a $5.8Bn rent-stabilized Signature loan portfolio, alongside Related and Neighborhood Restore.

• There are 868 individual loans in the portfolio.

• There are 35,000 apartment units included in the loan portfolio.

Basic math says the following:

• $550M / $5.8Bn loan pool equals ~10%

• $550M / 868 loans means about ~$634K in funding per loan.

• $550M / 35,000 apartments means ~$15K in funding per apartment unit (*if allocated evenly*)

Without too much context, the size of the $550M funding in relation to the loan portfolio size tells us something. $550M is ~10% of the original loan size. 10% of anything is a big number. In this case, it’s a “free” equity injection – especially in an asset class fraught with reduced maintenance levels due to poor incentive structures. My last statement may be contested. Half a billion dollars sounds nice, but is it really enough?  But that’s the wrong question to ask. NYC’s attempt at revitalizing its housing stock, which is kind of like saying its attempt at revitalizing its rent stabilized housing stock, because so much of the housing is rent stabilized, anyway – before the $550M announcement was Adams’s $10M fund to restore 400 vacant apartments. There is no comparison, setting aside little things like scope and use of funds, CPC and FDIC’s funding is literally 55x times Adam’s plan. This is better than before. Much better. The FDIC is walking the walk when it talks about its mission of preserving housing affordability.

According to the Real Deal, the use of funds will work something like this. Owners will have their original mortgage tranched into two portions. Maybe going from one $1M loan before to one $900K loan and another $100K loan (this is a guestimate, inspired by the $550M/$5.8Bn = 10%). This mortgage modification happens across the board. Owners get handed a slip with a few necessary upgrades to make. If those upgrades are executed and signed off on, then that $100K loan gets forgiven and owners cash returns increase – in most cases as they are left with only $900K in mortgage principal.

The cases where this would hurt owners is if the cost of repairs is greater than the forgivable loan size. And that calls into question the administration of the program. Will FDIC and CPC use a scalpel or a blunt instrument when deciding how to carve up funding? Specifically – will the funding flow to owners to use to perform renovations, or will the funding simply be used to pay down the owners’ loan balances once their renovations are done. The difference may sound trivial but consider the owner whose buildings are in great shape, without deferred maintenance. Is that owner eligible for CPC loan modification and to have the FDIC pay down his loan, even though there were no repairs to make? That sounds like a sweet deal. Maybe too good to be true.  Or consider a program where the funding is passed through to the owner directly based upon plans and estimated costs for repairs. You have improvements/violations to make/resolve and you get funding, or you don’t, and you don’t get funding. Besides cases of clear fraud (which, let’s be honest…), direct-to-owner funding would see more tenant conditions improve, and yet it would reward owners who grossly mis-manage buildings. To borrow from the school classroom, do you cater to the advanced students and push them to the advanced placement courses? Or do you make sure the 8^th graders with 2^nd grade reading levels don’t fall behind?

Attention sellers: how do you take advantage of this situation to sell for a higher price?

• Obvious: know if your loans were originally originated/bought by Signature. All the below pertains to owners whose loans were originated by Signature Bank.

• Pay attention to how the rules of the FIDC /CPC funding play out.

• Avoid committing major funding to deferred maintenance / violation removal for the time being.

Rent stabilized buildings are not down and out. Here’s why:

• (Will happen) Lower interest rates

• (Will happen) Loan forgiveness

• (This is true today) Near 100% occupancy

• (Probably happens) RGB keeping 3%+ annual rent increases

The next item on the list should be to create property tax ceilings for tax class 2 rent stabilized multifamily properties.

Sources: The Real Deal