Predatory Equity Grace Cho URP 590: Real Estate Integrative Seminar Winter 2018 What even is Predatory Equity? Speculator succeeds at displacing affordable housing residents Speculator (attempts to) transition the site for higher end use Bank provides loan for OR a speculator to overpay for an affordable housing Property enters foreclosure, building Speculator affordable housing residents fails, can’t pay are displaced mortgage Origins of Predatory Equity Origins of Predatory Equity Blockbusting in America from 1910-1970 Predatory Equity in NYC ● Term emerged in the last 10 years ● Pre-2008, private equity companies purchased rent-stabilized properties at inflated prices ○ Some had stated goal of tripling turnover rate ● After crisis, companies unable to pay back loans ○ Some went bankrupt ○ Some began harassing tenants to make them move Known Predatory Equity Companies in NY ● Blackrock Realty ○ 2006 Stuyvesant Town deal ● Vantage Properties ○ 2006-2007: spent $2 billion buying 125 buildings in NY ● Rockpoint Group ○ Purchased Riverton Homes in 2005 ○ Rental income = $5.2 million ○ Mortgage = $225 million ○ Planned to evict half of rent-restricted tenants in 5 years to Savoy Park, formerly owned by Vantage Properties triple rental income Efforts to Regulate in New York City ● Stabilizing NYC = tenant advocacy coalition ○ Urban Justice Center, Urban Homesteading Assistance Board, 16 neighborhood-based tenant advocacy organizations ○ Criteria for potentially predatory equity projects ■ High debt-to-income ratio or low capitalization rate ■ High tenant turnover rate ■ Harassment ■ Increasingly unaffordability ■ Poor physical conditions ● Predatory Equity Bill passed in December 2017; Speculation Watchlist created ○ Indicators = capitalization rate and code violations Underwriting example - Rampart Village, LARent-stabilized building with 8 units (1BR) ● Stabilized rent = $500/mo for 1,000 sq ft unit ● Annual gross rent = $48,000 ● Estimated gross rent multiplier = 9 ● Estimated purchase price = $432,000 Predatory equity approach ● Purchase price = $1.2 million in 2016 ● Short-term loan = $800,000 (to be paid off or refinanced within in two years) ● Market rate = $2,000/mo for 1,000 sq ft unit ● Annual gross rent = $192,000 ● Estimated gross rent multiplier = 11 ● New value = $2.1 million Consequences of Predatory Equity ● Loss of rent restrictions ● Residential displacement and neighborhood turnover ● Increasing unaffordability ● Unregulated speculation… with harsh results for residents no matter what ● Often affects communities of color ● Pushing middle class out of city Alternatives to Predatory Equity Single-family home rental property market ● “Our goal is to be a long-term presence in these [changing] neighborhoods, not to be a part of the problem” ○ To invest $425 million in East Coast cities ● Promise Homes to acquire 2,500 homes by 2019 ○ Incentives for tenants to stay longer; saves moving costs ○ Assistance to boost credit scores ● Freddie Mac backed single-family rental mortgages for working-class market ○ TrueLane Homes: portfolio of 1,000 properties with rent between $800 and $1,150 The Future of Predatory Equity ● Who knows? ● Hope for regulation (from Association for Neighborhood and Housing Development) ○ Responsible underwriting (debt service coverage ratio of at least 1.2 based on current rents and realistic maintenance costs) ○ Banks vetting borrowers and holding them accountable for property conditions ● How does development in particular parts of the city affect the naturally or regulated affordable housing? ● Status quo: continued harassment, displacement, dramatic change to neighborhoods Discussion Questions ● How should affordable housing be preserved, protected, and built? (policies, incentives, etc.) ● Consider the model of Promise Homes (private, profit-seeking company with benevolent vision for affordable single-family homes). Does this seem viable? Why or why not? ● What arguments could you make for predatory equity? What arguments could you make against predatory equity? ● In the book “Urban Fortunes,” Logan and Molotch differentiate between “use” and “exchange” values. As things currently stand with predatory equity, exchange value and the potential for profit are privileged over the use value for tenants in affordable units. Is use value something worth preserving? Is it possible to be preserved? ● Building and neighborhood improvements often lead to demographic change, especially in low- to middle-income, majority-minority communities. Is this something that should be regulated? Could it even be regulated? References ● https://www.bkreader.com/2018/01/nycs-new-speculation-watch-list-aims-curb-rent-speculation-te nant-displacement/ ● https://www.bloomberg.com/news/articles/2018-02-16/wall-street-s-home-rental-bets-shift-to-low er-end-u-s-houses ● https://citylimits.org/2017/07/06/boom-and-bust-have-gone-but-predatory-equity-remains-a-housi ng-threat-say-advocates/ ● http://www.kcrw.com/news-culture/shows/there-goes-the-neighborhood/i-didnt-want-to-evict-you ● http://nymag.com/realestate/features/62880/index1.html ● https://stabilizingnyc.org/our-work/what-is-predatory-equity/ ● https://town-village.com/2017/12/08/council-approves-bill-for-predatory-equity-watch-list/ ● Highsmith, A. (2015). Demolition in Progress: Flint, Michigan, and the Fate of the American Metropolis. University of Chicago Press. ● Kagan, M. (2015). How to value an apartment building. Moses Kagan on Real Estate. Accessed at http://kagansblog.com/2011/10/how-to-value-an-apartment-building/. .