For Alice Pierce, foreclosure was a relief.
That's how bad things were at Fordham Towers, an apartment building on the corner of East 188th Street and Washington Avenue and her home of 27 years.
In 2007, the building's longtime landlord took it out of the Mitchell-Lama affordable housing program and sold it to a group headed by real estate investor Mark Karasick, who borrowed heavily to pay for the building and another complex in Morrisania, Robert Fulton Terrace.
The acquisition was one of many similar deals in the Bronx and across the city in recent years, in which private investors borrowed tens of millions of dollars to buy apartment buildings, including thousands of rent-regulated units, at prices which critics warned were much too high to be sustained by rents.
Almost as soon as Fordham Towers was sold, conditions in the building began to deteriorate, said Pierce, vice president of Fordham Towers' tenants association. The new owners cut the maintenance staff from nine employees to just three and a half for 168 apartments, she said. The halls weren't cleaned and garbage was stored so poorly that rooms on the bottom floor began to stink. Rats proliferated. Tenants were left with insufficient heat and hot water, and elevators broke down.
This spring, the tenants association voted to go on a rent strike.
"This was a beautiful building," said Pierce. "We were fine until these people came in."
Then in May, the owners defaulted on their mortgage and lenders began foreclosure proceedings.
The building joins a wave of similar foreclosures. Citywide, 3,221 units are currently in foreclosure after being purchased by private equity firms and investors like Karasick who borrowed heavily to buy them and now cannot pay the debt, according to research by the Urban Homesteading Assistance Board (UHAB), a tenants' advocacy group. Nearly 60 percent are in the Bronx.
UHAB estimates that another 11,124 units citywide, including 6,635 units in the Bronx, are in danger of foreclosure for the same reason.
For the residents of Fordham Towers, foreclosure has thus far proven an unexpected reprieve. A court-appointed receiver hired new management in June, and they have increased the maintenance staff, hired new security, and gotten both elevators working.
"We're sort of happy that it went into foreclosure," said Pierce.
But the future of Fordham Towers is uncertain. The building is now controlled by an assortment of lenders and investors. Housing advocates fear that if members of this group aren't willing to accept a major loss, its next buyer could turn out as bad as its last.
Paying too much
Affordable housing advocates say all of this has been frustratingly predictable.
"It is a surprise to absolutely nobody who was looking at this two years ago," said Dina Levy, director of Organizing and Policy at UHAB.
When organizers at UHAB looked into Karasick's purchase of Fordham Towers and Robert Fulton Terrace, they discovered that he had borrowed $36.5 million from the Canadian Imperial Bank of Commerce (CIBC) to buy the two buildings, an amount which seemed unsustainable.
The economics of an apartment building is basically simple, says Levy. The only income comes from rents. Expenses are: 1) operations – the cost of maintenance staff, security, supplies, and utilities; and 2) the cost of repaying the mortgage. In order to make a profit, a landlord's income from rents must exceed the cost of maintenance and debt.
But in this case, the debt was so high it seemed impossible that rents could cover it. According to UHAB, the average rent for a one-bedroom apartment at Fordham Towers before the new owners was $797 a month, and rents would have had to rise by $400 a month per unit just to break even. But the building is rent-stabilized, limiting increases.
When landlords can't raise rents, said Levy, the only way to squeeze money out of a building is by cutting operating costs, which means maintenance. In its last year in the Mitchell-Lama program, operating costs at Fordham Towers were $838 per month per unit. But in a filing before the Securities and Exchange Committee, the new owners declared operating expenses in the building were just $302 per month per unit – which explains the decline tenants experienced in rats and broken elevators.
Now that Fordham Towers is in foreclosure, it's unclear what will happen next, in part because it is unclear who now owns and controls the mortgage. Canadian Imperial Bank of Commerce, which originally issued the mortgage, sold it to JP Morgan Chase, which in turn bundled it into a $3 billion mortgage-backed security and issued it to investors.
A lawyer for Karasick, Eric Horowitz, said his client hopes to retain ownership. If Karasick fails to negotiate a deal, the building may be sold. Levy and others warn that any new buyer who pays as high as Karasick did would just start the cycle over again.
Pierce would ideally like to see the building transformed into co-ops; at the very least, she hopes the new management sticks around.
"[They are] going to bring the building back to where it was and how it used to be," she said.
"The thing that's important to keep in mind," said Levy of UHAB, "is that these tenants didn't even take out a loan. They've just been living in their building, paying their rent. They couldn't be less culpable."
