The new debt facility was used in a February 2012 transaction by MHANY Management Inc., marking the first time a not-for-profit organization has purchased an overleveraged multifamily mortgage note in New York City. MHANY focuses on meeting the needs of low- and moderate-income residents of New York through intensive housing counseling programs and innovative affordable housing development initiatives. It owns and manages 1,300 rental units throughout New York City. The group purchased three overleveraged mortgage notes on four buildings comprising 29 units in Brooklyn. Upon purchasing the notes, MHANY is continuing the foreclosure process already underway, with the goal of acquiring title to the properties. After taking title, MHANY plans to undertake approximately $1.9 million in physical repairs on the buildings with HPD financing.
The properties are scattered in the eastern Crown Heights and Bedford Stuyvesant neighborhoods of Brooklyn. Surrounding the properties is a mix of 1- to 4-, and 10- to 20-unit buildings. Tidy single-family homes share blocks with obviously distressed buildings with open doors and unkempt yards. Previously thriving commercial corridors struggle under the weight of high vacancies.
The properties were all purchased in 2005 by a landlord who owns approximately 20 small buildings throughout Brooklyn—many of which are either in poor physical condition, in foreclosure, or both. Tenants reported that the landlord was verbally abusive and often did not provide heat or hot water during the winter. In 2009, the owner defaulted on his mortgages and New York Community Bank (NYCB) began foreclosure proceedings. Court-appointed receivers are currently running the properties.
The buildings are in fair-to-poor physical condition. Two of the properties suffered several fires over the years, reportedly due to faulty electric wiring. Two of the buildings are in HPD’s Alternative Enforcement Program (AEP), which targets the city’s worst-performing buildings for intensive intervention. The agency has already undertaken over $160,000 in emergency repair work on the buildings. The 29 units held over 400 open housing code violations as of February 2012.
When the properties went into foreclosure, the Urban Homesteading Assistance Board (UHAB) organized tenants to prevent the buildings from destabilizing and deteriorating further. In an attempt to prevent NYCB from selling the debt to a speculative investor, UHAB engaged MHANY and HPD to negotiate a deal with the foreclosing lender.
The transaction would not have been possible without a significant discount from NYCB; MHANY was able to purchase the notes for $1.5 million, substantially less than the total outstanding principal balance, which exceeded $2.4 million.
Enterprise originated the $1.35 million NYAF loan, using the notes as collateral and undertaking a thorough review of the potential risks and challenges to this transaction. Enterprise was additionally able to provide MHANY with a $250,000 working capital loan to help bridge the significant costs of bringing the project through foreclosure and predevelopment, including legal fees and funding operating deficits from the receiver.
The citywide affordable housing community is continuing to focus on the ongoing problems of banks selling non-performing debt to the highest bidders, the appointments of receivers that may or may not have experience running distressed multifamily housing, and the long foreclosure process (often a benefit to homeowners but a problem for multifamily housing, as tenants remain in limbo for years). Enterprise is working with our community development, lending, and advocacy partners to identify troubled portfolios, equip affordable housing operators with the tools to undertake the acquisition and foreclosure, and encourage more banks to work with affordable housing developers on the disposition of their distressed multifamily assets. We see these efforts as not only helping to protect low-income families from the effects of the foreclosure crisis, but also stabilizing New York City communities for years to come.