“Bankruptcy isn’t a dirty word.”
Shaun Riney and I recently sat down with Leo Jacobs – restructuring attorney, business litigation expert, self-described Winston Churchill of real estate, and one of the most interesting people we’ve had on this show. Leo represents some of the biggest landlords in New York City and has been at the center of many of the highest-profile distressed situations playing out right now.
We recorded on the eve of the Pinnacle portfolio bankruptcy auction 5,500 rent-regulated units, the first of what Leo believes will be many. Here’s what I took away.
The Pinnacle Auction: What Actually Happened
The Mamdani administration tried to condition the Pinnacle sale in federal bankruptcy court on the buyer committing to fix building violations. Leo’s take? It had no shot.
Under 11 USC 365, a sale has to be arm’s-length, free of fraud, and the result of a fair bidding process. All three were present. The judge’s job is not to make housing policy. It’s to evaluate the fairness of the transaction. As Leo put it: “To induce a bankruptcy court to make policy decisions on behalf of an administration that has been in administration for only two and a half seconds is tantamount to blasphemy.”
Did Mamdani shoot his shot? Yes. Did he miss? Absolutely. But his message was clear – he represents tenants, even when he crosses lines he probably shouldn’t.
Worth noting for anyone reading the headlines: Pinnacle had roughly one violation per unit. By NYC standards, that’s clean. The true distress in that portfolio was the debt – not the buildings. The market has spoken: 8% cap rate, $82,000 a unit, Flagstar financing 75% of the purchase at 5.25% for two years. That’s a good data point on rent-regulated New York City real estate.
Why Bankruptcy Is Having A Moment
Leo made a point that every owner should internalize: operators who have been doing this for 20 or 30 years don’t know how to traverse distressed terrain. They’ve never had to. That’s why so many people are paralyzed.
Bankruptcy exists for exactly this reason. It’s not a punishment. It’s not an admission of failure. It faithfully administers all of your debt and equity holders when the asset is no longer worth what’s owed on it, removing you from the state court boxing match and efficiently resetting the capital stack.
The Pinnacle transaction is the system working as designed. Joel Weiner and Flagstar right sized the debt through bankruptcy, saved on transfer taxes, and cleanly transferred title. Leo’s prediction: more of these are coming, and the Mamdani administration is actually accelerating the timeline to the bottom. Sentiment matters. The market is partly emotional, just like the S&P.
The Three Fears Around Bankruptcy
Fear #1: Personal Recourse. This is the real one. Many loans have personal guarantees. Before filing corporate bankruptcy, you need to honestly assess whether you can absorb the recourse trigger. If you can’t, that fear is legitimate. If it’s manageable, corporate bankruptcy starts to look a lot less scary.
Fear #2: Reputation. Going bankrupt in 2007 said something about you. Going bankrupt in 2025 says something about the market. Leo also raised something not enough people know about: state-level dissolution. You can dissolve an LLC under state statute and achieve many of the same outcomes as Chapter 11- orderly administration, priority of claims without the word “bankruptcy” attached to it.
Fear #3: Psychological. Leo has a cognitive psychology background and works with billionaires going through the pain of letting go. The ego that built the portfolio is often the same ego preventing the clean exit. The smartest people in this business are sometimes the most resistant to accepting their new reality.
When To Cut The Cancer Out
Leo’s framework is straightforward: if you’re truly upside down – debt greater than value with no realistic recovery path – that’s a cancer. Cut it out.
The dangerous move is playing both sides: fighting the foreclosure, keeping the rents, trying to buy back your own note. The courts don’t look favorably on it, and the meter is running. If you have one or two problem buildings and eight healthy ones, take your lumps on the two and right-size the rest. Don’t let the cancer spread.
When Leo takes on a distressed situation, he does three things first: sizes up the person (temperament, ego, agreeableness), sizes up the asset (what’s it actually worth under a fire sale number, not hope), and only then puts on the gloves. As he puts it, you’re not just buying legal expertise. You’re buying time and leverage to let the market find its footing.
The Bottom Line
The multifamily market is going through a reckoning. The owners who come out the other side will be the ones who faced their situation clearly, got the right counsel, and made the hard decisions early.
Common sense will eventually prevail. It always does.
Episode 61 of the New York City Multifamily Podcast is on Spotify, Apple Podcasts, and YouTube.
Enjoy The Episode!
-Seth
