NYC Multifamily Q4: The Changing Relationship Between Banks & Borrowers & Government
BY SETH GLASSER
What do you call a rent stabilized property manager in New York City? The hardest working government employee without a pension!
In this article I’ll go over how New York multifamily investors are navigating challenges presented to them by lenders, the federal government, and local bureaucracies.
Landlords have been tasked with doing the governments job for them. We live in a city with privatized housing, yet owners are not allowed to raise the rent on almost 30% of our housing stock. Of the three and a half million apartments in New York, one million are rent stabilized. If they aren’t allowed to raise the rent and profit from their investment (or at least breakeven) why should they be tasked with the day-to-day management? After all, their designated business partner, the government, takes 25% of the profit! (a typical tax bill is 25% of the gross income [not collected income]). Operating 100-year-old overregulated apartment buildings is a type of torture only a very skilled, gritty New Yorker can handle. One of my favorite clients who is my own personal comedian and part time therapist, describes it as “hell on earth.”
In the immediate aftermath of HSPTA and the early stages of COVID, property values and collections fell. To prevent defaults from loyal clients, banks were giving out favors like loan modifications and extensions. But interest rates have risen violently in the past few months and values have continued to fall. With that in mind, I think it’s only fair to change our perspective on this matter- the landlords are now the ones doing the banks the favor because they’re running the building for them! If you offered banks the keys to the buildings, I don’t think many would take them and here’s why: Banks have zero interest in being in the management business; they don’t want to sell notes at a discount; they don’t want to go through an 18-month foreclosure; they don’t want to be subject to negative PR or be exposed to government regulators assigned to them in the aftermath of the 2008 Great Recession.
Low Volume Bank Note Sales
Wouldn’t this mean that banks are trying to sell notes left and right? The current environment reminds me of 2009 where there was a lower-than-expected volume of loan sales and here’s why:
Reason One: Multifamily values are down significantly and seem to be falling every time Jerome Powell speaks, so buyers are having a hard time pricing deals especially if they aren’t buying the fee.
Reason Two: Business Plan A is buying the note at a discount and then working out a deal with the borrower and a new bank to refinance them out quickly, so their capital is in and out as quickly as possible – maximum IRR.
Reason Three: Business Plan B is to foreclose on the property, but this has a litany of problems attached to it. The first problem is that you could get married and have a couple of kids by the time the foreclosure proceeding was complete. The second problem is as the note owner you don’t really know what you’re buying. What I mean by that is the value of the real estate is attached not only the bricks but the paperwork the borrower keeps in their linen closet that the note owner doesn’t have access to. Learn more about what I mean by reading this previous article. This is why there is usually such a significant spread between the bid and the ask on the note. If someone bought a note on an apartment building that was underwater the borrower could go scorched earth and threaten to burn all the paperwork unless a favorable deal was worked out – when a person is backed into a corner you never know what they’ll do as animal instincts kick in – fight or flight.
As rates rise and values fall, especially on stabilized buildings, it will be interesting to see how the lending community responds with the assets they have on their books. When they lent on the asset, they put up 75% of the cash but now that values are down, they are the ones with almost 100% of the equity and the borrowers have none.
Rebound in 2023
Banks are in the business of making loans so they will continue to do that but with such an active first half of the year I would anticipate many lenders having already met their quotas for the year. It’s likely that they take a passive approach in the fourth quarter selectively choosing their borrower, deal, proceeds, and terms. This will result in less favorable lending terms than normal and therefore a much lower velocity to finish 2022 which we predict will have a rubber band effect for early-mid 2023 when velocity will have no choice but to rebound significantly.
Senior Vice President of Investments
Marcus & Millichap / NYM Group
facebook LinkedIn Instagram Twitter