The Q's been reading everything he can about the way high finance works when it comes to rapidly changing Brooklyn neighborhoods. Because for the life of me, I can't quite come to grips with the RATE of change. Not that neighborhoods don't change, and all over NYC we've witnessed the re-urbanization of the middle and upper classes for decades. A lot of us felt, many years ago, that the trajectory of prices in Lefferts would trend higher as folks decided it was a pleasant and less expensive alternative to others. (I'm primarily interested in rents in this post, though, because the value of townhouses seems the result of limited supply and pent up demand as much as regular ol' NYC price games. The tripling of prices in a decade is truly irrational without considering a psychological element, and massive propaganda. And clearly, a lot of people grew up on Sesame Street, and they want to live above Ernie and Bert. Probably a little more that, thank living under Spike Lee in Do the Right Thing.) Something is happening beneath our feet, not a conspiracy per se, but more a financial convergence, and it was killing me that I couldn't quite grasp it.
On a fact-finding mission, Thursday I met with Celia Weaver of the Urban Homesteading Assistance Bureau. UHAB may be a mouthful of a name, but a trusted resource since 1973 when it comes to keeping folks in their homes. They came of age in the era of "The Bronx is Burning," when thousands of City properties had been abandoned by landlords unable to unload them at any price. To stop the bleeding, an ingenious formula was devised to legally transfer buildings to the (often poor) tenants in the form of "limited equity coops." There are still lots of them around from those days, and proud homeowners they are, though some units have since transitioned into market rate buildings after certain terms were up and owners could reap the benefits of selling a home. The idea was an oldy but goody; give people a stake in their home and they'll do everything they can to improve the building, its block, its neighborhood. One could argue that it was the fearless generation that STAYED in NYC through its near-bankruptcy and subsequent drug wars that deserve the real kudos in the current renaissance, as many of the best blocks and buildings owe their allure to the conscientious prior gentry. Detroit is going through a similar defining moment right now - by investing in the various sorts of potential homeowners willing to give Detroit the old college try, the whole boat can gradually rise together. It happened here, it can happen there, though being a world capital of culture didn't hurt NYC. Oh, and Wall Street, though there was a time folks wondered whether Wall Street would just up and move to the 'burbs as well.
All well and good, I get it, you get it. But still, something more...
The idea that I learned and honed through my talk with Ms. Weaver is that the underlying speed with which things are moving is very much related to the rapid buying and selling of debt related to the big residential buildings all around us. Sure developers are building new stuff, like 626 Flatbush, and that garners a lot of the attention. But the biggest story here in Brooklyn, I would argue, is that Wall Street, and the biggest banks and real estate players, have made enormous bets on the upward trend. By doing so, they've warped the game considerably. I'll use one building, one realty holding company, and one set of personal stories to illustrate. However, in a spreadsheet sent to me by Celia, I was able to see dozens of big apartment buildings in southern Crown Heights and Lefferts Gardens that are going through the EXACT same scenario pretty much simultaneously. (I know some of you finance experts are saying "duh," but trust me when I say the vast majority of folks have no idea how any of this works. I'm writing to them, and you can feel free to gently correct me on the details.)
85 Clarkson Avenue is in many ways a run of the mill gorgeous multi-family, pre-war apartment building. It was purchased about a decade ago by Pinnacle Realty. Forget, just for the moment, that Pinnacle has a horrible reputation in this town for putting out longtime tenants by using unethical practices. Pinnacle made a bet on this neighborhood about then, sensing that the neighborhood had a big upside to ride. They bought the building at roughly what it was worth, a calculation based on current rent rolls and projected maintenance costs and typical rent increases. During the frenzy that came before the great crash of 2007-8, they were slowly but surely easing out old-timers at 85 and renting to fresh faces. Some claim they were specifically renting to young whites, though no one managed to prove it in court. In fact, just after they bought the building they fired the longtime super, Jose Diaz, a typical practice for Pinnacle. They wanted new blood and a new attitude. The super and the tenants were shocked. But frankly, 85 didn't really "take off" as they'd hoped, and they found themselves in a bit of a holding pattern. Had that mid-00s boom not burst, I suspect Pinnacle would have been where it is now in, oh, 2010. But it took a little while for them to sense that the time was right for the big transition. They got the greenlight a year or two ago, from the industry itself essentially, to go for it. Crown Heights North was cooking with gas, and CHS and PLG were on deck. And guess what they did, according to a friend that lives there? They fired the longtime super, again someone who was popular with tenants.
And this is where I would like to make a particularly devastating revelation very, very clear. I'm even putting it in bold, and I wish I had it on tape. Just before this most recent super was fired, he told my friend that the landlord has had enough, and that they were going to "stop renting to black people." Or perhaps more accurately, one would presume, certain KINDS of black people, when such a distinction can be made. One might imagine that Pinnacle would make exceptions for the right sorts of credit histories, demeanor or resume. Why not throw the book at them, you may ask? Well, if you don't do the undercover work, you're not going to be able to prove anything. Here's an example of building in the neighborhood where the AG DID an investigation, and they nailed landlord Yeshaya Wasserman for the crap I just described.
Then, a few days later, a good friend and block association colleague, and longtime resident of the block, told me that HER landlord was gonna stop renting to black people, and that in fact he'd been trying to do that for some time and found it hard to keep them for longer than a few months. Which, as I've come to learn, is not such a bad deal for a landlord looking towards a day when his building stops being regulated.
Then there are the numbers. What's amazing to note from the data I received was the remarkable amount of new debt that Pinnacle has taken on this year alone, throughout their portfolio of buildings. In many cases, they've added 25% or more to their mortgages. Why would a landlord do that? Well, for one, (like the joke about why a dog licks his balls) because he can. Plus, having more money to play with means you can go out and scrounge for more properties to buy and deals to make. An analogy might be the way a single family homeowner can go refinance and take out some cash and go to Vegas with a sure-fire plan to beat the house. On the upside, some of it is probably going to renovating apartments as they became vacant to attract a new clientele. Maybe a new roof, or a lobby paint job. Some of it can be used to "buy out" current tenants to make way for the more affluent ones behind them. In a nutshell, though, they're banking on a swift upward trend in rents, and they'll need to be aggressive to make that happen. A sharp downturn in the market and they could find themselves drenched in red ink, having to unload their properties quickly, to yet another investor interested in "distressed" properties, which is how many of these current big landlords described the properties when they bought them.
The other wild thing to note is that it's not just banks that are lending and buying and moving cash around. Big hedge fund types like Blackstone and Colony are gobbling up properties too, sometimes even single family homes that they can rent while they accrue value. All these lenders are also involved in...and here's the head-scratcher...the exact same forms of mortgage-backed securities that got us in the last mess a mere six years ago. Bundling. Tranches. The whole nine. With commercial buildings it's a little different than single family homes, but not much. Leverage. Making fast bucks and passing off questionable loans into packages to be sold to investors. (We can only hope Uncle Sam has learned a lesson and won't buy up a lot of these questionable loans and leave you and me on the hook.) Depending on your perspective it's "adding liquidity to the market" or "Ponzi with an MBA."
Stepping back from the mumbo jumbo for a minute, what I'm really saying is that when Big Money discovers you, the jig is up, or perhaps more accurately the jig is rigged. The sad part is that this is what Rent Stabilization was meant to protect tenants from - the vagaries and the greed inherent in the markets. Were we talking about other goods or services, maybe a case could be made that such profit motives worked to everyone's advantage - say, the tech industry. But we're talking about people's homes here. Remember the three basics? Food, clothing, shelter. I'd add clean water and health care to the list. And maybe coffee. But honestly, have we really sunk so low that Commercial Mortgage Backed Securities (CMBS) are more important than a family's two bedroom home sweet home? We're not talking about gilded mansions here, or "summer" homes. The vast majority of residents are either seniors, children or working people, not spongers, as those on the right might want you to believe. (We know better; we live here. Real people are all around us, not caricatures.) The irony of course is that so many of the working people living in these rent stabilized apartments are in the business of servicing wealthier people's "needs" for upscale food, clothing, shelter and, particularly around here, health care. And some are in the business of servicing the whole city's needs for sanitation and teaching and nannying and plumbing and housecleaning and yes, of course, everything else under the sun. But my main point is that what we're really talking about here is honest, decent folk. You could stereotype a building's people by the nastiest of its tenants, but that would buy into a narrative that simply isn't true. Suggesting that wholesale change in a building is GOOD for the neighborhood is like throwing out the babies with the bathwater, and I don't know about you but I LIKE babies.
Organizations like Flatbush Tenants Coalition and the recently mobilized Crown Heights Tenants Union, with assistance from UHAB and PACC (Pratt Area Community Council) and others, are becoming much more assertive in arguing for a more just and humane response to Brooklyn's surge in popularity among affluent renters. In the case of the CH Tenants Union, you're seeing a crucial alliance developing between longtime residents and younger newer tenants fighting to keep their apartments during management companies' efforts to bring rents up to support underlying debt. For many landlords, the young middle class renter who can afford a $1500 or $2000 apartment, often as a share, can help accelerate the desirability of the neighborhood. Better yet, many of these renters don't stay long, giving landlords another opportunity to legally add significant dollars to the baseline rent stabilized rate. Remember, once the apartment is out of stabilization it's out for good. So the race is on...get out of RS before Albany acts to up the $2,500 limit or de Blasio gets creative preserving affordable housing through...oh I don't know, I'm not the housing expert. Something creative.
So how does the Crown Heights Tenants Union go about creating these alliances? The old fashioned way...going out to the buildings that are identified as over-leveraged and putting up flyers and meeting in lobbies and educating tenants of their rights and the need for solidarity. Come join them on the 17th for their next meeting. Each building must create a solid tenants association to work with the landlord. The Tenants Union is getting tons of press, and its numbers are growing daily. Housing advocates are watching closely to see if this new alliance has legs. If you're interested in helping see that your building owner plays by the rules, and you're interested in being part of a movement for housing justice, by all means contact the Union or the Coalition via their websites. Or contact the Prospect Lefferts Gardens Neighborhood Association, which is becoming more active on the issue. Or me, and I'll rout you to the best contact at any or all of the above.
Lastly, you may be wondering which buildings Pinnacle now controls. List below. But remember, it's just one of a few powerful companies that owns a big portfolio around here. Most of these are located within spitting distance of Lefferts, but a few are right here and with all this new money flowing in, I suspect we'll see more purchases in the next year or two. I'll be seeking out more lists like this to see what buildings are ready to pop.
PINNACLE'S AREA HOLDINGS:
ADDRESS...UNITS...VIOLATIONS...NEW DEBT IN 2014
|1171 President Street||39||91|
|382 Eastern Parkway||46||88||$1,004,916|
|225 Parkside Avenue||126||64||$4,568,762|
|991 Carroll Street||69||54||$2,001,751|
|681 Ocean Avenue||60||37||1,897,549|
|1554 Ocean Avenue||71||35||$2,059,413|
|176 Clarkson Avenue||91||31||$2,462,088|
|3301 Farragut Road||42||30|
|489 Eastern Parkway||16||27||$1,689,595|
|481 Eastern Parkway||17||17||*|
|497 Eastern Parkway||16||9||*|
|40 Argyle Road||49||22||$2,392,567|
|28 Argyle Road||31||0||*|
|307 12th Street||25||22|
|1535 Ocean Avenue||45||20|
|1362 Ocean Avenue||48||20||$1,257,626|
|619 Rugby Road||16||19||$1,108,140|
|615 Rugby Road||16||12||*|
|607 Rugby Road||16||17||*|
|292 St Johns Place||16||16||$417,896|
|926 Carroll Street||58||16||$1,639,744|
|916 Carroll Street||58||15||$2,138,344|
|85 Clarkson Avenue||71||10||$2,047,472|
|529 East 22nd Street||48||8||$1,744,916|
|601 Crown Street||27||3||$552,047|
|426 East 22nd Street||64||67||$1,866,203|
|222 Lenox Road||158||44||$3,535,660|
|176 Clarkson Ave||91||4||$2,462,088|