May 14 (Bloomberg) -- Elevators break down, ceilings leak and security is lax at the Metro North apartments overlooking the East River in Harlem, says retired rehabilitation technician Bob Montesi, who’s lived there for more than three decades.
Even as deterioration accelerates at the 761-unit complex, which used to be in a state affordable-housing program, some tenants are facing rent increases of as much as 80 percent.
For Montesi, 74, who worked at a New York City-run hospital for 41 years, the changes are especially galling. One of the owners of the building is his pension fund.
In 2007, at the height of the real estate boom, four of New York’s five pension funds provided equity for the $938 million purchase of Metro North and four other apartment complexes built in the 1970s for middle-income residents. The deal was financed with an $800 million Fannie Mae mortgage, which tenant activists say could be met only by raising rents and cutting maintenance.
“When the deal went down, we felt the city sold us out,” said Montesi, who led a group that helped develop Metro North.
New York Mayor Bill de Blasio, a self-described progressive Democrat, wants to use the city’s $148 billion pension funds to help create and preserve 200,000 units of affordable housing. It was one of the campaign planks that swept him into office last year by the biggest margin for a non-incumbent in city history. Housing activists say a good place for the mayor to start is Metro North and the other buildings in the 4,000-unit Putnam portfolio.
Owners Urban American Management, a New Jersey-based property manager of 10,000 units in the New York area, and City Investment Fund LP, a partnership funded by city and state pensions, have hired a financial adviser to seek fresh capital, according to an offering statement. That would allow the public pensions to sell their stake.
Instead of walking away from hundreds of current and former city employees who live in the buildings, tenant advocates say they want de Blasio and Comptroller Scott Stringer to use their leverage to preserve low- and moderate-income housing there. The city could allocate subsidy money or tax breaks to keep the properties affordable, the advocates say.
“We don’t really see it as a good solution if they get paid off and the buildings get flipped again,” said Kerri White, director of organizing and policy at the nonprofit Urban Homesteading Assistance Board. “Let’s look at a way that the pension funds can be used for preservation, which the administration is claiming they want to do anyway.”
Last week, declaring a “crisis of affordability,” de Blasio, 53, released a $41 billion plan to reach his housing goal by increasing rent protections for the poor and requiring developers to set aside affordable housing in newly zoned areas.
In New York, only 425,000 units have rents suitable for the 1 million households who earn less than 50 percent of the city’s median income, or just under $42,000 for a family of four, according to de Blasio.
As part of his plan, de Blasio wants the city’s pension funds to allocate $1 billion to offer mortgages, guarantee tax- exempt bonds for nonprofit developers and fund construction loans to rehabilitate small buildings.
Two city housing agencies are in discussions with Urban American to find ways to keep tenants who earn too much to be eligible for federal housing vouchers to stay in their apartments, said Wiley Norvell, a spokesman for de Blasio.
“Preserving existing affordable units is a major priority for the administration,” Norvell said in an e-mail.
Eric Sumberg, a spokesman for Stringer, declined to discuss the city’s role in the Putnam portfolio, saying its pensions weren’t a majority investor.
“As a limited partner, it is inappropriate to comment on an ongoing transaction,” Sumberg said. “Comptroller Stringer remains concerned and actively engaged in finding ways to alleviate and expand access to affordable housing across New York City.”
Callie Dosberg, a spokeswoman for Fannie Mae, the mortgage financier under U.S. conservatorship, declined to comment.
New York’s pensions for police officers, firefighters, teachers and civil employees have invested $440 million in the City Investment Fund, which was set up in 2004 by New York-based Fisher Brothers Realty Corp. and investment bank Morgan Stanley to buy commercial and residential real estate in the five boroughs. New York state’s Common Retirement System also invested in the $770 million fund.
The City Investment Fund wasn’t formed to invest in affordable housing. In addition to the Putnam portfolio, it bought a Crowne Plaza hotel in Times Square and an office tower on Fifth Avenue.
The city pensions have a separate program to spur development of low- and moderate-income residences. The program, which offers fixed-rate mortgages insured against default, has financed the preservation or construction of more than 30,000 units.
The City Investment Fund returned 2.3 percent as of June 30, putting it the bottom half of 18 comparable real estate funds formed in 2004, according to data compiled by Bloomberg.
Between 2002 and 2008, U.S. public pensions poured billions of taxpayer and worker dollars into private real estate funds as global investors bet that property values would keep rising. State and local retirement systems more than doubled their direct ownership of property to $111 billion, according to U.S. Census Bureau figures.
Many deals collapsed, most notably the $5.4 billion purchase of Stuyvesant Town and Peter Cooper Village, Manhattan’s largest apartment complex, in 2006. California’s Public Employees’ Retirement System and Florida’s pension lost $500 million and $250 million, respectively.
In New York, some of the buildings purchased by investors during the boom were properties eligible to opt out of a state affordable-housing program called Mitchell-Lama. Named after two state legislators, the program provided low-cost financing and tax abatements to developers of housing for the middle class. In exchange, they received a guaranteed return.
Landlords could take buildings out of the program, usually after 20 years, by prepaying mortgages. If the building was developed after 1974, the owners could raise rents to market rates on vacated units.
The five buildings in the Putnam portfolio were removed from the Mitchell-Lama program in 2005 by real estate investor Cammeby’s International, which purchased the buildings for about $300 million, a third of price Urban American and the City Investment Fund paid two years later.
When the buildings were taken out of the Mitchell-Lama, eligible tenants received federally subsidized Section 8 vouchers to make up the difference between the rent they had been paying and the market rate. A small percentage of renters who weren’t eligible for the vouchers struck deals with Cammeby’s to limit rent increases. Extensions provided by Urban American are expiring.
The percentage of tenants receiving a rental subsidy declined to about 50 percent at the Putnam portfolio since the buildings were taken out of the state’s Mitchell-Lama program, according to White, the housing activist.
Another residential complex in the portfolio is Schomburg Plaza, two 35-story buildings with 600 units at the northeast corner of Central Park. Some tenants are withholding rent to protest Urban American’s failure to fix defective windows and poor insulation.
West New York, New Jersey-based Urban American has met repeatedly with residents to respond to their concerns, said spokesman Joe DePlasco.
“These buildings were in terrible shape when they were purchased, and improvements are ongoing at each of them,” he said. Urban American has never missed a debt payment, he said.
The company has invested more than $70 million to renovate market and subsidized units, and improve common spaces, landscaping, security, heating and energy efficiency, said DePlasco.
More than 400 tenants receiving government rent subsidies are living in renovated apartments, he said.
In 2008, responding to criticism, former Comptroller William C. Thompson, who oversaw the pensions when they invested in the City Investment Fund, the boards of the five funds adopted a policy under which they could decline investments in properties that might reduce the stock of affordable housing.
That policy doesn’t help Jackie Peters, a teacher, who lives at Metro North. Peters received a notice this month saying her rent would increase by $585 a month, or 25 percent. She has until May 31 to decide whether to renew her lease or move out.
“My pension fund made this unaffordable for me,” Peters said. “Is the city able to keep the workers in the city? That’s not what’s important to people who are just thinking about money.”