Linda Kemp remembers when the hallway floors at Robert Fulton Terrace were waxed regularly, when tulips, not weeds, bloomed in the garden, and when mold wasn't growing in the bathrooms of apartments in the 18-story complex that once was the envy of the Morrisania section of the Bronx. “We were always considered the Building on the Hill,” says the 51-year-old president of the tenant council, who has lived in Robert Fulton since she was 8. “It was a place to live with pride.”
That was before April 2007, when New York real estate investor Mark Karasick spent $44 million to acquire the building and its sister property two miles north, Fordham Towers. Tenant leaders suspected that Mr. Karasick, whose deals are often seeded by San Francisco-based private equity vehicle SFF Realty Fund, had grossly overpaid for his prize and that income from the two buildings' 490 rent-regulated units would not come close to covering expenses.
Canada-based bank CIBC lent Mr. Karasick $36.5 million for the deal in 2007 and recently insisted the purchase price was “well justified,” even though a securities filing shows the mortgage approval was based on a monthly operating cost of $301 per unit, less than half of what the former owners spent. In a letter to Bronx Rep. Jose Serrano last October, the bank's general counsel called tenant concerns “unwarranted.” But cuts in service—maintenance staff was slashed from nine to three—had immediately followed the sale. Then, this past May, the tenants' prediction came true: Robert Fulton and Fordham Towers fell into foreclosure.
Now, hundreds of other rent-regulated buildings in New York City purchased at the height of the real estate boom may end up in similar distress. Optimistic underwriting enabled investors, often backed by private equity, to snap up rental buildings at bloated prices in highly leveraged deals. In many cases, the new landlords had unrealistic expectations for raising rents, and now some 70,000 units are in jeopardy. That's left government officials seeking ways to stem what some are calling the greatest threat to the city's neighborhoods since the widespread landlord abandonments of the '70s.