BRONX, N.Y.—Built a century ago, sold and sold again to speculators in the real estate boom, and foreclosed during the crash—five walk-up buildings on Kelly Street are on their way back up.
By the end of 2011, developers will close a $16.5 million deal to fix up these apartments and keep them affordable.
“We've generated some real momentum," says John Crotty, a partner with affordable housing developer Workforce Housing Advisors, one of the partners behind the Kelly Street rehab.
So far, Workforce Housing has taken possession of eight buildings, including the five on Kelly Street, and is negotiating to claim five more—for a total of 370 apartments.
But the problem is much larger. More than 100,000 apartments in New York City are at risk of foreclosure, all because speculators took out mortgages larger than the economic value of the properties based on income.
“Most will resolve as distressed properties,” says Harold Shultz, a housing researcher and senior fellow with the Citizens Housing and Preservation Council.
Affordable housing officials and developers are trying to keep these apartments affordable, but, even after the crash, they must bid against speculators to buy them.
“There is still crazy money out there," says Shultz. Speculators are often willing to pay more for distressed apartments than community developers, because the speculators often have no plans to perform significant renovations.
“On every deal, there is a cover bid, another bidder stalking away,” says Crotty. Often the other bidder is a schill representing the same speculator who lost the building to foreclosure. The owner, who many times would no longer be paying the mortgage, would continue to collect rent for months until the property was finally seized. That would add up to a substantial war chest for the previous owner to attempt the repurchase.
Encouraged by easy money during the finance boom, speculators aggressively bid for apartment buildings in New York City.
These buyers often overestimated the power of gentrification and underestimated the power of New York's rent stabilization laws, which effectively act as an eviction protection ordinance.
Speculators, or “predatory equity" buyers, targeted some huge, famous affordable housing properties, such as Starrett City, Stuyvesant Town, and Peter Cooper Village. But most of New York City's overleveraged properties are much smaller.
At the Kelly Street properties, there are just 79 apartments and two supers' units. Whole window bays had no glass, apartments lacked working plumbing, and one of the front doors had been sealed with concrete.
Legitimate residents still lived in roughly half the apartments, while squatters had taken over many of the rest.
The five buildings on Kelly Street had a mortgage on them with an unpaid balance of $5 million—about average for a foreclosed predatory equity property in the city. Workforce Housing paid $3.4 million.
The total development cost is expected to come to $16.5 million, or $208,860 per apartment. The development partners plan to pay for that with a mix of $9 million from the sale of 9 percent low-income housing tax credits to National Equity Fund, Inc., a $3.6 million first mortgage from JPMorgan Chase, and a $3.4 million second mortgage through the federal Neighborhood Stabilization Program.
Most of the renovated apartments will be reserved for residents earning less than 60 percent of the area median income, with a handful reserved for residents earning 50 percent or less.
A revived neighborhood nonprofit, Banana Kelly Community Improvement Association, Inc., partnered with Workforce Housing to save the Kelly Street property. In the 1970s, Banana Kelly renovated the same buildings, making them the centerpiece of its work in the neighborhood. But its former development partner eventually passed away, and the buildings were sold.
Now Banana Kelly is back as emergency manager, working to make the walk-ups habitable for the people who live there as the deal prepares to close.