Affordable housing: private equity solution to predatory equity.

Nearly 150,000 New Yorkers live in affordable rental buildings whose owners are likely to be foreclosed on over the next five years, bringing the threat of disrepair and decay of this valuable housing stock.

One of New York's most important assets--rent regulated housing which is a vital and irreplaceable resource to the City's workforce--must be protected from new threats. Creative approaches must be found and implemented to preserve appealing and safe affordable rental housing for future generations.

While national regulators and elected officials struggle to stem the rising rate of single family home foreclosures across the country, New York faces a different crisis: tens of thousands of rent regulated apartment buildings bought by real estate private equity firms that are now threatened by the consequences of the owners' overly aggressive financing.

Tenants will face hardships as services, amenities and maintenance are reduced to cut costs following investors' default and foreclosure.

As a result, private equity firms that bought affordable rental housing have come under fire from tenants and public officials concerned about the long-term survival of rent regulated housing in New York City.

But responsible private real estate investors today have a unique opportunity to provide leadership and play a major positive role in finding creative approaches to preserve affordable housing for working families.

Traditionally, small landlords owned the majority of apartment buildings with loans from local banks. Recently, large institutional investors have made substantial acquisitions of rent regulated apartments, including many above 96th Street in Manhattan, and in the outer boroughs. During the past four years nearly one tenth of the entire rent regulated housing stock in New York City was bought by institutional investors, which is the equivalent of housing for one-third of the population of Washington, D.C. or Boston.

This large-scale entry of private equity firms into the City's affordable rental housing market was made possible by the securitization of mortgages into commercial mortgage backed securities. In theory, combining loans should reduce risks through diversification. But securitization provided a false sense of confidence and encouraged even riskier lending. By 2007, loans to investors were being made on the basis of overly optimistic projections of future rent increases and presumptions of wholesale evictions and turnover of rent regulated tenants. That's when we started hearing the pejorative "predatory equity."

Unlike traditional loans from a single local banker, investors around the world with no relationship to the borrower buy securitized loans. The structure for these securitized loans is very complicated, involving multiple parties and complex tax rules. These factors inhibit the lender's ability and willingness to modify troubled loans, and instead favor foreclosure. As a result, nearly 150,000 New Yorkers live in affordable rental buildings whose owners are likely to be foreclosed on over the next five years, bringing the threat of disrepair and decay of this valuable housing stock.

To preserve affordable workforce housing we must get back to the basics of sound real estate investing. Financing must be predicated on conservative underwriting criteria and realistic rental growth projections.

Creative and innovative solutions will emerge as private sector investors work together with tenants and their advocates, elected officials and government agencies at all levels. In the 1970s, business and civic leaders, exemplified by Lew Rudin and Felix Rohatyn, cooperated with government officials to solve the city's fiscal crisis. Similarly, we are now seeing our current leaders devising solutions to today's problems that jeopardize the preservation of affordable rental housing. Senator Schumer, Mayor Bloomberg and Governor Paterson are showing creativity and commitment to solve our city's housing crisis, and the incoming Obama Presidential administration appears prepared to place a high priority on urban issues, including affordable housing.

The federal government's Troubled Asset Relief Program (TARP) could be used to preserve affordable rental housing. Federal lending with terms similar to the recent bank bailout should be explored to provide patient capital to permit the orderly sale of rent regulated buildings whose owners are facing foreclosure.

The pending sale of Starrett City--the country's largest government subsidized affordable housing development--shows what can be achieved when government and responsible real estate private equity investors collaborate to preserve affordable rental housing.

My firm, partnering with The Christian Cultural Center, the Housing Partnership Development Corporation and the Clarett Group, is a bidder for Starrett City. We are among the real estate investors in the City committed to work with tenants, community leaders, public officials and government agencies to seize opportunities to preserve affordable and safe housing for generations of New Yorkers to come.

BY DONALD P. COGSVILLE, FOUNDER & CEO, THE COGSVILLE GROUP