What’s the business strategy behind buying rent-stabilized buildings destined to lose money?
That question has been hanging over the industry since the legislature capped their rents (but not expenses) in 2019. Even as operating costs exceed rent collection in more and more buildings, rendering them insolvent, some still find buyers.
My colleague Lilah Burke wrote about several purchasers of large rent-stabilized portfolios who claim the deals make sense as a long-term play, at least at the discounted prices they paid. But one major landlord told me the buyers in that piece were, in his view, inexperienced in the asset class and were underestimating the challenges. He predicted that they were in for a reckoning.
Meanwhile, smaller sales at even lower prices — below $30,000 per unit — are passing under the radar. It’s hard to see a rationale for these acquisitions, given the state legislature’s reluctance to change the rent law and the Supreme Court’s repeated refusal to even hear a legal challenge to it. Mayor Zohran Mamdani’s promised rent freeze is just another nail in the coffin.
“Last milking”
The prevailing theory seems to be that for a period of time, a buyer can extract profits by spending little or nothing on maintenance, then default on the mortgage (if there is one), ignore the property tax bills and walk away.
As Jamie LeFrak, vice chairman of his family’s eponymous real estate company, explained on social media, “At the end of the building’s normal financial life there are peculiar small buyer/owners who are able to own these buildings with little regard to taxes, laws and regulations. They can perform a ‘last milking’ with minimum operating cost while the ‘in rem’ process plods along.”
LeFrak, whose family ranks among the city’s largest landlords, added, “We all know there are a handful of bad guys who buy these at the end of the line and then disappear to a faraway country.”
He called them “rough and dirty operators who are judgment-proof and able to endure tax foreclosure. That’s who buys these buildings for $30,000 per door when they’re past the point of no return.”
LeFrak defined “the end of the building’s normal financial life” as when operating costs (before capital expenditures and debt service) exceed revenue, and no amount of capital reinvestment can make it profitable.
The 2019 Housing Stability and Tenant Protection Act drastically accelerated this process for thousands of buildings. “Having your building become worthless through dictatorship-type laws is not normal,” one rent-stabilized landlord commented.
Most lenders will not provide a mortgage to a building nearing that point, but some buyers might be getting in at such a low basis that they can simply use cash.
“The building has to be just cheap enough that it doesn’t require financing,” one commenter posted on X.
The Mamdani administration is promising to crack down on landlords who neglect or abandon their buildings, leaving tenants to suffer. It will be fascinating to see how that plays out in hopeless buildings where abandonment was the strategy from the outset — a consequence of a rent law that ended their “normal financial life” in just a few years.
The mayor will portray these owners as morally bankrupt. Perhaps they are, but when the government drives buildings into bankruptcy, those are the only investors who buy them.
Read more
The slow bloodletting of NYC real estate
Who’s still buying rent-stabilized buildings?
New twist in saga of “unfixable” East Village SRO
