Investors Move Quietly in East New York Amid de Blasio’s Housing Construction

Last year, in making the case for the rezoning of East New York, the Department of City Planning tried to allay fears of gentrification by arguing that, thanks to the area’s weak market, the neighborhood would likely not see any market-rate development for the near term.

Instead, conditions would be such that developers would use the city’s subsidy programs to build affordable housing. As a result, the administration predicted that, together with the affordable housing to be built on public land, something like half the units produced as a result of the rezoning would be affordable, or 2,300 units.

Fifteen months since City Council approved the rezoning, the three major developments in the pipeline for the East New York rezoned area are, as predicted, affordable housing. There are, however, a few sites where property owners have indicated an intention to develop, and some of these owners told City Limits they are considering the feasibility of market-rate buildings (with a rent restricted component as required under the city’s new mandatory inclusionary housing policy).

Only time will tell how fast the market does heat up, but community advocates are still worried it will heat up too quickly, resulting in an influx of market-rate apartments rather than affordable housing. What concerns them, in the meantime, are problems with existing buildings: homeowner and tenant harassment, rising rents, and investors using rehabs and marketing to drive up home prices.

How much these trends have been exacerbated by the rezoning, and how much they are due to pre-existing market forces, is of course a matter of continued debate.

City-sponsored development makes progress

Atlantic Avenue is soon to see an influx of large, city-funded, and rent-restricted apartment buildings.

According to the city’s June 2017 Progress Report on the rezoning, the city is reviewing developer applications for a large city-owned site on Atlantic Avenue as well as for many small sites in the area, altogether expected to yield more than 300 units. The city will also soon begin seeking developers for a public site in Brownsville that may hold an additional 100 units.

The non-profit affordable housing builder Phipps recently released a rendering for the first building of a 900-unit project in the area that will also receive city subsidies.

The city is also exploring the feasibility of developing the Grant Avenue municipal parking lot, but notes that there are “formidable engineering constraints” due to the proximity of the underground A line.

Earlier this month, the Real Deal broke the news of another affordable housing project, the first project announced since the rezoning passed last year: Alan Bell of B&B Urban, a prominent affordable housing developer focused mainly in the Bronx, will be constructing 100 units of rent-restricted housing on Atlantic Avenue and Linwood Street, with 30 percent of the apartments reserved for formerly homeless New Yorkers.

Through the year 2024, the Department of Housing Preservation and Development (HPD) is requiring that all developers using city subsidies to build affordable housing in East New York set rents according to specific termsheets. That means in the case of Bell’s building, the other 70 percent of apartments will be required to serve households making $51,540 or less for a family of three.

The progress report says that in Community District 5 as a whole, an additional 752 units of new affordable housing have been constructed and 324 units have been preserved since the rezoning, with nearly 40 percent of those units serving households making less than $42,950 for a family of three. A City Limits mapping of these addresses found that most, if not all, of the units are actually to the south of the rezoning area, though some are located very nearby.

Other owners are pondering

Phipps and B&B Urban are not the only ones contemplating the potential for development on the area’s upzoned avenues.

While there are no large market-rate buildings known to be on the rise, the local non-profit affordable housing developer Cypress Hills Local Development Corporation has already been out-bid on a couple land deals. Director Michelle Neugebauer says it’s unlikely those higher bidders could support their projects with affordable housing. It’s unclear whether the sales have gone through.

In addition, just prior to the passage of the rezoning, Essex Realty NY Inc. bought a commercial warehouse at 3038 Atlantic Avenue for $3.4 million. The property owner has now retained One Commercial Realty to sell the warehouse for $6.2 million. An ad for the property notes it’s located in the “newly rezoned area of East New York” and that East New York’s new Gateway mall has “helped gentrify the area.”

David Chase, president of One Commercial Realty, says that while they’ve just begun advertising the property, so far they’ve received interest from buyers interested in keeping it a commercial warehouse. That said, he thought it was within the realm of possibility that, depending on negotiations, the property could become one of the first “75/25” buildings in the rezoning area—market rate with the mandated 25 percent affordable component.

“The city is putting in investment,” Chase says, noting that the administration is repaving Atlantic Avenue in conjunction with the rezoning. “I think the area is improving and I think the area has the potential to have working people.”

(Other owners and brokers made similar comments about the neighborhood’s demographics. East New Yorkers might be lower-income than others, but they certainly do work: the unemployment rate is actually lower than the citywide rate.)

Then there’s Shahriar Davaran of Elyon Bapaz Inc., who bought a two-story building at 2746 Fulton Street in 2014, demolished it, and filed plans for a four-story mixed-use building. After the rezoning, Davaran applied for a new permit to build a six-story mixed-use building, according to building records. He could not be reached for comment.

At 504 Liberty Avenue, property owner Harrylal Ramnath is trying to decide what to do with the vacant plot of land he bought in 2015 before knowing about the rezoning, he says. Originally he filed for a new building permit to build a masonry, but now he’s also contemplating a six-story residential building with a commercial ground floor.

Further east at 735 Liberty Avenue, Dani Mizrahi plans to demolish a building and replace it with a four-story, 10-unit apartment building; he also hopes to build some additional floors on the building next door to make a second four-story, 10-unit apartment building. Existing residential tenants are leaving soon, he said.

He invested in these properties in 2015, he says, because he understood East New York is “the most upcoming neighborhood in the whole five boroughs…It’s completely changing; with the whole rezoning…it will be all big buildings and stuff with stores and restaurants.”

In the new building, Mizrachi says that he’ll likely make 30 percent of the units rent-restricted and 70 percent market rate—a good deal for him, he explains, because since market-rate rents are still moderate in this area, the affordable and the market rate units will for the time being be priced at similar rates. (In East New York, however, developers are not allowed to use affordability “Option 2,” in which 30 percent of the units must be set at rents affordable to families of three making $68,720. Developers in East New York only have to rent at least 25 percent of the units at restricted rates, but the rents of those units must be lower, affordable to families making $51,540 and less, which are typically below East New York’s market rents.)

As for concern that people like him are driving the gentrification of the neighborhood? The way he sees it, the more developers build, the more likely prices will stay down because supply is keeping up with demand.

There may be other property owners along the avenues who are plotting development. One owner, however, isn’t taking the risk of rebuilding in East New York’s current market; instead, Yehuda Zargova of Elite Properties NYC is planning a more assured route to revenue.

Last year he bought a three-story building at 2129 Pitkin Avenue for about $350,000 from the Structured Asset Investment Loan Trust, according to property records. It had earlier belonged to a long-time homeowner who lost the home to foreclosure.

Although Zargova could knock it down and build a seven-story building, instead he evicted the tenants and is renovating in the hopes of bringing higher-paying ones.

“Working people are moving in; non-working, squatter-type are slowly moving out,” he says of the neighborhood.

From foreclosure to flipping

The story of 2129 Pitkin Avenue is a frequent one heard in the neighborhood and particularly on the residential side-streets. These blocks were not upzoned—in fact, many were “contextually rezoned,” or given a zoning to protect their existing character. In this case, the city’s rezoning gave side-streets a very small boost in the amount of residential floor area permitted, but also reduced the permitted height of the buildings.

It is small homes, which are typically located on side-streets, that have made up the bulk of sales activity for the past few years. A combination of prior disinvestment and sudden, rapid investment is making shelter increasingly unaffordable to low-income tenants and would-be homeowners.

East New York was one of New York City’s worst hit neighborhoods during the foreclosure crisis. Many homeowners either lost their buildings to a bank during the recession, or fell behind on a mortgage payment and sought relief from a private buyer. A data analysis by the Center for NYC Neighborhoods found from 2014 to 2016, 73 percent of all East New York homes that were flipped—bought and sold again within a 12-month period—originally belonged to a homeowner in foreclosure. In 2015, East New York lead the city in the number of homes flipped; in 2016 East New York came second.

Many of those investor-bought homes are now are being resold for prices higher than what lower-income families can afford. In 2015, Cypress Hills had the highest median gross return from flips of any neighborhood in the city.

A study by researcher Lucy Block, an Association for Housing and Neighborhood Development fellow, found that sales prices have increased in the neighborhoods of East New York and Cypress Hills at faster rates than in Brooklyn as a whole. In the two years between the rezoning’s announcement and its approval, small homes sold for on average $34.71 a square foot more than the two years prior to the announcement. And in the one year following the approval of the rezoning, the average sales prices grew by another $40.25 per square foot.

And it’s not only that prices have increased; it’s also that the credit market has become more constrained. According to a data analysis by the Center for NYC Neighborhoods, there’s been a decrease over time in the number of mortgages for East New York homes provided to lower and moderate-income families, which could mean both that lower-income New York families are having a harder time accessing financing to buy homes, and that slightly better-off New York families are flocking to East New York as a last oasis for affordable homeownership.

Advocates say it’s common for an investor to do very little work on a building, but rather to use marketing language to drive up the price of a property. On the other hand, the Motek Group LLC has done substantial renovations, according to the realtor and the building’s impressed neighbors, at their property on Ridgewood Avenue. The two-story house was sold by a local homeowner in January to the Motek Group LLC for $134,000—more than $150,000 less than what the homeowner had paid for it for fourteen years ago, though it was unclear why. The building is now on the market for almost $700,000 and advertised by the Hartland Group on Zillow as a “fully gutted”, “high-end designer renovated home” in the “upcoming neighborhood of Cypress Hills.”

“No one should be upset because this will only bring a huge plus to the neighborhood because they made this house beautiful and there was a lot put into this home,” says Hartland Group realtor Elana Magreli, who adds that the final selling price of the home will be based on appraisals solicited by the buyer, not just the owner’s asking price.

There were no renovation permits, however, filed with the Department of Buildings. The owner could not be reached for comment.

Fate of properties yet unknown

At another property just south of the rezoning area, tenants and their advocates are actively fighting to prevent a foreclosed building from ending up in the hands of a profit-oriented investor. The building will soon be auctioned by the city to the highest bidder, and Urban Homesteading Assistance Board organizer Jorgy Fletcha is concerned that given the zoning changes in the neighborhood, that auction might attract another neglectful owner only interested in higher rents. UHAB is planning on bidding on the building, but Fletcha says there’s a possibility they could be outbid. The organization and others have long advocated for new policies that would change what kinds of foreclosed properties the city auctions.

Of course, not all East New York’s smalltime property owners have been dispossessed by the mortgage crisis or have already sold to investors. Much of what happens to the neighborhood in the months to come could depend on the decisions those owners make, and the options available to them.

Take the Machado family, which acquired a vacant lot on Shepherd Avenue many decades ago for cheap, and has been using it to park vehicles. Hearing rumors that rents in the neighborhood were going up, the family envisioned developing the lot with a small building with a three to four-unit apartment building. According to building records, the family applied for a new building permit in March.

“That application? We’re not going through it,” said Christian Machado when City Limits inquired about the permit. “We’ve got to get the money together.”