Opinion: What the Workout of the Signature Bank Loans Can Teach About Preserving Affordable Housing

“Will the Signature buildings be viewed as a one-off, or the tip of an iceberg of a more endemic problem?”

The privately owned rent regulated housing stock is arguably the largest source of affordable housing in the city. Its preservation should be a central feature of the city’s housing policy. Yet, it often falls prey to adverse legislation that does not balance the need to physically and financially maintain this housing, while keeping it affordable.

The Housing Stability and Tenant Protection Act of 2019 sought to strengthen tenant protections by eliminating the ability to decontrol rent stabilized apartments and tightening allowable rent increases relating to vacancies and apartment and building renovations. These changes had dramatic effects on both ends of the rent stabilized market.

At the high end of the market, the 2019 law undermined the financial assumptions of some lenders and owners, who expected decontrolled rents to be raised to market to support their investments. This contributed to the fall of Signature Bank and to recent problems of New York Community Bank: both had large portfolios of loans secured by rent stabilized apartments. It also resulted in high profile properties being sold at large losses. 

What hasn’t received as much attention is how the rent restrictions created an ever-tightening tourniquet on the cash flows of the most vulnerable segment of this housing—the vast majority of apartments, many built before 1974, located in low and moderate-income communities. Long established programs that could provide a safety net for this housing have diminished and became more difficult to use. 

Here are some basic metrics of this housing, as reported by the 2021 Housing Vacancy Survey,  that should be considered to keep this stock both healthy and affordable: 

• There are almost 1 million privately owned, predominantly for-profit, rent stabilized units in New York City
• 760,000 of these apartments were built before 1974 
• The median household income of the pre-1974 apartments is about $47,000 per year 
• Over 1.5 million people living in households earning 80 percent or less of the area median income reside in all rent stabilized housing

The pre-1974 buildings, many of them small (less than 50 units), are heavily concentrated in low-income neighborhoods and most reliant on revenue from rent stabilized units. These buildings need continual access to capital to repair and replace their aging systems. Post 2019, the only viable way to support new investment is to seek rent increases through the major capital improvement (MCI) provisions in the rent stabilization regulations. The irony is that the buildings most likely in need of improvements have tenants least able to afford such increases. 

These same low-income buildings are disproportionately affected by the inflation of operating costs, like insurance, and by higher interest rates as mortgage loans come due—currently increasing from 3-4 percent to 7-8 percent. The cumulative effects will leave less money for maintenance and an inability to borrow funds for capital improvements, resulting in worsening living conditions for residents. These conditions are leading to the slow but accelerating deterioration of rent stabilized apartment buildings in low and moderate-income areas. 

How might this be averted?

The Federal Deposit Insurance Corporation’s (FDIC) takeover of Signature Bank, with its statutory requirement to preserve affordable housing, can provide a window to the cost and approach to preserve this critical housing. To fulfill that requirement, the FDIC has entered into a joint venture with a partnership of Related Fund Management, the Community Preservation Corporation (CPC), and Neighborhood Restore, collectively named Community Stabilization Partners (CSP), to work out 868 mortgage loans totaling $5.6 billion secured by 35,000 apartments (an average of 40 units a building). The Community Preservation Corporation, with its 50-year history of preserving affordable housing, reportedly will handle the management and servicing of the assets.  

CPC’s history of preserving affordable housing centered on balancing three objectives: restoring a building’s physical soundness, restructuring its economics to achieve long-term financial stability, and maintaining affordability for its residents. Whether the resources available to the workout team will enable it to meet these same objectives, should be closely watched as a barometer for fixing other troubled rent regulated apartment buildings.

CPC has historically approached preservation in the following way. First, CPC would work with the owner to define a scope of work that could restore a building’s physical integrity. The scope would focus upon the building’s mechanical systems, its exterior envelope, and other health and safety measures. Difficult judgements had to be made between work to be done immediately, and work done over time and paid by the building’s cash flow. 

Second, regulated rents could be increased through MCIs to pay for renovations (eligible seniors are exempted), but for older lower income buildings, renovations—even moderate in scope—would require increases likely to be unaffordable to many tenants. To keep rents affordable, two city programs had been used, plus, if available, federal rent subsidies. The first city subsidy was an as-of-right program, known as J-51, that could reduce real estate taxes for up to 20 years to off-set the costs for eligible renovation work. Second, for more extensive renovations, the city could provide long-term, secondary loans with interest rates as low as 1 percent.

Using these subsidies, often in combination, a calculation was made as to how much subsidy was needed, combined with market rate debt, and/or owner investment to complete the renovation and refinance the existing debt while generating sufficient cash to pay for the building’s ongoing operations, together with a reasonable profit to the owner. Long-term financial viability assumed that the rent regulatory system would reasonably pass along inflationary operating costs.

For almost all such transactions, CPC accessed a new mortgage to replace the existing debt, often at a discount, through a program it had developed in 1983 with the city’s public employee pension funds. The pension funds would provide a long-term fixed rate mortgage (30 years) for the property, insured by the city or state mortgage insurance program. The final product—a fixed up building, with long term reduction of real estate taxes and long-term fixed rate financing—held out the promise of sound and stable affordable housing for another generation of residents. Presumably, the FDIC can restructure its existing Signature loan assets to achieve similar results as part of the workouts. 

Perhaps most importantly, CPC worked with the city, state and pension funds to organize these programs in a package that was easily accessible to owners of small, low-income buildings. CPC became the one-stop shop for these owners, who could never navigate the maze of multiple city and state programs on their own. The efficiency of this system produced tens of thousands of preserved apartments at low-cost, as the transactions were not burdened with long and costly processing regimens.

Not all workouts are possible. Uncooperative and/or “bad” owners pose a dilemma. Replacing them may be a difficult path to follow. If a buy-out of an existing owner is not feasible, a forced sale through foreclosure portends to be a lengthy legal route, exacerbating existing conditions in buildings. Accepting less than ideal results with less-than-ideal owners is a judgment that the workout team will undoubtedly face.  

A challenge for the Signature workout team is that many of the tools used by CPC have frayed, while at the same time buildings are subject to more mandated public costs, most prominently those related to energy conservation. The as-of-right J-51 program expired, and was reintroduced with provisions that limits its usefulness. Public subsidies, the below-interest loans, are both under-funded and come with complicated processing requirements, not easily accessible at any scale. The Low-Income Housing Tax Credit (LIHTC), an exponentially more complex program, is for practical purposes not suited for the upgrade of small low-income buildings. 

How these difficulties may be bridged bears watching. Will a combination of cash from the FDIC-CSP joint venture leveraged with public subsidies be sufficient to meet long term standards of physical integrity, financial stability and affordability? 

How might this impact city and state policy? The 35,000 units of the CSP workout is but a drop in the bucket regarding the preservation of this affordable stock. Will the Signature buildings be viewed as a one-off, or the tip of an iceberg of a more endemic problem? Might this result in a rethinking of legislative actions to amend the 2019 law, and increase funding priorities for preservation? Or will the need to preserve other rent regulated properties in distress be kicked down the road? 

Herein lies a grand opportunity! The city, working with lenders with large portfolios of rental properties, might use the same public tools that would be available to the FDIC team to preemptively preserve their troubled properties in designated low and moderate-income neighborhoods. In turn, the banks could restructure their existing mortgages, as outlined above, to meet a bottom line of long-term physical and financial soundness and affordability. Properly restructured with mortgage insurance, the mortgage might be sellable to a third party like Fannie Mae or Freddie Mac.

This can be a win-win all around—for tenants, owners, lenders and the city. 

Michael Lappin is the former CEO of the Community Preservation Corporation (1980-2011). During his tenure, CPC financed and/or developed the preservation and building of over 92,000 affordable apartments in New York City.