Opportunities for Preservation of Overleveraged Multi-Family

Housing

Presented by: Harold Shultz, CHPC

David Walsh, NYSHFA

Dina Levy, UHAB

What is an Overleveraged Building?

An Example

Annual Per Apt/Month

Total Debt Service $23,957,325 $1,108Loans of $367 M

O&M (Est) $14,704,320 $680

Total Debt + O&M $38,661,645 $1,788

Gross Income (2007) $17,310,476 $801

Net $(21,351,169) $(987)

DSCR = .36 !

Banks and CMBS

• Two types of lenders– Banks– Commercial Mortgage Backed Securitized

Trust

CMBS

Commercial Mortgage Backed Trust

Investors

Trustee

Master Servicer/Special Servicer

What Will Happen?

• Extend Mortgage• Recast Mortgage• Sell Mortgage• Foreclose Mortgage

What Will Happen?

• Capital Starvation

• M & O cut to the bone

Results in:

• Long term building deterioration

• Neighborhood deterioration

Extent of the Problem

2009: Potentially more than 70,000 units of over-leveraged housing in NYC

•Rent Regulated

•Mitchell Lama

•PB S8

One Example: 4,000 unit portfolio(Non Securitized)

Original Owner

Sale: in March of 2005 $295 million, or $74,000 per unit.

1st Private Equity/LL@ 20% = $59 M1st Lender @ 80% = $236 M

Sale: in May of 2007$918 million, or $232,000 per unit.

2nd Private Equity/LL @ 20% = $184 M2nd Lender @ 80% = $734 M

DEBT SERVICE TRIPLES IN 2 YRS

• Transparency

• Pricing

• “Market Watchers”

Barriers to Acquisition

- Long-term responsible owners

- Supportable debt based on existing income stream

- Adequate operating and capital reserves

- Use-restrictions (in some cases)

Preservation Goals

Administrative and Legislative Proposals:

- Voluntary Sales - Phantom Tax Relief

- Debt Acquisition - Restrictions on PIPP/LLP

- Restricted Foreclosure Sales?- HUD/Treasury MF Preservation Program

Opportunities for Acquisition

Types Of Loans

• Portfolio Loan – Originated by Lender and sitting on balance sheet. Lender may or may not want to remove loan through sale or securitization process.

• CMBS – Loan may be pooled with other loans, transferred into a Trust, which then issues bonds that may vary in yield, duration and payment priority.

CMBS Loan Participants

• Trustee – Holds all loan documents and distributes cash flow received from Servicer to Investors

• Servicer – Manages the flow of payments and information and is responsible for communicating with the Borrower

• Rating Agency – Establish ratings for each bond class and continually monitor performance

• Investors – Rated versus Unrated Pieces

CMBS Participants

• Ownership – Who owns the various loan pieces?

• Valuation – How much is the property worth?

• First Loss Position – Who is controlling holder?

• Servicer – Will the servicer share information with you?

• Trustee – Trust not looking to sell if loan not in default

Challenges with Securitized Loans

• Mezzanine Financing - Acquisition of various Mezzanine Loan pieces. Foreclose where collateral is equity ownership entity in the deal. Take subject to first mortgage. (ie: John Hancock Tower – Boston, MA)

• Alternative Property Usages – Property being reviewed as possible Supportive Housing project where traditional all-affordable deal in major trouble and lender may be willing to make deal. Supportive Housing financing structure may be applicable and may work

Strategies

• Brokerage Firms – Cushman & Wakefield, Eastdil, Massey Knakal,

• Banks –Deutsche Bank, JP Morgan, NY Community Bank

• Law Firms – Dechert, Paul Hastings, Skadden Arps

• Mortgage Brokers – Ackman-Ziff, Holliday Fenoglio, Meridian Capital, Palisades Financial

Opportunities: Where To Look