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July 23, 2008

Honorable Thomas P. DiNapoli
New York State Comptroller
110 State Street
Albany, NY 12236

Dear Comptroller DiNapoli,

We are writing to express our concern about the New York State and Local Employees Retirement System (NYSLERS) investment in certain NYC real-estate deals that are placing both low-income residents and affordable housing stock at risk.

A new breed of real-estate speculator, armed with huge pools of private capital and access to substantial bank financing, are targeting multi-family subsidized and rent regulated affordable housing throughout New York City with the goal of raising rents, maximizing profit, and ridding these projects of their low income tenancies. Moreover, these investors are paying inflated sums to acquire these projects which, in most cases, are not supportable by operating income. Advocates have termed this new threat “Predatory Equity.”

The unsupportable debt placed on many of these projects mirrors the crisis now playing out in the single family sub-prime market. Unless this practice is curbed, there is serious potential for massive disinvestment, rising foreclosure rates, and displacement of low- and moderate income tenants from thousands of units of affordable housing.

We are concerned about the NYSLERS investment in predatory equity funds doing business in all five boroughs of New York City. These include investments in funds connected to Vantage, Taconic Investment, Dermot Company, Urban American and Stellar Management.

For example, the NYSLERS invested in the City Investment Fund and Morgan Stanley Real Estate Fund IV, the private equity funds that financed the acquisition of 4,000 units of former Mitchell-Lama housing in Harlem and on Roosevelt Island (see chart enclosed). A review of this deal indicates that the sale more than tripled the debt leveraged against the properties. This transaction raises serious questions about the consequences for the 4,000 low and moderate income families who occupy these rental units and the long-term financial viability of the project to operate sufficiently.

More broadly, we are concerned about the number of private equity investors who have been systematically targeting subsidized and regulated developments. Those that have purchased affordable housing in our districts have been either flipping the buildings for even higher prices or pushing low income tenants out to deregulate units and replace them with a higher income tenancy.

SEC filings show that many firms promise rates of turnover as high as 15-20%, a projection well beyond the normal 5-8% turnover rate, in order justify the enormous sums being paid to acquire these affordable housing units. The Vantage company is a prime example of the level of aggression these firms will employ to meet their expected return on investment.

New York City’s Comptroller Bill Thompson has already acted on this issue by enacting an “opt-out” policy that will allow their pension funds to refuse investment in sales of affordable housing they deem unsupportable. This policy will divert an important source of funding from these predatory firms as well as send a strong public message condemning this kind of behavior.

We urge you to adopt this policy for the NYSLERS and help protect the state’s remaining affordable housing from being lost to speculation.

Sincerely,