The reason given in the Wall Street Journal article was the owners' failure to oust enough rent-regulated tenants.

Many tenants and elected officials (Congressman Charles Rangel, State Senator Bill Perkins, Riverton resident Assembly Member Keith Wright, and others attended a rally led by Riverton tenant association leader Cynthia Allen.

The likely default was predicted by the Partnership to Preserve Affordable Housing in its April 28, 2008 memo (click on "read more" below to see it), written by Thomas Waters, housing analyst for the Community Service Society. When equity funds invest substantially more than the rents will supply, the investment can only be repaid by evicting the rent-regulated tenants. Failure to do that means defaults, lack of maintenance, and disaster.

Click on "read more" below for an explanation of how "Predatory Equity" will lead to massive disinvestment in NYC's affordable housing stock.

Case Study: RIVERTON APARTMENTS

• 1,230 units of rent-stabilized housing in a complex of seven buildings in Harlem
  
• Extends from Fifth Avenue to Harlem River Drive and from 135th Street to 138th Street
  
• Elected officials are U.S. Rep. Charles Rangel, State Senator Bill Perkins, Assembly Member Keith Wright, and City Council Member Inez Dickens

The Riverton was developed in 1944 by Met Life in response to protests against its whites-only policy at Stuyvesant Town. The insurance company hoped that a separate black development would mollify protesters. It has long been seen as an important home of Harlem’s middle class. Many elected officials, including former Mayor David Dinkins, have lived there.

In recent years, the Riverton has become a dramatic illustration of the highly speculative, destabilizing practices of private-equity-backed investors in New York City residential real estate.

In August 2005, it was bought by Larry Gluck and Rockpoint Group (private equity) for $131 million. That is $106,500 per apartment. Gluck and Rockpoint together put in $26 million. North Fork Bank put in $105 million in interest-only financing. Rent stabilized rents (around $750 a month) provide enough income for operations and to pay the interest – no more.

Then, in December 2006, Gluck and Rockpoint refinanced the Riverton with German American Capital Company, an arm of Deutsche Bank, for $225 million in mortgage debt and $25 million in mezzanine debt. That is $203,250 per apartment. Deutsche then worked through Citigroup to convert the mortgage debt into a security which was sold to the public.

The terms of the refinancing, included in Citigroup’s SEC filing for the security, make clear the speculative nature of the deal. Gluck and Rockpoint used the borrowed money to pay off the $105 million to North Fork, create reserves of $29 million for Major Capital Improvements and vacant apartment improvements, and take $72 million in cash. That is $46 million more than they put in a year earlier. The deal also included $44 million in credit to account for their expected inability to make interest payments with income from the building after operating costs. Annual debt service, even with no principal due, is more than $13 million.

Gluck and Rockpoint planned in advance to lose money for a period of years, but they hope to profit in the long term by converting rent-stabilized to market-rate apartments, which they believe they can rent for $2,000 a month. The SEC filing shows that in 2006, they had 1,143 rent-stabilized tenants and 87 market-rate tenants or vacant apartments. They project that by 2011, they project they will have deregulated another 560 apartments – having turned the stabilized apartments over at almost 10 percent per year. At this point they project themselves to be operating in the black, with an asset worth $340 million.

Here is the key section of the SEC filing: “As of December 5, 2006, the Riverton Apartments Property exhibited a weighted average rent of $14.51 per square foot, consisting of 1,143 (92.9%) rent stabilized units and 55 (4.5%) fair market units. There are 32 (2.6%) vacant units which have undergone or are currently undergoing renovations. As units are vacated and the sponsors' capital improvement plan is implemented, renovated units will be leased to new tenants at market rents over the projection period, resulting in the projected increase in cash flow and value. Tenants that occupy stabilized units will be subject to certain legal increases to their rent, such as (i) the pass through of expenses incurred from approved major capital improvements (ie. base building improvements described above) and (ii) the pass through of utility expenses. As of December 2011, the borrower projects that the Riverton Apartments Property will have a total of 580 (47%) stabilized units and 650 (53%) fair market units leased at an underwritten weighted average rent of $36.68 PSF.”

Spreadsheet analysis suggests that these projections are reasonable – but only if they can achieve that high rate of turnover – displacing half of Riverton’s low- to moderate-income tenants in a five-year period.

Without a high rate of turnover, Riverton Apartments will continue to lose money for many years. Gluck and Rockpoint will be forced to pay the debt from their other resources or default on the debt, potentially delivering big losses to the investors who bought the debt from Deutsche and Citigroup – investors who probably had no idea how risky the initial loan really was, or that it was predicated on displacing a community.

A default could also lead to service cuts and declining conditions in the building – truly a situation where everyone loses.