New Developments in LSNYC Bronx Milbank Case

In May 2010, Legal Services NYC-Bronx filed a motion on behalf of tenants living in a portfolio of ten distressed apartment buildings arguing that once a foreclosure action is initiated, and a court-appointed receiver is in place, the mortgage holder can be held liable for maintaining building conditions. A decision on the case is currently on hold because the buildings’ special servicer, LNR Properties, recently announced that a deal in the works to transfer the buildings and reinstate the loan. However, the companies have refused to reveal the identity of the potential buyer, or any details of the deal.

The case concerns ten distressed apartment buildings housing more than 500 families. The portfolio has been in a steady state of decline since its owner, a private equity firm known as Milbank Real Estate, defaulted on its $35 million mortgage. In March of 2009, the mortgage holder, a $3 billion commercial mortgage-backed security trust controlled by Wells Fargo and serviced by LNR Partners, Inc., initiated foreclosure proceedings.  The foreclosure judge appointed a receiver who is charged with collecting rents and managing the properties, but due to the high number of vacancies in the buildings, along with the already severely distressed conditions in most of the units, the income from rent collection is not adequate to properly maintain the portfolio.As a result the tenants have endured horrible living conditions since Milbank over-leveraged their buildings.  Water leaks, hazardous molds, cracked and peeling lead paint, collapsing ceilings, broken locks on entrance doors, useless intercoms, rat and roach infestations, busted boilers, and electrical fires are commonplace throughout the portfolio. (Click here to read more about LSNYC Bronx’s May 2010 motion) 

On August 4th, LSNYC Bronx advocates and tenants participated in another press conference with Speaker Quinn and others calling on the parties to halt the transfer of the mortgages. Speakers at the event pointed out that while the transaction would bring in a new owner, it would not change the terms of the debt and therefore would be highly unlikely to improve the outcome for the building and its tenants.

From an August 3rd Crain’s article (“Mystery Buyer of 10 NYC Buildings Asked to Unveil”)

City officials and advocates for the tenants say they are skeptical the financing of the deal can work unless the new owner skimps on renovations. LNR’s cash-flow projections for the project show the properties turning a profit by 2012 and a near tripling of revenue by 2021. But an analysis by the speaker’s office shows that even the most optimistic of revenue and expense projections for the building would result in a loss at the current level of debt.

“While this transaction will bring in a new owner, it will not change the terms of the debt and therefore is highly unlikely to change the outcome for the building,” the council members wrote.

The buildings are part of a growing list of financially troubled properties in the city that officials say are being overleveraged a second or even third time around. Lenders are seen as reluctant to write down the value of their loans, and there are still investors willing to take a gamble that they can turn around even the most dilapidated of New York real estate.

“What we would like to see is the loan written down to a realistic level and the buildings go to a preservation developer that knows how to bring back distressed buildings,” said Jonathan Levy, deputy director of the housing unit at Legal Services NYC-Bronx, which represents the tenants.

More great coverage of the recent developments:

“Advocates: Deal Prolongs Housing Crisis for NYers”  Wall Street Journal/Associated Press, August 3, 2010

“Pols Warn Foreclosed Buildings’ Mystery Buyer”  CityLimits.org, August 4, 2010