Why NYC’s Aging Apartment Buildings Aren’t Getting Fixed

0:06Lilah Burke: Welcome to Deconstruct, a podcast from The Real Deal.

0:09Hannah Kramer: I'm Lilah Burke. And I'm Hannah Kramer. This week on Deconstruct, we will talk about Ken Griffin's alleged deal to buy the Manowinwood, Charles Cohen's development plans in South Florida, and the Sony campus out in Los Angeles.

0:22Lilah Burke: And opinion columnist Eric Enquist will join us to talk about how New York policy has made it harder to rehabilitate existing buildings. Let's get started.

0:34Hannah Kramer: This morning on Deconstruct, we have TRD columnist Eric Enquist with us. Eric, welcome to the pod. Glad to be here. So in your feature for our latest magazine, first of all, the sort of slug we had on the story before it went to print was don't fix that building, right? You start in the story by talking about how the Mamdani administration, the source of kind of a lot of fear among landlords, is for some people the least of their problems. So maybe we can start by ranking the things you see as big problems for these landlords right now, maybe roughly by urgency. It really depends on what kind of real estate business you have.

1:13Certainly, if you're a rent-stabilized landlord, Mamdani is a big problem for you. I don't want to minimize that. He's taken up a lot of the oxygen in the room. But for a lot of people in real estate, their problems predate Mamdani. They have to do with mostly state policies, some city, some related to the city council, previous administrations, but they're all pre-Mamdani. So while there's been a lot of focus on the rent freeze and the violations that he's running up on multifamily buildings, the fact is, if you're in the business of renovating real estate, making it better and trying to charge more rent, which is the bread and butter of real estate, really.

1:53These problems predate Mondani and they have more to do with Albany than they do with New York City. But if you're in New York City and you are in the business of improving real estate, I found half a dozen policies that really make it difficult to do that.

2:07Hannah Kramer: Let's maybe bullet them out a little bit, right? Sub rehabs is something you talk about a lot in the piece. What else? So sub rehabs are substantial rehabilitation. I also talk about the 2019 rent laws and how that makes it difficult to just do very basic apartment upgrades. Good cause eviction, which makes it very hard to vacate a building so you can renovate it. I talk about demolition, which theoretically you are allowed to demolish your rent-stabilized building and build a new free market building, but getting permission to do that is nearly impossible. I talk about the Certificate of No Harassment Program, which is a process, a very long, bureaucratic, difficult process that you must go through if you have a certain building in order to just get permission to renovate, just to get building permits.

2:52And then finally, the loft law, which is an old law that was actually not intended to make it difficult. It was supposed to help landlords rehabilitate their loft buildings. But in the tradition of New York state politics, it has done the opposite for many of them.

3:07Lilah Burke: Okay, let's drill into the first one, sub-rehabs. What is a substantial rehabilitation? What does that mean? And what's so difficult about it? So the context for sub-rehabs is that when the rent stabilization law first passed, you know, 50 years ago, there was a concern that buildings that were in very bad shape would not get fixed up because the rents were capped. And if the rents are capped, you can't get enough revenue out of the rents to justify fixing them. So there was a fear among lawmakers that some buildings would just be abandoned. And so therefore they created a substantial rehab program that said, if your building is substantially deteriorated, you can fix it up and take it out of rent stabilization, therefore charging the rents that you need to charge to justify the investment you're making in fixing the building up.

3:58And so that went on for years and there were problems with it because there was no real definition of what is a substantially deteriorated building. Like that's kind of a judgment call. So there were a lot of court cases deciding whether this building really justified being pulled out of rent stabilization. So the state came in, and this is what agencies are supposed to do, and they provided guidance on what exactly constitutes a seriously deteriorated building. And two main criteria, if your building were 80 % vacant or more, and you replaced 14 of the 17 major systems in your building, that was considered a substantial rehab.

4:39And if those two conditions were met, you were presumed okay to do the work, deregulate your building, and then rent it at free market rents. And that guidance came down in 1995, and it worked for decades. But what happened was eventually the progressives took control of the state legislature and the state housing authority, a state housing agency that okays these projects, started to change their criteria. And instead of encouraging these kinds of rehabs, began actually discouraging them, but not really telling anyone. They just started rejecting them.

5:10Hannah Kramer: And that's one of the things that you start to talk about in the story. You talk about this guy, Woody Pascal, who is an official at the state housing agency. And he has a quote in a warrant statement that you have here. And he said, more and more DHCR, the state housing agency, was under pressure from elected officials, the attorney general, and organized tenant groups to take their side. Right. That is sort of a shocking statement for real estate. Tell us why. It was shocking, not because people didn't think this was happening. They were shocked that anyone said it. No one really ever says anything about what goes on behind closed doors at city and state agencies where they decide these policies.

5:50And here he was coming out and saying, we intentionally switched the policies because we were under pressure from elected officials and from tenant organizing groups to stop approving these substantial rehabilitation projects that took buildings out of rent stabilization. And of course, he didn't say it while he still worked for the state. He had left the state and joined a landlord organization. So he was free to speak his mind at that point. But people were still surprised that he laid it out. Clearly, he's never going back to government service.

6:23Lilah Burke: And so what's the effect of this change in policy around substantial rehabilitations? What does this mean for the housing stock in New York, for landlords and for tenants? There are a lot of buildings, old buildings in New York that need rehab. I mean, that's no secret. The question is, how do you rehab them? You need to vacate the building. That's your baseline necessity. And that was also in the state guidance. How do you vacate a building? Usually you vacate it by waiting for tenants to leave or by buying them out. And buyouts typically are tens of thousands of dollars. Often they're six figures.

6:57and they were never a problem for the state before if you were to buy out tenants to vacate your building that way and then do a sub-rehab. But now the state's attitude towards these buyouts flipped 180 degrees. And their attitude was, well, if you have to buy out your tenant, the building must have been in pretty good shape because otherwise the tenant would have just left on his own if it was really substantially deteriorated. And of course, landlords look at that and they say, that's ridiculous. In New York City, some people live in the most, just wreckage of apartments. You know, they're hoarders.

7:29The apartments are falling apart. And the fact that they're demanding money to leave has absolutely, you know, doesn't have any bearing on the condition that the apartment was in. And so the idea that you couldn't buy out tenants makes it really difficult to vacate a building. And if you can't vacate it, you can't fix it. Now, you could say, well, why don't I just buy my building and wait for tenants to leave? I mean, that could take years. That can actually take decades. And one of the reasons it takes longer is even if you don't have a rent-stabilized building, now good-cause eviction entitles you to rent renewals in perpetuity, just like rent stabilization does.

8:06So tenants can stay as long as they're paying the rent. And even if the building is in decrepit condition, they can stay and some of them will stay. And if you buy them out, the state rejects that as a reason. The state now says that means your building was habitable and did not need to be rehabbed. So basically, it's an all-out policy to maintain rent stabilization wherever possible, even if the building is in bad shape. Why does this matter? Because there's a housing shortage. In New York City, the vacancy rate is 1.4%. For rent-stabilized units, it's under 1%. So you really need as many units available to be rented as possible.

8:48When someone is vacating a building and not renting units, that doesn't count as a vacancy. Those are just not counted in the stat at all. So buildings will sit empty or mostly empty for years waiting for those final tenants to leave until someone can come in and renovate the building. So there is sort of a conflict between tenant protection and the ability to fix buildings. And that's a problem because, again, empty units are really a terrible, terrible thing to have when you have a housing shortage. And the fact is you have to endure empty units for years if you want to renovate a building. So that's problem number one.

9:28Problem number two is if you just have a rent-stabilized building and a tenant leaves after 30 or 40 years and you need to gut rehab that apartment, you really can't do it anymore because you can't recover your investment by rent increases. You can only recover$30 ,000. Maybe you can renovate one bathroom for$30 ,000. You certainly can't do lead removal, asbestos removal. You can't upgrade all the plumbing to meet the new plumbing codes, the electrical to meet the new electrical codes. You can't get your apartment back on the market for$30 ,000. And that's what the state is asking people to do.

10:04So we have, while there's a 1.4 % official vacancy rate, actually 6 % of rent-stabilized units are not on the market at all, sitting empty, not on the market, not counted as any statistic other than that we know they're about 57 ,000 at least, vacant rent-stabilized units not being rented because of this investment problem.

10:25Hannah Kramer: Right. And this, it seems, has flipped the whole dynamic for investors as well, right? How much has the attitude changed if you are, you know, a real estate investor who needs to then go out and get capital from someone else so that they can come in and try to do these rehabs. Like, it seems like this used to be a solid potential investment. You could get investors to come in and help you do this. And today, not so much. So one thing about a high demand city like New York with a housing shortage is if you can get nice units on the market, you can rent them for quite a bit of money. So that's just the jackpot.

11:01So investors are happy to put money into projects where they're putting units out on the free market, right? But getting there is now harder than it's ever been, and there's a big risk. So there's a lawsuit right now between the state and a real estate firm called Peak Capital Advisors, where Peak did sub-rehabs for 31 buildings. And they were all rejected after the fact by the state on the basis of they did buyouts. Maybe the buildings weren't really in terrible shape. It wasn't well documented. And so the investors who put in millions and millions of dollars to fix up these 31 buildings are going to lose everything, as are the lenders who put up more than$100 million for this.

11:50And that includes, you know, Fannie and Freddie, too, banks and government agencies. have put a lot of money into these projects. And why would they lose it? Because if those are rejected and can't be free market anymore, now they have to go back to rent stabilization. So the rents are going to be a lot lower. That means your buildings are worth about a third, maybe, of what they were worth as free market buildings. And therefore you can't pay the debt service. You can't repay the loans. So the lender is going to take a haircut. The investor is going to lose everything they put in unless Peak wins the case.

12:24Lilah Burke: And it's not just small landlords affected by this, right? Can you tell us a little bit about how some of the big players are affected? We talked a little bit last week about Eliot Spitzer. I know you wrote about Gary Barnett. Can you talk about those? So there is a provision in state law that says you can demolish a building, even if there are rent-stabilized units in there, and put up your own building free market. Almost no one tries to do this because it's notoriously difficult to get approval, but But it is in the state law. And Gary Barnett, who's a billionaire's road developer, said, you know what?

12:58It's there. I'm going to try it. And he did try it. And he ran into a buzzsaw with regulators. And it took him seven years and a whole team of lawyers to get the right to demolish his building. He also had to buy out a tenant. You know, the last tenant demanded more than a million dollars, several million to finally leave. And that eviction itself just took about two years. So the whole process took him seven years to vacate the building. So long story short, he demonstrated the capacity to demolish the building. But the state came in and said, you also have to show you have your raised money to build the new building.

13:37And he said, but the law doesn't say that. And the state said, we don't care. We're the regulators. We decide this. And he's like, well, that's not what the law says. We're going to court. And he went to court and he won. And after he won, the state said, OK, we're just going to change our rules. So that can't happen again. And now you have to demonstrate the capacity not just to demolish a building, but to build a new one. So along comes Elliott Spitzer, the former governor. He runs his father's, the real estate firm his father created 60 years ago. He said, I want to knock down 985 Fifth Avenue, which is a luxury rental building and makes a lot of money.

14:10But it can make more money as a condo. So he went to the state and said, I want to demolish this building. It's there in the law. I have financing lined up to build my new building. And there are six rent-stabilized units. And I need permission to non-renew those leases. A year went by, nothing. Two years went by, nothing. After like 28 months, he said, I've got to sue these people. And he did sue. And two weeks after he sued, they approved his application. And I asked him, like, what's the lesson here? And he said, the lesson is the state will approve your demolition request, but you might have to sue them first.

14:49Hannah Kramer: Not a great path forward, I think, for a lot of would-be real estate investors and probably not a great system to have in our apartment rehabilitation pipeline, right? Just to wrap things up here, you know, this appears like a huge issue in the way that real estate projects are updated and run in New York. What's the solution? What's the path forward? And is there one that's politically tenable? The politics of this are very difficult because tenants' rights are sort of inviolable in terms of New York politics. In any housing bill that you do, you have to put a tenant's rights provision in there just to, like, pass muster and give it a chance.

15:33But again, the problem is the more protections you give to existing tenants, the more difficult it is to actually renovate a building. For instance, New York City has a program called Certificate of No Harassment Program where you have to get this certificate, you have to pass this extensive background check just to get a certificate to get building permits to renovate. Because there was a time when construction harassment was much more common than it is now. And if you wanted to get a tenant out, you'd do sort of unnecessary work to make their life difficult. And then they would just leave voluntarily.

16:05That incentive is largely gone, but the Certificate of No Harassment program was nonetheless expanded because it's good politics and it was also made permanent. It started as a temporary pilot program. So those are thousands of buildings where you have to endure this seven-month or longer intensive background check. They call up your former tenants. They call up the previous landlord's former tenants. Was anyone harassed? Did you ever have problems with your landlord? If someone says yes, you might not get the certificate, and therefore you can't get building permits. Therefore, you can't do any kind of real renovation to your building.

16:38So it's just another example of the obstacles that stand in the way of investors who are in the business of improving buildings and getting more rent out of them. That's a problem for New York because New York is a largely built city. There's a lot of focus on new construction, but mostly the issue here is like, what do you do with the old buildings that you have? Like, how do you keep them in good repair? How do you make them bigger? How do you keep them up to code? And these are sort of the nuts and bolts of real estate and managing a housing policy in a city. And if everything is about protecting the tenant who's there, or even if there's no tenant there, just preserving the rent as it is, even if the unit is vacant, and there's less attention given to how do we incentivize investors to put money into fixing up buildings, or at least maintaining them, the housing shortage is only going to get worse.

17:31So there's a lot of focus on the rent freeze. And yes, that's a problem for people who own multifamily rent-stabilized buildings. But really, in totality, we have a series of policies that really make it hard to maintain and upgrade your buildings.

17:47Lilah Burke: All right. Well, Eric, thank you so much for joining us. My pleasure. I'll be back anytime.

17:55Okay.

17:55Lilah Burke: Okay, so for the story that you're obsessed with this week, Hannah, I hear you have a rumor for me, which is great because I love a rumor. So tell me what's happening.

18:06Hannah Kramer: I do have a rumor. And if the rumors about this are true, this really could be, you know, the deal of the year in a lot of ways. So the rumor that is flying around and that we have been reporting about increasingly over the last couple of weeks is that billionaire hedge funder Ken Griffin is going to buy the Moishimana portfolio in Miami's Wynwood neighborhood. If true, this deal would be somewhere between$700 million and a billion. And it would give Ken Griffin control over a big, big swath, something like 30 acres in Wynwood, which is this kind of funky industrial arts district in Miami.

18:46Lilah Burke: Okay, big deal. Tell me about some of the players here.

18:49Hannah Kramer: So Ken Griffin obviously is the founder of Citadel, somebody that we have covered very closely as he's moved the core of his business, you know, from hubs in Chicago and New York. They still have a big hub here in New York to Miami. He's somebody who's been, you know, very pro-Miami, big on its growth and its future and specifically its future as, you know, a hub for tech and finance. And the rumored use for the MANA portfolio would be this new tech AI campus. So a lot of kind of intrigue and interest around that. Now, Wynwood itself is a super interesting neighborhood. It was industrial back in the 1920s.

19:32Hannah Kramer: Starting in kind of the 70s, it became this edgy, grungy arts district in Miami. When I was living there in 2020, it still had this edge but was starting to be developed. But today when you go to Wynwood, it is full of this really weird mix of these kind of dead-eyed apartment hotels. A weird mix of really cool, great restaurants and really overpriced restaurants. It does still have, you know, amazing street art. It has several big kind of creative office campuses. So it's become, I don't know, this weird amalgamation of everything that's been happening to Miami in the last five, 10 years. And you have things like the Goodwill, where I donated clothes during COVID, is now this funky hotel.

20:23Hannah Kramer: So when you walk through Wynwood, even just one year to the next, you see all this transformation happening around you. And if the Mana portfolio sells to Ken Griffin, we'll see yet another big transformation for this neighborhood.

20:36Lilah Burke: And who is Moishe Manah?

20:38Hannah Kramer: Moishe Manah is a really interesting character. So he was born in Tel Aviv. He got his start with a moving company here in New York City, started as just like a man with a van, and then grew that company to be one of the largest movers here in New York. Allegedly took on the mob because the moving business was apparently at the time, you know, mafia run in a lot of ways. And he won? He says he won. Okay. I don't know how true this is, but he says that, you know, he spoke to John Gotti on the phone and told him where he lived and said he could come get him if he was worried. Okay. But Manna parlayed that into first what started out as a real estate, smaller real estate empire.

21:21Hannah Kramer: But Manna parlayed that moving business money into what started out as a smaller real estate empire here in New York with a building down in the Meatpacking District, the Manna Contemporary Art Center out in Jersey City. and then several decades ago started buying up quite a lot of land in Miami. So this big portfolio in Wynwood is something that he's been working on, you know, for decades and decades. He's also assembled a ton of land in downtown Miami, and there's been a lot of talk about what he's going to do in downtown Miami. You know, for years, we've covered that plan in particular that hasn't really come to fruition.

21:56Hannah Kramer: In 2019, our colleagues Catherine Klerges and Keith Larson did a cover story on him for the magazine. And he's just a colorful guy. He took his shoes off during the interview. You know, he talked a lot about how much he hates Donald Trump. But he hasn't really come through with his downtown Miami plans. But the Windward portfolio obviously has done incredibly well. And one thing I'm wondering is, you know, if this Ken Griffin deal goes through, does that give him the boost he needs to make the downtown Miami plans happen? You know, it's not totally clear how it all hangs together. But certainly he's a really colorful character.

22:30Hannah Kramer: They're definitely good for a fun quote and very interesting to hear from in person.

22:36Lilah Burke: Okay, so this is rumored to be happening, right? But we don't have confirmation yet.

22:40Hannah Kramer: We don't have confirmation yet, but, you know, people in Miami are talking. There are sources saying that they have, you know, knowledge of the deal and that it's going to happen, some people say, as soon as, you know, by December, which is Moishimana's birthday. And we are wondering here at The Real Deal whether we need to find a new spot for our annual Miami forums. So if you have a convention center that's accessible to us, let us know. We've held the forum at the Manic Convention Center in Miami for quite a long time. So we might be looking for a new home.

23:11Lilah Burke: We'll see. Well, if you have a convention center or you have news or a tip about this deal, please let us know. Yeah, absolutely.

23:21Hannah Kramer: All right, Lila, let's jump into our headlines for today. I think you have two stories for us, right? Somebody who's on the up and up and somebody who's maybe on their way down a little bit. Tell us about it. Sure. So we'll start with the up.

23:34Lilah Burke: The up is Charles Cohen. Cohen is angling for a comeback. He was once a billionaire. I'm not super sure if he's a billionaire anymore. So he was knocked down pretty hard by this fight. There was a court order judgment of$187 million. And he was fighting this for a long time. And finally, he's paid it off. And now he's trying to do something new. So he's planning a pair of office towers in Dania Beach in South Florida. And this would be Coen Brothers Realty's second office property planned for South Florida.

24:08Hannah Kramer: Classic New York developer move for your comeback is head to Florida. Yes. Well, good news for him.

24:15Lilah Burke: Seems like he's trying to do something new. Yeah. And tell us, on the other hand, about a developer who's in a little bit of a struggle. So down this week is Michael Hackman of Hackman Capital Partners, and they have lost the Sony campus in Culver City, California in L.A. It was an$160 million property. They took out$100 million on it. Sony was the sole tenant for a long time, but then pulled out in 2024, and Hackman defaulted after that, and now they've lost the campus. So bad news for them. Tough one. And that project, Fortress had the note on that property, right? Right. Fortress bought the note.

24:53Hannah Kramer: Yes. So both of these stories have a little bit of a fortress angle to them. Yeah. A lot of fortress action going on right now. Interested to see what they kind of push forward at that campus. For our last headline of the day, Friday was the 25th anniversary of the 9-11 terrorist attacks. Now, Lila and I were both pretty young when the attacks occurred. But Lila, you spent some time on Friday stitching together some remembrances from people in real estate who were on the ground here in New York and across the eastern seaboard as the tragedies unfolded. One story that stood out to me in particular came from Michael Leibowitz, now the head of Douglas Elliman, but who at the time was a big insurance broker and worked on Larry Silverstein's deal for the Twin Towers.

25:40Hannah Kramer: He, in fact, encouraged Silverstein to take out a larger policy because, as he said, what if a plane crashed into these towers? So many incredible stories of resilience and hope in the face of tragedy in that story. I encourage you to read it online now. That's all from us for today. See you next week. Our script today was written by Lila Burke and Hannah Kramer, edited by Kara Ivan Press, and our in-room producers were Mary Jaduk and Ushu Sukai. Our sound engineer and host producer is Mila Miller.