Default Talk and Frayed Nerves, NY Times, August 25, 2008

By CHARLES V. BAGLI

Gloria McKenzie maneuvered down the pathway with a cane, surveying the 700-foot-long grassy mall that is surrounded by five of the seven apartment buildings that make up Riverton, the storied Harlem housing complex.

The owners of Riverton, a middle-class bastion that sits between 135th and 138th Streets, from Fifth Avenue to the Harlem River, spruced up the playground underneath the shady sycamore trees, as well as the lobbies and elevators. Ms. McKenzie, a retired city worker, said she didn’t particularly like the gazebos and planters installed at the north and south ends of the mall, because they eliminated many of the benches where older tenants took in the sun.

“Don’t get me wrong, I’m happy here,” she said. “I just wish they’d put in some more benches. There’s no place for seniors to sit since they built this gazebo.”

But if the hustle and bustle of the city often seems remote from the Riverton mall, that appears to be coming to an end. The owners, Laurence Gluck of Stellar Management and an equity firm, the Rockpoint Group, bought the complex three years ago and have notified lenders that they are in imminent danger of defaulting on their mortgage.

Tenant advocates and investment bankers quickly seized on last week’s notice, fearing that it might be the first in a line of defaults by aggressive developers and private-equity firms across the city who took on heavy debts with the hope of raising profits by rapidly replacing longtime, rent-regulated tenants with those paying market rates.

At Riverton, where 90 percent of the 1,232 apartments are rent-regulated, tenants worry that a default could lead to a court-appointed manager, cuts in services and a decline in maintenance while the fate of the complex is decided. Although the owners play down the crisis, it would be an ignoble blow for a 61-year-old complex whose tenant roster has included a former secretary of housing and urban development, Samuel R. Pierce Jr.; the jazz pianist Billy Taylor; former Mayor David N. Dinkins; and Judge Fritz W. Alexander of the State Court of Appeals.

Cynthia Allen, president of the Riverton Tenants Association, said she worried about what was in store for many rent-regulated tenants. “Either he has to get rid of 600 of us, or he was going to crash the buildings,” said Ms. Allen, referring to the owners. “The future doesn’t look very bright either way.”

The tenants association sponsored a rally on Saturday with Congressman Charles B. Rangel, Assemblyman Keith L.T. Wright and State Senator Bill Perkins, as well as members of Tenants and Neighbors and the Urban Homesteading Assistance Board, two citywide groups. Mr. Rangel demanded that Riverton remain an affordable-housing haven, no matter who the owner is.

“If a default occurs,” said Mr. Wright, who grew up at Riverton and still lives there, “new owners will have to come in, probably with no connection to the community or its historical significance.”

Despite warning that they were in danger of “imminent default,” Mr. Gluck and Rockpoint insisted that they would make the next payment on their mortgage, which is due on Sept 1. But Kathleen Cudahy, a spokeswoman for Stellar Management, seemed less certain about the payment due on Oct. 1. “They’re prepared to put in their own equity to ensure that they don’t default,” Ms. Cudahy said. “They are in discussions with their lender and are confident that it’s going to be worked out.”

Kathryn Corro, a marketing executive at Rockpoint, did not return calls.

Financial analysts who believe that Riverton is carrying too much debt are not so confident. Merrill Lynch reported last week that Mr. Gluck and Rockpoint had told an affiliate of Deutsche Bank, which lent them $225 million, that they have “insufficient funds to make the payment due in September.”

Merrill also reported that CBRE Realty Finance, which lent the partners an additional $25 million, planned to write off its entire loan. A separate report by Lehman Brothers also said that the owners “appear ready to exercise their ‘default option’ ” and walk away from the loan and the complex. Lehman estimated that Deutsche Bank would take a 50 percent loss.

If Riverton’s owners do default, investors would lose millions, and Riverton would plunge into uncertainty. A bankruptcy judge might end up appointing a manager. But tenant activists and city housing officials are worried that a default could start a downward spiral for the complex.

The problems at Riverton are getting much attention because of fears among tenant activists and investment bankers that other similarly financed real estate developments may follow.

“Riverton may be the first multifamily deal to crash and burn, but it will certainly not be the last,” said Dina Levy, director of policy for the Urban Homesteading Assistance Board. “We have tracked more than 70,000 units of subsidized and rent-regulated housing in New York City that have been leveraged to the hilt by overzealous real estate speculators.”

This was not supposed to happen at Riverton, which like Stuyvesant Town and Peter Cooper Village in Manhattan and the Parkchester in the Bronx, was built by Metropolitan Life in the late 1940s for returning veterans. But there was one noticeable difference: MetLife didn’t rent to blacks and Hispanics at Stuyvesant Town and Parkchester.

Frederick H. Ecker, the chairman of MetLife at the time, put it this way: “Negroes and whites don’t mix. Perhaps they will in 100 years, but not now.”

“My parents were barred from Stuyvesant Town,” recalled Mr. Wright, whose father, Judge Bruce Wright, was a young lawyer at the time. “My mother went down there and they said, ‘No blacks allowed.’ So they came here.”

Riverton Houses, as it was then known, was smaller and it did not have any garages or stores like the other complexes, but it did develop a rich community life for residents, who included Suzanne de Passe, a former vice president at Motown Records, and Clifford L. Alexander Jr., who was secretary of the Army in the Carter administration.

Security guards and maintenance workers lived in the complex and took special pride in Riverton, making sure that the playground and the benches were for residents only.

“Getting into Riverton was a coup,” said Stephanie Tolbert, a retired library clerk who has lived at Riverton for 40 years. “At one time, you wouldn’t dare go into the playground if you didn’t live here. They didn’t want outsiders sitting on the benches.”

In 1976, MetLife sold the complex for $12.5 million to a group headed by Charles A. Vincent, a prominent Harlem businessman. In 2005, Stellar Management and Rockpoint bought the complex for $131 million, putting together a $105 million loan from North Fork Bank and $26 million in equity. “Everyone understood that they wanted to upgrade vacant apartments,” said Richard Toussaint, a tenant leader. “Stellar didn’t make any bones about they’re putting those apartments at market rate. But they didn’t do anything underhanded.”

The new owners erected a fence and locked gates around the complex, reinforcing the notion of a gated community, and refurbished the mall, while renovating the lobbies with marble floors, new elevators and handsome glass doors.

“The lobbies look like a hotel now,” said Jeneva Anderson, 15, who has lived with her mother in Riverton since 2001. “Some things improved. Some things, like maintenance, went down. You call them to fix something and they forget. But I love living here.”

In December 2006, the owners refinanced, getting a $225 million, 10-year, interest-only mortgage from Deutsche Bank and borrowing an additional $25 million from CBRE Realty. Critics say that they overpaid for a property in which 93 percent of the apartments had regulated rents. But with real estate values booming, real estate executives say, lenders were willing to provide generous financing for deals that today appear misguided.

Despite the owners’ current financial problems, the refinancing enabled them to take out about $35 million in cash, after closing costs, repaying the original loan and setting aside $53 million in reserve funds for building improvements and apartment renovations. They also recovered their equity investment of about $44 million, according to financial records and interviews with executives who had been briefed on the deal.

The owners employed essentially the same strategy that Stellar Management used at Independence Plaza and Park West Village in Manhattan: reduce operating expenses and work to convert the rent-regulated apartments to higher, market-rate rents in order to boost profits.

According to the project’s prospectus, Stellar Management had assumed it would convert 53 percent of the apartments to market-rate rentals by 2011 and boost net income to $24 million.

But less than two years after refinancing, Stellar and Rockpoint have not been able to convert the apartments quickly enough. As of July, only 10 percent of the apartments had market rates, up from 5 percent in 2006. Financial records indicate that net income at Riverton is about $4 million a year, a far cry from the $24 million that the owners expected by 2011.

“In a perverse way, it’s not surprising,” said Jerilyn Perine, executive director of the Citizens Housing and Planning Council, a nonpartisan research and advocacy group. “You have these people buying at way more than what anyone familiar with the market would deem to be its value. They made erroneous assumptions about raising rents and converting apartments. Then, when it fails, they’re shocked and amazed.”

Ms. Perine, a former city housing commissioner, fears that other defaults will follow this winter, especially as the escalating cost of heating oil eats into profits.

Like many tenants, Ms. Tolbert has mixed feeling about the recent changes at Riverton, but she vowed that no one would dislodge her from her home.

“I’m not worried,” Ms. Tolbert said. “They can’t put me out. I’m a senior in a rent-stabilized apartment.”