Think again.
Take the bankruptcy that Samuel Hertz filed in late January for 420 Avenue F and 320 Ocean Parkway in Kensington and 2302 85th Street in Bensonhurst, which have a total of 145 apartments. Their tenants have names like Melnikova, Akramov, Durglishvili and Ananin.
Hertz purchased the three buildings in January 2018 for $46 million with a $25 million loan from ConnectOne Bank. That’s a loan-to-value ratio of just 54 percent. It must have seemed like a safe bet at the time and it was also a 1031 exchange, allowing Hertz to defer capital gains on a very profitable sale in 2017.
But 2018 was a terrible, terrible, not a good year to buy a building with stabilized rents. It’s hard to imagine that deals didn’t run into problems that year. And $317,000 per unit was a lot for Hertz to pay.
The big blow was the rent-strangling Tenant Stability and Protection Act in 2019, followed by the pandemic, the rent-free movement, eviction moratoriums and the dysfunction of the housing courts. Subsequently, operating costs rose, but the Rent Guidelines Council remained stingy with rent increases.
The 2019 law and the fallout from the pandemic “have dramatically eroded property values and hampered rent collections,” Hertz wrote in its lawsuit.
Hertz, located at 1080 Ocean Avenue, seems to have tried to do the right thing. The investor actually paid down its mortgages by $1.83 million and put in another $1.95 million to subsidize operations, in part by taking out more loans.
But in retrospect, it seems like he threw good money after bad. Every month all three buildings lose money.
Take 420 Avenue F. The monthly rental income is $96,000, or about $1,900 per unit (three units generate no rent).
Monthly costs include $49,000 for mortgage interest, $20,000 for property taxes, $7,000 for management fees, $6,000 for insurance and $6,000 for water and sewer.
Add in other expenses and the total comes to $106,000, meaning the building is losing $10,000 every month.
But it’s probably even worse, because according to Hertz’s filing, repairs and maintenance cost just $32 per unit. A realistic number is several times that amount. Furthermore, his actual rent collection is likely lower than the 96 percent reported in his application.
The mortgage requires him to pay nearly $13,000 in principal each month. That brings the monthly loss to more than $22,000.
The 85th Street building is losing $18,000 a month, and 320 Ocean Parkway, the most valuable in the portfolio, is losing $22,000. Half of these losses will go toward the principal amount of the mortgage, as lenders now typically require for rent-stabilized buildings.
But even if the loans were interest-only, Hertz would be swimming in red ink.
Paying the principal on your mortgage is fine if your property value rises, but not if it falls. It’s like paying off a car loan when you owe more than the car is worth.
Hertz sought bankruptcy protection after ConnectOne Bank filed bankruptcy proceedings in November.
He said in the filing that he “continues to struggle with rent collections, evictions and the increased costs of maintenance and operations.” But he noted that the buildings would be financially viable if mortgage debt were reduced.
That is an option for ConnectOne Bank. Another would be to sell the loans for dimes on the dollar. A third would be to foreclose and sell the properties at auction.
As the saying goes, choose your poison.
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