Dive Brief:

• The special servicer for eight commercial mortgage-backed securities loans in New York City has instructed its legal counsel to foreclose on the 28 workforce properties that back the loans, according to a recent press release from credit rating agency DBRS Morningstar. It did not name the servicer.
• The eight loans, which back 747 units in multiple neighborhoods in the Bronx, were delinquent and in special servicing as of November. Seven of those loans, covering 25 properties and 663 units, were transferred to special servicing over the summer for imminent monetary default, according to DBRS Morningstar.
• The properties are owned by New York City-based Emerald Equity Group. The company, which is led by CEO Isaac Kassirer, cited non-paying tenants and inflated expenses as the source of the payment issues. Financial services firm Sabal Capital Partners originally issued the debt, according to The Real Deal.
   

Dive Insight:

Emerald bought a series of rent-stabilized buildings, aiming to convert them to market-rate properties in the late 2010s. However, the passage of a 2019 rent law thwarted those plans and forced some of its properties into bankruptcy in 2020.

“The Housing Stability & Tenant Protection Act of 2019, high inflation rates, increasing operating expenses — which continue to outpace permitted rental increases for rent-stabilized apartments — and an inability to collect rents have critically impaired the value of rent-stabilized assets in NYC over the past five years,” DBRS Morningstar said in the release.

Emerald isn’t alone in struggling with unpaid rent after eviction moratoriums and rental assistance programs have expired. For instance, servicers foreclosed on four buildings owned by New York City-based City Skyline Realty in early September, according to The Real Deal. The owner defaulted on $26 million in debt on four Upper Manhattan rent-stabilized properties — 174 West 137th Street, 507 West 139th, 510 West 148th Street and 505 West 161 Street.

A survey from the Community Housing Improvement Program, a trade association for owners of rent-stabilized rental properties across New York City, estimated that 93,500 tenants were more than three months behind on rent in September, 37,500 owe more than $25,000 and 4,500 tenants are more than $50,000 in arrears.

Steep declines

Initially, the servicer was drafting a loan modification as it continued discussions with Emerald about plans for correcting various property conditions and general performance issues across the portfolio. However, the servicer eventually instructed its counsel to file receiver applications and foreclosure motions.

“Ultimately, the execution of that forbearance agreement was unsuccessful as the guarantor was unwilling to sign off on the representations and warranties, indicating that unconditional releases must be provided,” according to DBRS Morningstar.

When the 28 properties come back to the servicer, their value will be much less than when the loans were originated in 2020. The broker opinion of values for the properties indicates weighted-average value declines of approximately 55% when compared with the issuance appraised values, according to DBRS Morningstar. When the properties are eventually sold, that loss could land around 45%.

However, DBRS Morningstar noted that updated appraisals have not been ordered on the properties and the special servicer has yet to calculate an appraisal reduction for any of the delinquent Emerald portfolio loans.

While the lack of updated official appraisal information leaves questions, DBRS Morningstar predicts the broker opinion of value could represent a baseline for current pricing on the 28 properties.

“Given the sponsor’s inability to address deferred maintenance issues and stabilize cash flows across the portfolio, as well as the property type and market-specific difficulties noted in the BOVs, DBRS Morningstar notes that the updated appraisals, once obtained, are unlikely to come in significantly higher than the BOVs provided to date,” the rating firm said in the report.

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