NYCB Freefall, Office-Resi Limbo & Brotherly Feud Rips Multi Empire

“Material Weaknesses:” NYCB Crisis Deepens

That thing we were supposed to be good at? Turns out, we weren’t very good at it.

NYCB revealed Thursday that it found “material weaknesses” in how it tracks loan risks, compounding the crisis at one of the country’s most important CRE lenders. It also wrote down the value of previous acquisitions by $2.4B and cleaned house up top, replacing its CEO. The bank’s stock is now down nearly two-thirds (as of this writing Friday am, but YOLO) since the start of the year, and for CRE players who’ve been in a perpetual state of whiplash since Signature went under (carcass was acq. by NYCB), it’s unclear where they’re supposed to turn next. 

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NYCB(cont.)

The bank’s exec chair Alessandro DiNello, former CEO of NYCB unit and major mortgage lender Flagstar, is now CEO, replacing Thomas Cangemi - Cangemi had already been alpha’d by DiNello during a conference call last month, in which DiNello took on the lion’s share of analyst questions and promised to do “whatever it takes” to get the bank back on track. (Things got spicy with another board member yesterday, who resigned in protest of the leadership changes.)

DiNello certainly has his work cut out for him: the bank is being shorted, being sued, and being bodied by regulators. (For more on how regulators are thinking about their approach to banks, read this exclusive convo. The Promote had w a federal Bank Examiner)  

NYCB’s book is dominated by $37B in multifamily loans, almost half of them backed by rent-regulated complexes. This made it extremely vulnerable (22% of the bank’s total loan book, per Wedbush) to the turmoil in New York’s rent-regulated sector, which has been Default City this year and in decline since the passage of the ‘19 rent reforms. 

What happens at street level when such a bank stops doing business or fails? Transactions are paralyzed, of course, but it’s a lot more than that. Renovations tend to be financed, as does maintenance. The standard upkeep of a building gets more challenging, and the problem is even more pronounced on low-margin product like RS buildings. Private players are snapping up pieces of the action, but the void left will be immense. Plus, these things don’t tend to happen in a padded cell: other regional bank stocks quivered after the NYCB announcement.  

(If you want a high-level look at where CRE lending stands right now, check this out.)

O Brother, Where Art Thou?

It’s the Indian epic Mahabharata, playing out in SoCal 🌴 real estate. An epic 20-year feud between 5 billionaire brothers, who somehow amassed a 17,000 😲-apartment empire in the Valley, culminated this week in a jury’s decision to order 1 of the brothers, Haresh Jogani, to pay a whopping $2.6B in damages to the other 4. The jury also ordered that the $6B portfolio be divvied up (you can picture the multi brokers doing their kegels)  

I appreciate an attorney who has a sense for the literary: “At the end of the book, there was no money, hence the name, Bleak House,” Peter Ross, who represented 2 of the brothers, told Bloomberg, referencing the Dickens novel. “That’s not the case here. There’s billions here that remain to be distributed.” 

The family, as good Gujju families tend to do, made its fortune in the global diamond 💎 trade (its epicenters: Antwerp and Surat). In 1969, one of the brothers, Shashi (who was awarded $1.8B in damages), moved to California and started to stitch together a property portfolio. Once he brought his brothers on as partners in the 90s, the business leveled up. 

Haresh’s defense rested on one of those classic parables in business: Is a person’s word their bond? He argued that without a written 🖋️ agreement, his brothers couldn’t prove they had a partnership with him. But the jury found that Haresh had violated an oral contract, common both in the diamond trade and in the Joganis’ community. 

Staggering stat: A lawyer for one of the brothers estimated that the portfolio’s NOI is $137M, a sum that would place it among the top dynasties in Manhattan real estate. Dhandho. 

Florida Goes FAR Out

Florida is the YIMBY capital of America at the moment, and developers are making the most of it. The state’s Live Local Act kicked in last year to address the housing crisis, incentivizing developers to build more AH and workforce housing by giving them fat tax breaks, slashing red tape, and allowing them to build taller and add more units. (Developers must designate at least 40% of rentals at or below 120% AMI for 30Y, and mixed-use projects must be at least ⅔ resi to qualify). The Whitman family’s use of Live Local at the Bal Harbour Shops is a fascinating case study. 

It was a breakthrough, but developers wanted more. They argued that it didn’t address FAR restrictions - which made the height and density increases useless – and didn’t provide parking requirement exemptions. Help, developers cried, and lawmakers heeded the call. This week, they approved mods to Live Local that allow projects to be built to 150% of the “highest currently allowed” FAR in the area, per TRD. The amendments also did away with parking requirements for some projects. Good deal, but it’s silly to think developers would be fully satisfied.

“This is not the last time you are going to see Live Local on the Florida legislative agenda,” land use attorney Keith Poliakoff told the publication. “This is only the beginning.”

Quickies

• Veritas (Yat-Pang Au) is selling off 750+ RS units in SF (remember that the firm lost a massive part of its portfolio to foreclosure, since taken over by Brookfield - I did a juicy dive into that saga here)

• “Shadow” CEO of Jersey (obviously)-based National Realty Investment Advisors, Thomas “Nicholas” Salzano, pleaded guilty to a $658M 👏 👏 Ponzi scheme 

• Miami developer Rishi Kapoor being sued by LatAm investors for nearly $10M (this is the same guy whose relationship to Miami mayor Francis Suarez was under scrutiny)

• Eastdil is shopping the fee interest in the Row Hotel in NYC, a 1,331-🗝️ Times Square-area hotel fka Milford Plaza that’s made headlines for its role as a major NYC migrant shelter. The ownership situation here is murky: it’s likely the brokerage is working on behalf of the lenders on both the leasehold (owned by Rockpoint/Highgate) AND the ground (owned by Werner/Deutsche).

• Sterling Bay is expected to sell Groupon’s former HQ in Chicago for below its $374M debt. It bought the building in ‘18 for $510M.

Office-Resi Limbo

“Nothing happens. Nobody comes, nobody goes.” - Samuel Beckett, Waiting for Godot

In October, the Biden administration threw $35B towards perhaps the defining problem of today’s real estate market: How do we convert all those damn office buildings into much-needed housing? The funds, typically used to finance 🛤️ infrastructure, could now be used by private developers to kick off office-resi conversions near transit facilities.

“Across the country, we’re seeing decades-high levels of office vacancies in many downtowns, while at the same time many American cities and towns face a steep shortage of housing,” Transportation Secretary Pete Buttigieg said at the time.

Noble intentions. But when a government behemoth meets the realities of development, the results can be less than stellar, as this terrific Bloomberg deep dive demonstrates.

So far, no transit-oriented development loans have closed under these Build America Bureau funds, though three projects are currently in an active underwriting phase.

What’s the rub? 18-24 month financing approvals vs. your standard 60-90 days in the private market; rigorous environmental 🟢 reviews; and the coughing up of a $1M nonrefundable deposit that essentially DQs smaller developers. I got some more color from one such developer - his words below:

• Prevailing wage is required ==> makes this not a fit for smaller projects

• Timeline to approve one of these loans for a TOD project is 14-18 mo and project needs to be shovel-ready at start of application. This is the most damning part IMO. Makes it really hard to use on a regular project

• Needs to be a JV with a govt entity (this is satisfied by Historic Tax Credits). Basically says that some govt entity needs to sign an agreement saying the project benefits them. Entity doesn't need to have an investment in property, can just be an MOU

• On the + side: up to 35Y amortization; interest rates on par w corresponding T-Bill; prepayment of loan can be deferred 5Y

Unquotable Quotes

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