Isaac Kassirer was at the forefront of one of the hottest trends in commercial real estate. He borrowed from global investors by promising to gentrify apartment buildings in New York’s low-income neighborhoods and raise the rents. Mr. Kassirer fell behind on some loans before the coronavirus pandemic and now some tenants are in open rebellion. Longtime residents, joined by some new, high-paying renters, are on strike. When the pandemic ends, recently passed pro-renter laws are likely to make it harder for him to carry out his plan.
Mr. Kassirer’s company, Emerald Equity Group, said that “these issues we are experiencing in fact what many building owners in this great city are finding themselves grappling with as a whole” and that it is addressing tenants’ complaints. Wall Street embraced landlords like Mr. Kassirer over the past decade. Bankers packaged up their loans and sold them to bond investors with the promise that the buildings would generate much higher income. The market for those bonds grew from about $400 million of issuance in 2012 to $22.4 billion last year, according to commercial mortgage tracker Trepp LLC. Rental housing was the most common property type financed by such bonds. Today, the combination of new laws meant to preserve low-income housing and the pandemic has left many of the borrowers struggling to pay off their debt. Forbearance programs tied to the pandemic are delaying a possible reckoning. Mr. Kassirer borrowed $90 million from global investors in late 2018 to upgrade nine buildings he owns in New York’s East Harlem neighborhood.
Emerald promised to realize a “strategic vision to replicate the high-class Manhattan amenities,” according to its website. He had fallen behind on some mortgage payments before the pandemic hit and about 40 of his mortgages in the area went into forbearance in the spring, according to Freddie Mac data. The $90 million mortgage he got was called a transitional loan. Transitional loans are riskier than typical commercial mortgages advanced by banks. The space is dominated by nonbank lenders such as credit funds and real-estate investment trusts that have grown to become a major force in commercial real-estate finance in recent years. They originated an estimated 12% of commercial mortgage loans by value in 2019, up from 2.9% in 2009, Mortgage Bankers Association data shows. Mr. Kassirer got his transitional loan from LoanCore Capital, a lender owned by two of the world’s biggest investors, Singapore’s GIC, a sovereign-wealth fund, and the Canada Pension Plan Investment Board. The two investors together manage more than $700 billion. The Singaporean and Canadian funds deferred comment to LoanCore. A spokesman for LoanCore said the company is a responsible lender that takes strong actions to remedy issues faced by tenants in buildings it financed. The company didn’t provide examples of any actions it has taken and the spokesman declined to comment further.
East Harlem has long been home to low-income, Spanish speaking residents. It is where Magdaly Marrero, 60, raised her two children on paychecks from McDonald’s, KFC and Popeyes restaurants. Mr. Kassirer bought her building in August 2017, shortly after he purchased several dozen similar buildings nearby, totaling nearly 1,200 units. It was the biggest deal yet for the then-34-year-old real-estate investor who had previously bought buildings in the Bronx. LoanCore packaged Mr.Kassirer’s loan with dozens of similar mortgages into two bond deals totaling $1.5 billion.
Transitional loans, which were popular in hot real-estate markets such as California, Florida, New York and Texas, did create affordable housing in some instances. Elan Gordon used transitional loans to convert two struggling hotels into 240 affordable apartments in Greenville and Bluffton, S.C. “It’s delivering new supply to an area that needs it,” said Mr. Gordon, who runs SHIR Capital, an investment firm in Austin, Texas. He is converting four more hotels in Austin into below-market rent apartments.
In other situations, the loans are used to boost rents. In Toledo, Ohio, one bond funded a $23 million loan on 888 apartments where the owners planned to introduce regular rent increases, pet fees, application fees and eliminate free housing for maintenance staff, according to a prospectus. In the East Bay of California, a formerly seniors-only community is in the midst of a conversion to an all-ages apartment complex. Current rental listings suggest the property owner is making good on its plan to increase base rents by 64%, as projected in a 2018 bond prospectus. Banks cut back on transitional lending for reputational and financial reasons. “It’s just not our business model,” said Joe Fingerman, head of commercial real-estate lending at Signature Bank, a New York lender. The bank backed off from such lending under pressure from affordable housing groups. The bond market that financed transitional loans sputtered this spring when the pandemic hit. The share of delinquent loans increased from 0.22% in March to 2.2% in September, Trepp data show. New deals also slumped, with about $7 billion of new issuance so far in 2020, versus $22.4 billion for all of 2019. Half of the 2020 volume was before the pandemic, according to Trepp. Hit by New York’s new rent laws, pushback from tenants and the impact of the pandemic, Mr. Kassirer’s situation is worse than for most landlords. Tenants say he let his buildings fall into disrepair. Rat and cockroach infestations, mold, broken radiators and appliances, gas shut-offs and other issues have forced some tenants to move. Others stayed put and joined the rent strike in East Harlem and three other Manhattan properties
where tenants are collectively withholding more than $600,000 of rent checks, according to those tenants’ attorney. Emerald said that the issues inside the buildings “were not caused by us but rather [were] the result of aging structures built at the turn of the last century that are in need of restorations and upgrades.” It added that it is making “strenuous efforts to address any outstanding issues at our buildings and are confident of resolving these soon.”