Tenants Want Bank to Pony Up for Maintenance on Foreclosed Bronx Apartments

Dees Stribling, Contributing Editor

New York–The tenants at 3018 Heath Ave. and nine other buildings in The Bronx want their landlord to make repairs to their buildings. That might be an ordinary enough grievance, but this dispute might have far-reaching implications for multifamily owners in the city–or rather, those lenders who foreclose on such properties. The ten buildings in the Bronx are in foreclosure, and the tenants want the lender to undertake major repairs.

According to the New York City Department of Housing Preservation and Development, there are hundreds of immediately hazardous violations in the 10 buildings in The Bronx, which are home to about 500 families. Conditions such as broken plumbing, bum HVAC systems, rat infestations and the like.

The tenants claim that the portfolio has been in decline since its previous owner, Los Angeles-based Milbank Real Estate, defaulted on its $35 million mortgage. Like so many investors in the mid-2000s, Milbank bought at the height of the bubble, anticipating that it would be able to gentrify the properties and thus charge much higher rents.

The following real estate collapse and recession made such plans untenable. In March 2009, the mortgage holder, a $3 billion commercial mortgage-backed securities trust controlled by Wells Fargo, took possession of the properties. Now the tenants want Wells Fargo to pay for badly needed maintenance, and are employing a novel legal strategy to compel the bank to do so.

Normally in a foreclosure, the court appoints a receiver to maintain the properties as the case works its way through. But in the case of these highly leveraged buildings–and a lot more apartments in New York are likely in the same fix–the rents being collected can’t cover the maintenance costs, or more fundamental repairs.

A motion filed on Wednesday by Legal Services NYC-Bronx in State Supreme Court in The Bronx asks Justice Stanley B. Green to force Wells Fargo and its special servicer LNR Partners Inc. to take better care of the buildings while the foreclosure process continues. In other words, spend some of their own money, above and beyond rental income, for repairs.

The move represents more than just a legal gambit. Considerable political pressure is also being brought to bear, with City Council Speaker Christine Quinn, Bronx Borough President Ruben Diaz Jr., and others local politicos publicly pushing for the bank to assume maintenance responsibilities, something they said at a press conference on Wednesday.

It’s unlikely that Wells Fargo will want to do any such thing (the bank didn’t return calls asking for a comment). Generally speaking, mortgages are structured so that lenders or the purchasers of mortgage-backed securities don’t have take on such extraordinary property management expenses. Still, in the topsy-turvy new normal of real estate, it’s possible that the idea of holding lenders with multifamily REO on their books responsible for major repairs might get some traction, if not in court then among lawmakers.