August 13, 2019

View from the Inside: A Storied Lender's Journey to Hell and Back

Michael Lappin

Michael Lappin
Managing partner /MLappin & Associates LLC

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February 14, 2016 11:00 PM

View from the inside: A storied lender's journey to hell and back

Michael Lappin

It is good that the Community Preservation Corp. (CPC) is poised to increase its lending activities and hopefully renew its role as an important community lender ("After being on the brink of collapse, major affordable-housing lender is back in business"). However, let's not overstate CPC’s past problems, nor undervalue or misunderstand its past accomplishments.

CPC consistently pursued its mission to support the varied and changing affordable housing needs of the communities it served. In building and preserving more than 147,000 housing units from its founding in 1974 during its first 37 years, CPC was one of the most creative and productive affordable-housing organizations in the city and state.

In its early years, CPC, together with the city and state, worked with building owners to rehabilitate and preserve their buildings in neighborhoods threatened with abandonment. As the city’s economy rebounded, CPC worked closely with the Koch and Dinkins administration to rebuild the abandoned buildings and restore communities. CPC and the city comptroller brought the enormous resources of the city and later state pension funds to support these efforts. Tens of thousands of apartments were built and restored through these efforts, breathing new life into New York’s neighborhoods.

In the early 1990s the city’s economy went into recession, threatening the viability of many affordable rental buildings, as well as recently converted moderate and middle-income cooperative and condominium housing. CPC, working with the State of New York Mortgage Agency, stepped up to restore the financial and physical health of these properties.

CPC’s signature achievement in this area was the restoration of the 12,271-unit condominium complex at Parkchester in the Bronx. It led a partnership that bought the unsold residential and commercial units and organized a $250 million six-year renovation program. The result: the predominantly moderate-income apartment owners saw the collective value of their renovated homes grow by almost $300 million!

In the 1990s, New York City’s population grew by more than 600,000, but the city’s housing production failed to keep pace, with only about 85,000 new homes built during that period. The severe shortage of housing for households earning between $90,000 and $130,000, became a priority for the city to support its work force for its growing economy. CPC joined that effort. Working with small builders in the outer boroughs, CPC provided debt averaging about $240,000 per apartment to successfully finance thousands of condo units whose projected price was affordable to the aforementioned income range. The only public subsidy provided for city projects was 421-a real estate tax benefits. Many of these properties catalyzed the growth of new communities throughout the city.

CPC’s purchase of the Domino Sugar site in Brooklyn in 2004 was viewed as a major opportunity to leverage the strength of real estate market to create a large new site for affordable housing, cross-subsidized by its market rate sales and rentals. The company made a commitment to have 30% of the housing units affordable, skewed to align with the income ranges of local residents.

Domino and work-force housing were additive to CPC’s continual efforts to build and restore low and moderate-income housing.

The precipitous decline in the economy in 2008-2009 hit particularly hard on CPC’s investments in work-force housing.

In early 2008 CPC halted new lending for moderate-income condominiums. However, many projects had already been committed or placed into construction. As these properties neared completion and began marketing, loans for purchasers virtually disappeared. Without sales, the added carrying costs (interest payments, insurance, security, etc.) strained the budgets of both developers and contractors of these mostly small projects in the outer boroughs. Several of these projects defaulted. CPC’s New Jersey, Connecticut and upstate projects, although a small percentage of its lending, suffered more severe defaults as moderate-income areas declined. Many have yet to recover.

CPC, like all residential lenders, was affected by the depth and length of the recession. For the first time in its then 33-year history it experienced significant losses. Prior to that time, its losses, from about $5 billion of loans, were less than one tenth of one percent (0.1%).

In 2009, CPC had outstanding loans of around $900 million on for-sale projects. While we were watchful of these loans—not all were considered “bad”—various strategies were employed to get the projects completed. Some completed their sales program, some became rentals, some were sold and/or foreclosed with losses, etc. At the end of 2011 these loans were paid down to about $350 million. We estimated our losses, principally on for-sale loans, to be about $60 million. CPC had accumulated sufficient liquid assets to cover these losses, not to mention its significant property assets.

There is no doubt that CPC has gone through a difficult period over the last several years, particularly as its sponsoring banks virtually eliminated its line of credit for construction loans despite CPC never having missed or made a late payment in its history.

Nonetheless, the “rebranded” CPC has been bequeathed with a substantial net worth as evidenced by its latest balance sheet: income from its servicing portfolio, income from Parkchester, and income from sales and monetization of its other property assets. With this financial strength and its new and renewed credit agreements, CPC can once again become a significant partner with the city and state to meet the affordable-housing needs of the communities it serves.

Michael Lappin, principal of MLappin & Associates LLC, was CEO of the Community Preservation Corp. from 1980 to December 2011.

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