Odd Lots - NY Community Bancorp's Problems in the Rent-Stabilized Market

Episode Date: February 8, 2024

The last week saw a major plunge in shares of New York Community Bancorp after the company revealed challenges in its lending to multi-family residential developers. So what went wrong at this bank? And what does it say about this particular market? On this episode we speak with Quantierra CEO Ben Carlos Thypin, a New York City landlord and investor, about the bank's large role within NYC's rent-stabilized housing market. Over the last year, Ben has advised funds to short NYCB based on its exposure to this complex corner of real estate. He explains how NYCB's position, combined with market and regulatory changes to the city's housing market, contributed to the strains.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast Oddlots on Amazon music. Hello, Oddlots listeners. You were about to hear a conversation about the troubles at New York Community Bank Corp. We recorded this interview on February 6th and a statement to the market NYCB said that its deposits have increased since the end of last year and that liquidity remains ample. A spokesperson for the company did not respond to a separate request for comment from OddLodz. Now here is our episode on New York Community Bank Corp. Hello and welcome to another episode of the Odd Lops podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, banking troubles again. Obviously we had that little, I don't know, mini-crisis.

Kerfuffle. Kerfuffle last March with SVB and a couple other banks. And then recently, I think just last week, we're recording this Tuesday, February 6th, another one. That's right. So we saw New York Community Banking. Bankor, NYCB, their shares fell something like almost 40% in a single day after they released a bunch of announcements. So let's see, I'm trying to remember all of them. So they missed on earnings per share. They cut their dividend and they increased their reserves for bad loans. So basically the

provisions or the amount of money they set aside to cover souring credit. And of course, this set off a wave of conversation and analysis about how much of that issue has to do with NYCB specifically or whether it's saying something broader about the outlook for these loans. And I should just say that in its statement, NYCB specifically cited commercial real estate and multifamily as well, which is sort of the, I always call it the forgotten CRE because everyone focuses on offices, but Multi-family also falls into the CRE category. Yeah, right. We did that episode a few months ago.

I think in October, we did an episode on multifamily because we know that there was just this incredible boom, right? In 2021, and social media influencers were like raising money on Instagram for, you know, Sunbelt CRA. And so there is this big question about the category more broadly. This is, of course, not a Sunbelt. story. It's New York Community Bank Corp, but it gets this question of like, oh, is this something idiosyncratic to the bank, or is this broader? Are we going to see multifamily

problems elsewhere? It feels like each one of these banks that's gotten into trouble over the last couple of years, there is this furious debate. It's like, it's just idiosyncratic. It's just Silicon Valley. It's just crypto exposure. It's just New York. But then eventually you have enough idiosyncratic and people start to go worry. Are there like, are there things going wrong, are there similarities with other banks? Yeah, and it's funny. You mentioned the multifamily episode. I think that was with Lee Everett. He was basically saying

that was the next shoe to drop in the troubled CRE category. But we did actually do an episode even before then titled the NYC landlord who says the golden age of being a landlord is over.

That's right. So we did do a New York specific one, our guest then Ben Carlos Teppen. local real estate guy who owns residential real estate. He also does some data stuff and other things. And he basically came on. He's like, look, my family has been in this business of renting out apartments for a long time. And the business is going bad. This is not a business I really want to be in it anymore. He mentioned that he would be selling off some or all of his assets over time. I think he specifically said he wouldn't be doing a fire sale or like a mass liquidation,

but then he wanted to get out of the business. He also said that he was interested in ways to essentially not just get out of the business, not just remove his de facto long position, but seeing if there were ways to bet on the downside. It was this, there is like a combination of like, okay, yumbism in New York seems to be on the rise, so there perhaps is going to be more supply, plus a sort of shifting political landscape, but I think this is key such that regulations will make life harder for landlords. Yes, this is the return to, I mean, it never went away completely, but a newfound popularity of rent control and the issues that maybe causes for landlords. And of course, I mean, the backdrop to all of this is that interest rates have gone up spectacularly.

And so why deal with tenants and policy when you can just put your money in a money market fund and earn 5%. Yeah, that's right. And also, you know, in New York specifically, we have an affordability crisis. And we have an affordability crisis even among individuals. and families that make a lot of money. So plenty of New York City professionals who are renters, who make decent incomes, still find this housing market very frustrating, feel that they're paying way more than they should be in getting squeezed. And of course, you know, people with good money and professional jobs historically have had a lot of political power. And so this idea that, okay, there is this very powerful renter class in New York City, specifically, that politicians

have to listen to, which sort of tilts the dot, turns the dial more towards pro-tenant policies that landlords may not like. Well, on that note, I'm very excited. We have been back on the podcast. Ben, thank you so much for joining us. Thanks for having me. Let's talk before we get into the conversation, because we want to talk to you about this real estate market. We want to talk to you about CB specifically and what's going on with them. I mentioned in the intro that, that you said on our episode early last year that you're not just interested in getting out of the space, selling off of your assets, but also exploring ways to essentially short the space. Of course, you've done some work on that, including on NYCB. So I think we should start with a disclosure.

Where are you at right now with this? Sure. So, you know, after our episode last year, really before it, I was exploring, you know, the various ways that one could approach shorting multifamily to, you know, express the thesis. that I talked about on that podcast. And I found out a couple of things, one of which shorting is very hard and requires a lot of capital. But in doing so, I settled on New York Community Bank as a target and spoke to and advised several hedge funds on New York Community Bank being a good target based on, you know, totally public information. I can't speak to what trades, if any, they executed on this. All I can say is that I, neither I know my firm were or are short New York Community Bank and have not

received or are not entitled to any compensation tied directly or indirectly to the performance of that stock. But you were paid for your advisory services or your consulting services to the hedge funds. Correct. And just to be clear, you said on the podcast last year that you were planning on getting out of the residential real estate business in New York City. What's happened between then and now on that front? We've sold one of our buildings. We still have a few more to sell off. Got. So maybe just to begin with, can you talk a little bit about NYCB's relationship to multifamily? Like, what is the exposure here? So they mention a multifamily portfolio. What is that? How did they come to own it? And what does it look like? Yeah. So they are, by their own account, I think the second largest multifamily lender in the

country. And multifamily loans represent 44% of their entire loan book, not just real estate loans. And 22% of their entire loan book is a particular type of multifamily loan, which is rent-stabilized, loans on rent-stabilized buildings in New York City. And this is a business they've been huge in for five decades. They are currently the biggest lender on rent-stabilized buildings, even more so than the now-failed signature bank. And, you know, the growth of New York Community Bank as an institution is really tied up in the fortunes and evolution of the rent-stabilized market over the past 30 years. So, you know,

let me ask the two of you. If you ever lived in an apartment in New York City within a building that was built prior to 1974 and contained six or more residential units? Yes, but it hasn't been rent-stabilized. Exactly. And did you pay like what felt like a really high rent for it? Oh my God. I am still paying a really high rent for it. Go on. Well, there was a time that all apartments in buildings like that were rent-stabilized. And the reason that you paid a very high rent for that ancient apartment is deeply tied up in the story of New York Community Bank over these past 30 years. Wait, so what is the allure of rent-controlled apartments? Because if I think about, I want to be a real estate developer or a lender in New York, I do, you know, I want some luxury building

that's all shiny and new and I can charge an incredibly high amount for people to live there. I don't necessarily think, oh, I'm going to go into rent-stabilized properties. Right. So historically, up until the early 1990s, the allure of these properties was a lot less than it became. And it was largely based on, you know, the solidity of it as a business. You know, the rents are low, so the occupancy always stays high. And it was a bond business. And what changed in the early 90s is, you know, New York City at that time was in really bad shape. There's a lot of high budget deficits, high crime, all these foreclosed buildings, cost. in city hundreds of millions dollars in property tax revenue. And in response to that dynamic, landlords claimed that the foreclosures and the blight were the fault of rent regulations. And if you think about this doesn't really make sense because, you know, it's a self-serving argument and sort of gets the causality backwards. Like every city in the country was having major problems resulting from de-industrialization, white flight, and these other, you know,

mega trends, most of which did not have any form of rent regulation. So the real estate industry claim was like, all right, if you let us raise the rents, then we'll fix up the buildings, property taxes will go up, et cetera. Politicians and the New York City Council bought that and implemented a policy called vacancy decontrol, which allowed apartments to be deregulated in the buildings that we talked about. Once the legal rents breached a threshold of, at the time, was $2,000 that was later raised several times. And I think before it went away. The highest was $2,700. So, you know, at the time, legislators from places like Bushwick, which were very poor, where, you know, the highest rent in the neighborhood was $500, they could never imagine that a rent could get to $2,000. Oh, I see. So they thought they had a long way to go until they would reach that cap.

Yeah. So, you know, incidentally, that's in 1994, a little bank known as Queens County Savings Bank goes public the year before in 1993. That later becomes New York Community Bank. So what happens between 1994 and 2019? New York City's economy booms like many other urban markets around the country. Population growth, job growth far-out-out-place housing construction, which then sends rents on existing housing soaring. So this makes for a very good combination for landlords. The value of apartment buildings increases. Liquidity in the debt and equity markets for apartment buildings in New York City increases. and New York Community Bank really grows along with its landlord clients. It becomes the biggest lender on these rent-stabilized buildings, provides acquisition loans for the landlords to expand.

It provides refinancing after refinancing, allowing their clients to take money out of these buildings. And during this process where the bet is basically, all right, market rents are, it's worth deregulating these buildings all over the city because the spread between market rents and the regulated rents is so high, the pricing on these assets gets totally out of whack. The spread between buildings that are selling in the Bronx, which have a very weak credit profile, and buildings that are selling in Manhattan really narrows. And that continues for the next 20 years. Sorry, just to back up, just because I want to be precise, what specifically did the New York City Council do in the early 90s when you say that 2,700. What happens there? Okay. So up until that point, rents on a rent on a regulated apartment, like the one that Tracy lived in, could only be raised a certain amount.

Oh, wait. I didn't live in a regulated apartment. Well, it was a regulated. Oh, it was. Yes. Sorry. Yes. It's previous life. Yes. And up until that point, the rents could only be raised by a certain amount based on what the rent guidelines board issues each year. Okay. And starting there was some erosion of that system prior to 1994, but the big change in 1994 was that the apartment could become completely deregulated once it breaches that $2,000 threshold. So instead of it being able to only go up 3% a year, it could go from 2000 to 4,000. And there's also a bonus for when an apartment goes vacant. So every time an apartment turns over from tenant to tenant, the rent could be increased 20% as opposed to just the rent guidelines board amount. So the obvious question here is that would seem to create an incentive structure for landlords

to basically try to get to the 2,700 or 2,800 threshold so that they could then raise the rent to whatever the market can bear. Did we see that behavior? And how exactly do they try to speed up that process? Yes. So there are three ways that they try to speed up that process. One is buyouts offering people money to leave, which is legal. Others are harassment of tenants out of buildings and using all sorts of means.

And the third is inflating the cost of renovations that they're doing that are used to justify increases. Because that was always another way to increase rents was like if you need to put in a new boiler in the building, you could amortize the cost of that improvement across all the rents. in the buildings, in the building. If you need to redo the plumbing in a particular apartment, you could amortize the cost over that. Sorry, something I'm still confused by, even post-1994, and I've only lived in New York almost 20 years now, but every once in a while you hear some story about so-and-so

has an apartment on the Upper East Side and they're living in it and their grandmother is still there, but it's still like crazy. This is the Friends plot line, right? Yeah, something like that. How did those stories exist in a post-94 world? Sure. So one, there's still a very old system of rent control. Yeah.

So, like, that is a very small number of units, but also does represent some of those situations. So we're talking about a difference between rent control and rent stabilized. I see, I see. So the rent control, like, they're just like, this is it and this is the price. Yeah, where someone is. That actually was not changed. What changed was these, was the units that were designed to just go very slowly. Correct.

I mean, rent control is also designed to go up very slowly in a way. but once a rent control, at this point, once a tenant in a rent control unit vacates, that, you know, becomes rent-stabilized and it sort of enters into the new system. I see. But to answer your broader point, which I think speaks to this dynamic here, is post-94, you know, this trade of, you know, improving the apartment, either actually or on paper, in order to get the rent above the deregulation threshold, really only works in strong sub-markets. So there was a time, every apartment in a building of a certain size in below 96th Street was rent-stabilized.

But Manhattan is the highest rent market in New York City. So all of those apartments, or excuse me, a huge proportion of those apartments were deregulated because there was enough spread in there for the landlord to be able to, for it to be worth doing the work. Same thing in places like Park Slope and sort of Western Brooklyn, Queens, you know, the gentrifying areas of the city. city. Whereas in the non-gengerifying areas, the ways this policy mainly manifests itself was in just increasing the rents higher than they otherwise could be, but rents never are much, much more rarely reach the threshold to be able to deregulated. Can you talk to us a little bit about the financing picture? To what degree did this dynamic

become, I guess, well known in the fundraising side of this whole thing? So, Was it pretty easy to get loans an additional capital in order to either buy more properties on the assumption that you could eventually get to that threshold and raise the rent or to fund renovation to try to get to that threshold? Yes. It was pretty easy and became particularly so in the early 2000s, early to late 2000s, you know, with sort of the broader shenz in real estate of institutionalization, more private equity, and, you know, became a more sophisticated. a business that was putting more capital in more places. So prior to, let's say, 2000, the rent-stabilized business was still a pretty sleepy business insofar as like what type of capital played in it. So like mom and pop might have an apartment building? Okay. And, you know, there were certainly large landlords at that point that had accumulated a lot of these properties, but, you know, private equity firms were not a big player at that time. But in, particularly in the

2000s, the private equity and both on and also private credit and the New York Community Banks of the world really put a lot of capital into this sector and largely based on the premise that they would be able to raise these rents a lot more. On April 4, 23, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App.

From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts. Let's talk a little bit more about that because Tracy mentioned in the beginning, like setting aside everything, you know, it doesn't seem like rent control or rent-stabilized buildings or any of these buildings are like a particularly exciting place to lend in. but if everyone thinks the place is not an exciting place to lend and then intuitively there's sort of like above market opportunities for the one player that goes in. And we see this all the time in all kinds of markets where like, yes, like you can make a lot of money in distressed assets of all sorts because most people don't want it.

So if you put in the legwork to make it work, you can make a lot of money. Talk to us a little bit more about like the relationship that New York Community Bank Corp had with fellow landlords. in your world, why landlords like working with them, why they liked working with landlords, and why this was the profits that they accrued during the good times. Sure. So the New Community Bank really,

like many community banks, it's a relationship bank. And clearly as part of its strategy, it was building relationships with rent-stabilized landlords. So this has several benefits to them. Obviously, making loans is what a bank does. But also, these community banks typically require

anyone getting a commercial mortgage from them to have deposits at this bank as well, and also like the deposits from tenant security deposits held in these buildings. Excuse me, at New York Community Bank. So it became, you know, a way for the New York Community Bank's of the world to really build their deposit bases and their loan books on a product type in which there's a lot of product. You know, there's a lot of these buildings that need loans. And it's also kind of complicated. So like lenders from out of town, you know, they're,

which were coming to land on office buildings and all sorts of other assets were less inclined to land on rent-stabilized buildings, not because of any sort of accurate assessment of risk, but just because it's easier for some- Wasn't their thing. So for some French bank to loan on an office building, then figure out the rent-stabilization code. So if we're looking at all the headwinds that are facing this particular segment, in addition to things like the fact that rates have gone up enormously. I think there was a more recent change to policy in 2019. Can you walk us through what exactly that was and how it sort of changed the picture for multifamily?

Sure. So prior to 2019, the bad behavior that we talked about earlier of harassment, the lack of housing construction, and the general dynamics in New York City's housing market really produced a terrible situation. We have, you know, rent housing burden for tenants across the city is way up, record levels, homelessness is way up. And in 2019, a finally unified statewide coalition of tenant groups called Housing Justice for All capitalized on the post-Trump progressive resurgence to pass the Housing Stability and Tenant Protection Act of 2019, which is now known as the HSTPA.

This bill did many things, but for the purpose of this conversation, the most important things it ended vacancy decontrol. So you can no longer deregulate rent-stabilized apartments. So that reduces your incentive to harass your tenants out? Theoretically. And it removed the 20% vacancy bonus. You can't raise the regulated rent by 20% on turnover. And it also severely curtailed the degree to which landlords could recapture the renovation costs in rents.

It's funny. So I wanted to go here actually at some point in the conversation because right around the corner, little did we know in 2019, that a couple years later, we'd have like the worst inflation in 40 years. And we know that it was like a real headache and a very costly headache for landlords to get contractors in and renovate and floors and air conditioners and anything else that landlords would have to deal with. So I was sort of curious about that. Okay, it sort of like curtails the ability to recapture renovation costs. But objectively, the cost of renovation did explode, right? Two years later.

Can you talk a little bit more about the intersection of these regulations with just the reality that you don't even have to, not even for like sort of nefarious purposes or purposes of raising the rent? Like renovation cost really did explode. Right. So I think, you know, the regulations, inflation, and interest rates changing are really accelerants to what was sort of an inevitable trend on these buildings. So, you know, post-HSTPA, the liquidity in the market for these buildings just dries up. There's no price discovery. Most sellers don't want to crystallize their losses. Most buyers don't know how to price the assets, you know, in large part because the issues that we just discussed. And brokers in the sector are by and large, like,

indulging their client's delusion. So, you know, this puts people like, or excuse me, lenders near community bank in a difficult position. Because like in addition to not wanting to mark down the value of their collateral, like any lender wouldn't. In this case, doing so would, you know, put some of their deposits at a lot of their deposits at risk as well. And they don't know what the future holds. Like everyone in this world of rent-stabilized buildings is sort of engaged in this collective delusion. They're waiting for the Supreme Court to overturn rent control. They're waiting for the legislature to weaken the HSTPA. And I think this, This is where they really miscalculate and really sort of bought into their own propaganda

from 30 years ago, which is that they think that real estate investment drives economic conditions, but really economic conditions tend to drive real estate investment. And they would have known this if they had looked at the data from the rent-stabilized building sector, which showed that this trade really started to taper off before the HSTPA in 2017, the amount of rent-stabilized buildings being traded. So the question is why. And the reason, I think, is pretty simple if you look at the history of the deregulation. There are fewer and fewer buildings in which this deregulatory trade actually worked because, you know, if market rents are not high enough, it doesn't make any more, it doesn't make sense to invest all this money in these buildings. So after all the deregulation that happened over those preceding 25 years, the vast majority of rent stabilized stock and therefore collateral in near community bank loans remains concentrated in lower income submarkets. So this is a There's always subprime real estate, and the buildings are, you know, they're a century old, they're expensive to maintain, the tenants have a weak credit profile. So even if the laws did

allow for higher rent increases than they do now, at some point you can't pull blood from a stone. Big rank increases are going to increasingly show up and increase collection costs, legal fees, etc. All while operating costs, to your point, Joe, are increasing on these ancient buildings. And if you think about like the other buildings in these neighborhoods, the vast majority of other multi-family buildings, one's built after 1974 in places like the South Bronx, literally require subsidies to operate. What's the future of these buildings now? So one thing you see landlords say nowadays is because of the changes to rent control

that they aren't motivated to get new tenants in. So why spend a load of money renovating an apartment, getting it up to standard if you're not going to be able to make up that investment by charging market rent. Just leave it empty. So are we just going to end up in a situation where apartments are empty or at some point do landlords maybe crystallize their losses and start saying, you know what, I'm just going to sell this off. Maybe a developer can knock down the building, build something new. What actually happens? So it's obviously going to vary a lot between landlord to landlord. Some are in better financial positions than others. But to your point, Tracy, it doesn't really make sense to invest

conventional for-profit capital in these buildings, certainly at anywhere approaching the values of the past. So I think, broadly speaking, we're sort of in a standoff between these rent stabilized building owners, their lenders, and on the other side, the government, because these buildings need subsidies to survive. But if I'm the government, and I guess we're all the government away as taxpayers, we don't want to subsidize buildings at above market value. But on the other hand, you don't want buildings to degrade to a point where subsidy becomes way more expensive and, not to mention the tenants living in the buildings, increasingly suffer. So it doesn't seem like we're at the point politically where that people can, you know, come to an agreement on injecting capital into these buildings.

But I think that's an inevitability. But just going back, your basic argument here is that, you know, okay, like you bet on this deregulation trade. Maybe the Supreme Court will one day say all rent control or something is illegal or rent stabilization regimes are legal. Or maybe the government will water down the 2019, the New York state government or something will water down the 2019 policies. But your basic argument is that even if that were true, that gap between what these build, the fair market value of these buildings today under current law and the sort of dream legal changes aren't that big or aren't as big as some of the call option embedded is not as great as some of these investors imagine. Correct. In some cases, the call option is very valuable. Like if it's a

fully rent stabilized building on the Upper West Side, you know, they're basically, you're buying the land. That land there is very valuable. But the, if it's a fully rent stabilized buildings in Eastern Queens or the South Bronx, that land is not very valuable. So the idea that they're going to demolish it anytime soon, it doesn't really hold up. So I think, you know, we're dealing with a disconnect between what the market in its collective delusion valued these buildings at before and what they're fundamentally valued at based on, you know, cash flow and fundamentals of these buildings. And a change in law doesn't change that very much simply because of where the real estate is located and the credit profile of the tenants in the buildings.

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We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcasts. What separates good leaders from transformational ones? I'm Jessica Chen and in season two of Leading By Example,

we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your own. podcast. Setting aside the investor upside potential from a regulatory change, one of the arguments that

the anti-rent control argue people make is like, and you sort of did touch on this, that it is a perverse or bad situation for people living in a building if their owner has either no interest or financing capacity to keep that building up. So then essentially the person is living an asset that continually gets degraded or does it get fixed that often and the building is falling apart. How real is that for some people in some buildings, that phenomenon? I think it's very real, but I think that argument from landlords really tends to fall on deaf ears because people were living in conditions like that under the old regime. It's not like all the money that was being made in this business was being plowed back into investing

these buildings. These buildings are the least well kept in the entire city. They were before and they are now. So it's certainly a very real dynamic that these buildings require capital and they have owners that for both rational economic and moral reasons or ideological reasons don't want to invest capital in those buildings. However, a lot of the problem goes back to having a really inept regulatory apparatus for housing because in many cases these landlords are legally obligated to provide to make these or make sure these buildings are in good repair and have not. been doing so for quite some time. So Ben, obviously people are going to need a place to live. This real estate isn't going away. Are these investable assets? Is there a play here for some of this real estate? I don't want to leave listeners with the impression that these are like

uninvestable buildings. They are, they're fundamentally depreciating assets, but like as many Bloomberg listeners would know, like there's plenty of financial assets out there that have depreciating cash flows. What really needs to happen here is these buildings need to be valued at a values that reflect their fundamentals. We're starting to see previews of this where like some of these rent-stabilized buildings are leased entirely to city programs or entirely to tenants with section 8 vouchers. So there's going to be various forms through which capital is injecting these buildings to stabilize them, whether it's providing vouchers to tenants, city leasing it directly, non-profits taking them over and getting, you know, government financing and every possible

formation in between that. There's no several to fixing these buildings. because they're all in their unique situation. And, you know, we have so little open housing that it's not like the tenants have anywhere that they can go. So it's a very live issue. All right. Ben Carlos Teippen, thank you so much for coming on odd lives. Fascinating sort of like New York City real estate history that you did a great job out clearing up how we got to this position. Thanks, Robin.

Tracy, I thought there were a lot of interesting points in there. One thing in particular I just start on, and it's not directly related to the regulation, this idea of like the relationship lenders, you know, reminds me of SVB. It's like, oh, you have this expectation that that's where you hold the security deposits, et cetera. And it kind of brings me down. It depresses me a little bit because the idea of... You want a relationship with your bank? Well, I like the idea of financial institutions that actually get to know a space that, like, build up a specific needs rather than like pure commons. commodity lending or it seems counterintuitive because you think they should be developing

expertise and good risk management skills in a particular sector but instead so far what we've seen is it tends to lead to I guess over exposure I guess one thing also that is maybe unique and very different from an SVB other than the you know one thing that's when similarity obviously is the expectation of holding deposits and focus on one industry but I guess one thing that's different and interesting is and I thought it was a fascinating point. that I hadn't thought of because of the sort of complexity of New York City housing law. And I'm sure we basically just scratched the surface, that it sort of naturally repels most capital. Like, as you said, a French bank isn't going to sort of like really like take the time

to really deal with like, oh, post-1974 houses, pre-1974 houses, all that. And so it sort of creates the situation where one type of bet ends up being concentrated in the hands of one or a small number of players that actually put into the legwork to understand the market. Yeah. The other thing I thought was interesting about that particular dynamic was it kind of leads to a situation where, okay, there's not a big natural body of capital in this space for, you know, the various reasons that we laid out. But if you do the work, do your due diligence, put that effort in, you can get in and then

make a lot of money because the dynamic almost becomes self-reinforcing. Right. It's like you have this business model that's basically predicated on the value of your building going up. And then you have lenders who are very into that dynamic as well. And you have more money coming in vis private equity, private capital, which Ben also mentioned. It feels like it almost becomes this little like tiny feedback loop feeding on itself. The other thing that this is related, but the other thing that interested me was the idea that, well, these were always subprime. assets, right? But again, that ecosystem of players were sort of telling themselves a different story. Yeah. And everyone agreed on that story at the same time. And that that's fine, as long as everyone can keep agreeing. But then when the environment starts to change, when interest rates start to go up, operational costs go up, it kind of falls apart. Totally. I thought that was a really fascinating point that even if, like, you got the dream free market wish list that many of these buildings just do not.

have the embedded value that a lot of the investors sort of assumed or imagined that they would. That's like a really interesting debate there. I also thought it was interesting, you know, that in the old old days that rent stabilized balance, as he described it, it's a bond business. And so it's almost like when it got out of the business of being a bond business where suddenly people started maybe thinking of it as like an equity business. Yes, exactly. That's sowed the seeds of its eventual demise because you keep pushing to try to get out of the bond asset class. get something more like equity market returns.

And that's when the story becomes really important, the story being like, well, we're getting close to the 2,800 threshold, and we're going to renovate and eventually get over it, and then we'll make tons of money because this is going to be a shiny new designer apartment or something like that. On that happy note, shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast.

I'm Tracy Alloway. You can follow me at Tracy Alloway. I'm Joe Wisenthal. You can follow me at the stalwart. follow our guest, Ben Carlos type, and he's at So Bendito. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, and Kail Brooks at Kail Brooks. And thank you to our producer, Moses Ondom.

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