Who Knew You Could “Milk” Buildings Right Here in NYC?

You can milk a prostate, a cow, and a whole host of other animals. Pretty much anything with nipples, or so I’m told. Though rent-stabilized buildings in New York City don’t have nipples, it turns out you can “milk” them too. 

Certain unsavory—or, depending on your point of view, savvy—investors are doing just that. But not in the way you think.

The so-called “last milking” phenomenon was described by Jamie LeFrak in a recent Real Deal article by Erik Engquist. It involves the purchase of distressed properties by what LeFrak called “rough and dirty operators” at the end of their financial life, when “operating costs…exceed revenue and no amount of capital reinvestment can make [the property] profitable.”

The asset class in question is, of course, NYC’s rent-stabilized properties.

The playbook is simple: buy the bricks cheap—say $30,000 a unit—collect the rent for as long as possible while ignoring taxes, deferred maintenance, and debt service (if any). None of it matters—or so the thinking goes.

It is straight out of Goodfellas. When there’s no more juice left to squeeze, the operators cut bait and walk away. Or, as the film put it, “you light a match [to it].” 

Abandonment isn’t an unfortunate accident. It’s the whole strategy.

It’s a filthy business, carried out by loathsome characters, for sure. City Hall wants to put an end to it as tenants suffer. But these operators aren’t inventing the game; they are simply exploiting it for personal gain. They are merely players on a stage built by Albany, with perverse incentives and bad rules.

In short, lawmakers deserve their share of the blame.

In 2019, Albany enacted a rent regulation regime that effectively ended the value proposition of rent-stabilized properties. Many responsible landlords have lost their assets through foreclosure and bankruptcy. More will follow if the “rent freeze” becomes law.

The “last milking” phenomenon is, in many ways, the byproduct of poor governance and rotten policy.

Rob Peter to pay Paul long enough, and the damage rarely stays contained.   

Sources:

How Buyers Squeeze Profits From Buildings Doomed by Rent Law