Milking Time: Boom and Crash in Apartment Houses

I

APARTMENT buildings — thousands upon thousands of them — house the millions who make New York their home. Each one of them stands as a monument to somebody’s faith in urban real estate as a sure source of profit. And for many years the faith was justified, for it was possible to put up a magnificent building upon the merest shoestring financing. Firstmortgage money was plentiful, and what the savings banks and insurance companies were unwilling to lend, other lenders were eager to advance in the form of second, third, and even fourth mortgages. Of course the financing charges for such secondary loans were exorbitant — 6 per cent interest plus all the ‘bonuses’ human ingenuity could invent. Those who built had to bid high for the money they used, but New York was growing fast and it looked as if nothing could stop the triumphant rise of real-estate values. Who would quibble about paying 15 or 20 per cent for loans if he could erect a building, rent the apartments, and then sell out to an eager purchaser at a handsome profit? The purchaser also bought with borrowed money, but he too planned to sell at a profit as soon as possible.

The real-estate market, in other words, was another stock market where bullish traders bought for a rise and sold to others who were certain that prices would soar higher still. In these sales of brick and mortar, ticker tape played no part, but speculation and wild inflation were just as rife as in Wall Street, and the same processes of deflation were as inevitable in one as in the other. Of course there was never an actual crash in the real-estate market. There are no black days to remember like November 13, 1929, on the Stock Exchange, or the terrible day, more recently, when the Dow Jones stock averages reached a new all-time bottom. Yet the actual losses that have accrued in the past two years to owners and mortgagees with money invested in New York apartment buildings, as well as to the hundred-odd industries which depend upon real estate, can only be compared with the immense shrinkage in security values.

To tell in detail how it all happened would call for a book. For present purposes suffice it to say that the time came in 1928 and 1929 — at the peak of ‘ prosperity ’ — when owners of real estate could no longer meet interest and other payments on their mortgages. If they could not raise the necessary funds, they were faced with the alternative of either turning the property over voluntarily to the corporation or individual who had lent them money or losing it to the mortgagee by foreclosure suit. It then fell to the lot of this mortgagee, who now became the owner of the property, to take care of the prior mortgages and pay the huge taxes which lie heavily on all metropolitan real estate. As economic conditions grew worse, one mortgagee would lose to another in slow or rapid succession, depending upon their resources and the earning power of individual properties.

This has been the process, gradual in its first stages but swift in its acceleration, which has been going on relentlessly until now it has affected thousands of apartment buildings on a scale never witnessed before. Every time a house is ‘lost,’ numbers of people suffer directly, finding themselves out of pocket to the extent of many thousands of dollars, and the repercussions spread throughout the whole economic system.

In order to understand this bedlam of debt piled upon debt in the face of a shrinking income, let us spend a few moments in the office of a typical apartment-house operator.

Interest is overdue on the first mortgage, and the savings bank has already written two letters threatening immediate foreclosure. Even more pressing is the second mortgagee, who has demanded that back taxes for the second half of 1930 must be paid by to-morrow morning at eleven o’clock. Several tenants are waiting in the outer office. They come for only one purpose: their rents are too high, and unless they are granted a reduction they will move out. There are also several bill collectors hanging around. One of them is a painter who swears to the stenographer by all that is holy that he will put a lien on the building not later than noon to-morrow. The practised eye of the stenographer has also spotted one waiting man as a process server. Who else would have shown suspicion in every gesture and asked in a loud voice for each of the officers of the corporation by his full name?

Meanwhile, there have been three or four telephone calls from the building itself. A tenant has moved out without warning, breaking a lease and owing three months’ rent. . . . ‘No, it was impossible to rent apartment A-ll to the dentist who has been considering it for the past three weeks. We wanted fifteen hundred dollars a year, but he would pay only eleven hundred and he demanded the first three months as a concession.’ . . . Another call from the agent: he has caught the agent of the building across the street in the very act of offering to rent four rooms for eighty dollars a month when he promised only last week not to cut the price below ninety dollars. . . . ‘Vacancies still about 18 per cent. Well, is n’t everybody else in the same boat ? ’

All this within the space of a few minutes. The operators of this apartment house know only too well that there is no longer a chance of their being able to bring order out of such chaos. The problem before them now is to salvage as much of their investment as they can before the building passes into other hands. The property must be made to yield every possible cent before the mortgagee takes it over. Milking time has come.

II

Now how does one milk a building? It is a science which has never been reduced to written principles, but it can be carried out with all the exact precision of an experiment in a laboratory. I have recently had occasion to observe the process at close range and am beginning to appreciate some of the finer nuances. Let me offer as an example an apartment house which stands, we shall say, on West 102d Street.

It is an eleven-story building about twelve years old with elevator service and all the various modern improvements. The building had passed through many hands before it was finally bought by a certain speculator in 1928. He took over a first mortgage of $250,000, a second mortgage of $90,000, and agreed to pay an additional sum of $75,000 in cash. But this was not all. The speculator did not have $75,000, so he obtained from a mortgage firm a loan of approximately this amount, and gave in return a third mortgage. I say ‘approximately this amount’ because there were some mysterious transactions involving bonuses and special payments, which caused the third mortgage to be officially reported at $90,000. These figures, therefore, represented a valuation of $430,000 on the property.

The speculator was to operate the house, and from the rent he was to pay interest on all the mortgages plus certain fixed amounts which were required to reduce the principal of each. The summarized figures were as follows: —

Annual income from rents $70,000
Fixed payments:
Interest on first mortgage $7,500
Installment on first mortgage 15,000
Interest on second mortgage 5,400
Installment on second mortgage 15,000
Interest on third mortgage 5,400
Installment on third mortgage 15,000
Total fixed payments 63,300
Available for taxes and running expenses $6,700

From this small balance he was expected to pay taxes of at least $10,000 and maintenance costs of something like $20,000.

Now why would anybody in his senses ever enter into an idiotic arrangement like this? Strange as it may now seem, such operations were by no means uncommon during the boom years of the last decade. Every speculator believed that property values would continue to mount indefinitely, and he expected that he would soon be able to sell his building and ‘get out’ with a handsome profit. Unfortunately, things did not work out according to plan. Then what happened? The whole extraordinary story can best be told by following the fortunes of that apartment house on West 102d Street.

When the time came for the speculator to make his first quarterly payments, he found himself a bit short of cash, but he promised to pay up within two weeks. He was expecting, he said, to make a great deal of money on another transaction, which would enable him to take care of all arrears on the property. Two weeks passed, and he told the same story again, with additional flourishes. In the end, after a number of delays, he finally made an assignment allowing the third mortgagee to collect rents. Meanwhile he fell behind in his payments on both of the other mortgages, and taxes were overdue. So it went until at last the third mortgagee had to take over the house and assume the obligations of keeping it running and of paying off all the arrears, which now amounted to quite a large sum. The speculator was as sorry as he could be, but in turning over the property he said he was sure everything would work out all right. Those who speculate with other people’s money can afford to be optimistic.

Now the holders of the third mortgage did not intend to lose their investment if they could help it, but they could not collect anything from the speculator. Even the rents he had pocketed during the months he had operated the building were irrevocably lost. Their only hope lay in the apartment house itself. So they set about running it, always at a deficit, but expecting that at any moment they would be able to sell it.

Then came the crash in the stock market, which set in motion an endless train of further unfavorable developments. Many tenants found that they could not pay their rents and insisted on reductions, lease or no lease. Before very long three fourths of the tenants had managed to obtain cuts ranging from 10 to 35 per cent, and the others either moved out or were dispossessed. The third mortgagees were now so deeply involved, however, that they felt they could not let the house go even though they were losing money on it every month. From time to time they asked the holders of the first and second mortgages to reduce the huge payments that were falling due, but without success. Matters went from bad to worse until at last the approach of the autumn renting season of 1931 brought a new ray of hope. If all the vacancies could be filled at satisfactory rentals, perhaps they could weather the depression and sit tight until real-estate values began to pick up again. This proved to be the last illusion, for the renting season of 1931 was the worst in history.

III

At this point — it was the end of September — the firm went over the whole situation with a lawyer. To him the problem was a simple one. ‘You can’t possibly carry your losses any further. The only thing you can do now is to start milking the building. Then, when you have to, you’ll turn the house over to the second mortgagee and let him worry. You may get only ten cents on the dollar for your investment, but that is all anybody can expect these days.’ He brought in a friend, an ‘adjuster’ who had been making a specialty of just this sort of thing, and urged the firm to follow his advice in everything.

The adjuster studied the problem carefully. At the moment the bank account showed a balance of about $3000, which had been accumulated to take care of the New York City taxes for the first half of the year. These taxes should have been paid in May, but there had never been enough funds available. Every time the first or second mortgagee had insisted that the taxes must be met, the owner answered with a promise. In the middle of September, however, the vice president of the savings bank which held the first mortgage had given notice that foreclosure would be commenced immediately after October 1 if a receipted tax bill were not exhibited before that date. The adjuster’s first bit of advice was to ignore taxes entirely and to keep the mortgagees at arm’s length with the most plausible excuses that could be invented. The whole idea, he explained, was to pay out absolutely nothing, but to collect rents as fast as possible and for as long a period as they could. Then, when the mortgagees finally foreclosed, they could have the bricks and mortar and the tenants, and the firm would have a comfortable sum in the bank.

The plan seemed good enough in theory, but it would not be easy to carry it through. Not only had the firm promised to pay $5000 in taxes on October 1, but interest on the first mortgage, amounting to $3750, and an installment payment of $7500 would also fall due at the same time. Obviously the holder of the first mortgage would be suspicious of delays and would not let more than a few weeks go by without taking action. To make matters worse, interest and installment payments on the second mortgage, of more than $20,000, would come due on October 15. Even if the first mortgagee could be persuaded to hold off, no peace could be expected from the second: he would be concerned not only about getting his own money, but also about the heavy payments he might have to make in the event of a default. The main course of action was clear, however, and the milking process was begun in dead earnest.

The tenants of this apartment house had always been very slow in paying their rent. Most of them managed to pay by the end of the month, but few could ever be prevailed upon to part with their money before the fifteenth. The problem that confronted the adjuster was to coax the tenants to change their habits and pay up immediately for October; every day was precious. He advised going through the building asking all the tenants if there was any painting or repair work they wanted done, and promising everything they demanded if they would pay their rent without delay.

’It won’t do any good in this house,’ replied the managing agent. ‘I have been making the most solemn promises for months, and at least half the tenants have told me they won’t pay another cent until the work is actually done.’

‘Give them promises in writing,’ suggested the adjuster.

‘We’ve tried that too,’ said the agent. ‘In a number of cases I had to do that very thing to collect the rent for September, and of course none of the promises have been fulfilled.’

The adjuster concluded that the situation was even more serious than he had thought. But he was a resourceful man, and he made an appointment with the agent for the following evening, October 1, when together they would begin to make personal calls upon all the tenants.

IV

The next evening the campaign was launched. The agent had prepared a three-page typewritten statement summarizing all the promises that had already been made to the tenants. Most of the tenants had wanted to have their rooms repainted, some had asked for new bathtubs, and a few had demanded frigidaires to replace oldfashioned ice boxes. It would have cost about $3000 to do the work that had been promised — almost three fifths of the total rent collections for the month. The estimate, of course, was purely academic; the agent knew that the work would never be done. The adjuster arrived upon the scene at the appointed hour accompanied by a boss painter, whose important place in the scheme was soon to be revealed.

Ringing the first door bell, they were met by the tenant’s daughter. She let them come into the foyer without any show of cordiality, and left them there, but they could hear her voice from one of the inner rooms announcing: ‘Papa, it’s that agent again, and he’s brought two other men with him.’ The father appeared in a dressing gown, hostility and suspicion sticking out all over him as he asked, ‘Well, what do you want now?’ (The agent had collected his September rent only two days before.)

The agent explained hastily that he had brought along the new president of the corporation, indicating the adjuster, who wanted to meet the tenants personally and see that all their requirements were given immediate attention.

‘Oh, well,’ said the tenant, ‘come in and sit down.’

Before they had seated themselves in the living room the adjuster stopped short and let out an exclamation. ‘Look here,’ he said, ‘that ceiling is in bad condition! It must be calcimined at once.’

‘That’s what I’ve been saying for months,’ replied the tenant, glaring at the agent, who had told him two days before that that very ceiling was in the pink of condition.

‘I’ve brought the painter up here,’ continued the adjuster, ‘to show him everything that must be done.’ He turned to the painter. ‘ Make a note to repaint the entire living room and foyer. Now then,’ he said, facing the bewildered tenant, who was completely taken aback by such unexpected generosity, ‘ is there any other painting that needs to be done?’

‘Well, no; not exactly.’ The tenant’s voice had become more friendly. ‘But how about a frigidaire?’

‘Let’s take a look at your ice box,’ replied the adjuster.

They walked into the kitchen, where the tenant’s wife was engaged in clearing away the remains of dinner. ‘There’s the wreck,’ said the tenant, pointing to the ice box.

‘Wreck!’ exclaimed his wife, who seemed to size up the situation at a glance. ‘Why, I ought to have complained about it to the Board of Health five years ago! And the agent does nothing but make promises. Well, all I’ve got to say is, not another penny for rent until we see a frigidaire standing right there — and that goes for painting the living-room ceiling, too.’

‘Madam,’ said the adjuster solemnly, ‘if you had only been in the living room one minute ago, you would have heard me order this painter to do the entire living room and the foyer as well. As for the frigidaire, I ’ll order it myself personally to-morrow morning, and I think we ought to be able to get it delivered within a few weeks. As the new president of this corporation, I want to have the satisfaction of knowing that our tenants are satisfied. And if you insist, we’ll put it in the form of a contract. Our firm will write you an official letter saying that we acknowledge receipt of the October rent — there has to be consideration and all that sort of thing in a contract, you know, to make it legal — and then we will go on to say that we do thereby promise to attend to the painting and install the frigidaire. And just to show you that I mean what I say, I would n’t even think of accepting your check until I have actually handed you the letter.’

‘Well,’ began the tenant, ‘if it’s really to be a contract in writing — ’

‘Then it’s agreed,’ interrupted the adjuster. ‘The agent will bring the letter the first thing in the morning and will accept the check.’

After they had left the apartment the agent remarked that the method had worked all right in this case, but it would n’t have any effect on the next tenant, for he had already been given liberal promises in writing to induce him to pay his last month’s rent, and of course nothing had been done for him.

‘Let’s tackle him,’ said the adjuster.

I have already pointed out that the adjuster was a resourceful man. In dealing with this new situation he demonstrated that his methods were as flexible as his morals. First he got into a heated argument with the irate tenant, who let it be known that he thought the firm was composed of crooks and gangsters. Then, at the height of the argument, the adjuster managed to draw from the excited tenant a rash statement to the effect that he would write out a check for his October rent the minute a painter set foot in his apartment and started to work. This was a seven-room suite and the cost of painting it throughout, which the tenant demanded, would almost equal the month’s rent. The adjuster had not forgotten this when he told the tenant to be ready for the workmen bright and early the next morning.

As they left the scene of battle the adjuster gave his instructions to the boss painter. ‘Send a man in there at nine o’clock to-morrow to start washing the ceilings. At nine-thirty we’ll call for that check. By ten we’ll have it certified. Then we will give you the word if it is O. K. and you can take your man off the job. Give some good excuse and say you will be back some day soon.’

V

Everybody had a fine time that evening. The tenants were delighted. Everything they asked for was readily granted — painting, frigidaires, even drastic reductions in rent. When tenants complained that their rents were too high — and many of them did — the adjuster was too big-hearted to quibble about it. He volunteered liberal cuts, but, significantly enough, all reductions were to begin not with October but with November, and every concession was conditional upon the immediate payment of October rent in full. The painter stood by with a notebook taking down thousands of dollars’ worth of orders that he knew he would never carry out, and the agent was kept busy scribbling the terms of all the fantastic agreements that were made.

In some cases the agreement stated that unless the work was done by a given date the tenant would be released from any further obligation to pay rent — but of course he was to pay the rent for October as soon as he received a copy of the contract. In one instance the adjuster was kind enough to agree that if the tenant would grant a release from an earlier promise to paint two rooms, which would have cost about thirty-five dollars at most, he would be given the entire month of December free of rent (the rent was $100 a month). This promise would have to be carried out, if at all, by whatever operator was unfortunate enough to have the building on his hands in far-away December, and the adjuster knew that his client would be well out of the picture before then. The tenant, unaware of the situation, cheerfully paid his October rent and decided to buy some new pictures to cover up his unpainted walls.

When a tenant asked to be released from his lease, the new ‘president’ of the corporation was much more obliging than the agent had ever been. All the tenant had to do was to pay his October rent immediately, plus the rent for one additional month, and he was given a letter freeing him from all the leases in the world.

Within a week the adjuster and his two assistants had visited every tenant in the building and had actually obtained checks from more than three fourths of them. Those who could not be moved by promises and refused to pay were threatened with immediate dispossession, and the threats were followed by action. Rather than go to court, the tenants paid the amount of rent mentioned in the dispossess notices.

Meanwhile the office of the second mortgagee was growing more and more nervous. Interest and installments on the mortgage had not been paid and the operator’s promises were evasive. When representatives of the second mortgagee telephoned, they never managed to reach the right person. Their letters were answered in a way to prolong matters indefinitely. Large firms cannot act quickly, because of lack of coördination between various departments, and this worked in favor of the adjuster. He played one department against another and twisted them up in their own red tape.

Finally a conference was arranged between the adjuster and representatives of the second mortgagee for October 20. On the nineteenth the adjuster telephoned to say that the meeting would have to be postponed until the twenty-third because of ‘unforeseen circumstances.’ On that date he arranged with a friend to telegraph from Baltimore in his name, stating that he had been called away suddenly but would return as soon as possible.

He feared that this might be the last straw, particularly since word had come to him that the first mortgagee was becoming impatient and had already notified the second mortgagee that he (the second) must either take over the property or become involved in a foreclosure suit himself. At this point the adjuster took the precaution of ordering the rugs removed from the halls of the building on the pretext of having them rebound, and he also took stoves and other articles from the vacant apartments.

This desperate move was the adjuster’s last opportunity. The next morning a notice appeared in the Times announcing that a receiver had been appointed, and by the twentyeighth every tenant in the building had been notified to pay rents to no one but the receiver. By this time, however, all the October rents had been collected and the rent roll for November had been reduced nearly 25 per cent. The second mortgagee now became the new owner, taking over the bricks and mortar, and with them a group of tenants so disgruntled and angered that it would take months of patient negotiations to satisfy them. The new owner was not necessarily bound by all the fantastic promises, but the adjuster had sown the wind and the second mortgagee was left to reap the whirlwind.

VI

These are the methods by which a building may be milked, and many are the apartment houses in New York which are now being submitted to the process. In some instances departing owners leave even greater havoc in their wake than did the one I have cited. Only recently I chanced to run across a more extreme case. I had gone out one evening to make a business call at the home of a prospective client. I am in the real-estate business myself, and had learned that this man was looking for a new apartment. I arrived at the building where he lived — a large and imposing new apartment house — only to find that the entrance was in total darkness, without a single light. The inner door was locked, so I struck a match in the outer hallway to look for the house telephone. I saw a long row of buttons, but there were no names beside them, so I decided to seek directions from the janitor. I found a small side door leading from the street, and entered. Inside a porter was tending a huge boiler. He did not know by name the man I was looking for, but he gave me the surprising information that for a week there had been only one family living in the entire building; they were in apartment 5-E.

This must be my man, so I returned to the entrance and with the aid of another match pressed the button opposite this number. Immediately there was an answering click-click at the door.

The lobby was in pitchy darkness, and by the light of a match I saw that it was completely bare of furnishings. On one side I noticed an elevator. Making my way to it, I discovered that it was one of the self-operating variety, but it refused to budge when I pressed the buttons — the current was shut off. I searched for the stairs and walked up four flights, lighting matches at frequent intervals to keep from breaking my neck, for there was not a single light anywhere. Finally reaching the fifth floor, I saw a luminous rim around the edges of a door, and from within came the blare of a radio. Here I found my man.

From him I learned enough details of what had been going on in that apartment house to get a clear picture of a desperate operator at his worst. The owner of the property had furnished the entire building as an apartment hotel with modernistic furniture, electric refrigeration, radios, and tiled bathrooms. Within a few months he had secured more than twenty-five tenants. Then he had gotten into difficulties the exact nature of which my informant did not know, but I recognized the symptoms of acute financial distress. One day the owner had hired a fleet of trucks and had removed the furniture from all the apartments he was able to enter, tenant or no tenant. When the occupants of the dismantled rooms returned in the evening, they were told to move elsewhere. The owner also ripped out the electrical fixtures from the kitchenettes as well as every other appliance that could possibly be removed from any part of the building, including faucets and showers. All this had happened about a week before my visit.

By these methods the owner of the building had salvaged everything he could from the ruin that had overtaken him, and he had also managed to rid himself of every tenant except the one upon whom I had called. This family had put a special lock upon the door, which could not be broken, and their apartment was the only one that had not been stripped. They had refused to move when the owner entreated them to do so, but at last he had persuaded them to change their minds by flooding the apartment above them so that water poured through the ceiling. In taking these desperate measures the owner had admitted quite frankly that he was determined to empty the house and make as much trouble as possible for the mortgagees, who were about to freeze him out. His methods, he added, were the only cure for the depression in real estate.

Such occurrences as I have described are common these days among the owners and operators of New York apartment houses who have built or bought with borrowed money. I have no doubt that similar conditions prevail in other large cities. In the first case which I have described, the adjuster was aware that he would have to keep within the strict letter of the law, however much he might scheme to violate its spirit; even so, he was compelled to carry through his plans with great secrecy during the entire milking period in order to avoid a premature foreclosure suit. In the second case, the owner could doubtless be held accountable in court for his wanton damage to the building — that is, if he could be found, for he disappeared the moment the mortgagees took possession. Other instances that have come to my attention reveal more or less the same practices in mixed degree.

But all questions of law and morals and even sound business practice we must leave to the proper authorities. My purpose here is merely to describe the situation as I have seen it, not in isolated instances, but by the score. Each of the thousands of apartment houses that are being lost in this period of depression is the scene of a dramatic struggle such as I have sketched — a struggle against time, where the race goes to the swift. It is indeed fortunate, or unfortunate, — depending upon one’s point of view, — that bricks can tell no tales.