Kim Powell has lived in West Harlem all her life, most of it in her rent-regulated apartment. The 53-year-old remembers cruising the neighborhood in her father’s car as a kid, looking at the gutted and burned-out buildings of the 1970s. But over the last two decades many of the homes and shops in Powell’s neighborhood have been restored. As early as the 2000s, gentrified Harlem was on the entire country’s radar as Bill Clinton set up offices for his foundation in the neighborhood. It was around then that the Pinnacle Group, the owner of Powell’s building at 706 Riverside Drive, started planning a condominium conversion for the property.
Gentrification as a theory is sprawling and chaotic. Gentrification as it plays out in real life on the streets is always exacting—lot measurements, rent rolls, income levels. Each number is part of an investor’s plan. And each investor in the city’s housing market is operating independently, executing a specific plan for this building or that neighborhood—everyone’s got a niche. But what bonds these disparate players together is the institutional support they receive: aspirational mortgages from banks that are predicated on displacement of rent-regulated tenants.
In the case of 706 Riverside Drive, the condominium-conversion plan was made possible by a Wells Fargo mortgage. Pinnacle managed to secure a mortgage based not on the actual income a developer could draw from the property at the time, but on the potential income if the building’s units were flipped from affordable to luxury. In New York, this is an alarmingly regular practice.
The Math of Displacement
Powell has lived at 706 Riverside for 37 years and, like most of her neighbors, her apartment is rent stabilized. Apartments included in New York’s rent-stabilization program have measured rent increases set annually by the city’s Rent Guidelines Board, which generally approves something between a 1 and 4 percent hike each year. That keeps the income a developer can get out of a rent-stabilized building relatively flat. But the flat income also makes those buildings relatively cheap to buy, when measured against the premiums paid throughout the New York real estate market. So when the property makes the jump from a regulated rent roll to market rate condominiums, the returns that an investor sees are steep, and fast—if they have the bank capital to make it through that transition.
As part of the condominium-conversion process, Pinnacle was required by state law to offer tenants in rent-stabilized apartments the opportunity to buy their own units. If the tenants turned down the offer to buy, they still had the right to remain as long as they fulfilled the terms of the lease.
In 2007, when the city approved the request to put 706 Riverside Drive through condominium conversion, Pinnacle had buyers for 10 apartments and reported a rent roll of $28,015 a month for the remaining 41 units in the building. Despite this modest, relatively fixed income generated by the property, Wells Fargo granted Pinnacle a blanket mortgage of $34 million for 706 Riverside Drive, along with 10 other adjacent buildings of similar size and with similarly modest rent rolls.