A bankruptcy auction scheduled for Thursday is expected to determine the fate of about 5,200 rent-stabilized apartments across New York.
Summit Real Estate Holdings, an Israeli firm, serves as the bidder setting the floor with a $450 million offer. The portfolio's owner, Pinnacle Group, valued the properties at $826 million in its May bankruptcy filing.
The stark 46% value gap underscores mounting financial pressure on rent-stabilized properties. New York restricted landlords' ability to raise rents on vacant units in 2019 through the Housing Stability & Tenant Protection Act. Operating expenses have surged without corresponding revenue increases, driving Pinnacle into Chapter 11 protection.
Newly sworn-in Mayor Zohran Mamdani had asked the bankruptcy court to delay the Jan. 8 auction by 30 days. The city wanted time to evaluate Summit's bid and explore alternatives that protect tenant interests.
But a spokesperson for Judge David Jones of the U.S. Bankruptcy Court for the Southern District of New York told CoStar News in an email Wednesday that no hearing or conference call was scheduled on Mamdani's request and that the auction bidding was proceeding as planned.
The sale tests the appetite for rent-stabilized properties in America's largest multifamily rental market.
The properties generated $27 million in positive cash flow before debt service in 2024. However, debt payments consumed those gains, resulting in a $12 million loss, according to Pinnacle's bankruptcy court filings.
Rising interest rates also transformed performing assets into distressed properties, with mortgage rates jumping from between 3% and 4% to as high as 10.25%.
The outcome of the auction signals whether institutional capital views rent-stabilized units as viable investments or financial traps.
Nearly 1 million apartments in New York carry rent-stabilization protections, according to New York University's Furman Center, an organization that researches and debates housing and urban policy. These units anchor housing affordability across the city.
And Pinnacle's portfolio is not the only one experiencing financial distress.
In October, Morningstar DBRS put a $600 million loan on a New York portfolio that consists of 31 rent-stabilized multifamily properties totaling 53 buildings on review for a downgrade. The borrower, an affiliate of A&E Real Estate, defaulted in 2024 when it could not pay off the loan at maturity.
Morningstar's commentary on the loan highlights the struggles of rent-stabilized apartments.
"Although occupancy across the portfolio has remained above 85% since 2019, expense increases have outpaced rent growth, partially because of caps on rent increases as mandated by the Housing Stability & Tenant Protection Act of 2019. According to the December 2024 rent roll, the portfolio was 92.7% occupied, a slight improvement from 89.7% at issuance," Morningstar said.
The bond rating firm described higher expenses including utilities, property insurance and management fees.
New York's 2019 tenant protection act restricted rent increases on departing tenants and limited cost recovery for unit improvements. The law also curtailed condominium conversions, eliminating a profit strategy Pinnacle used successfully before the changes, according to its court filings.
Pinnacle portfolio
Pinnacle's bankruptcy filings show 82 debtor entities collectively owning properties encumbered by $564 million in Flagstar Bank mortgage debt. Independent appraisals by Bowery Valuation set the book value of the portfolio at $826 million as of December 2024.
The properties span Manhattan, Brooklyn, the Bronx and Queens. The portfolio includes 19 properties with commercial tenants operating retail, grocery and office businesses.
Summit deposited a 10% down payment securing its stalking-horse position. Flagstar has committed financing to complete the deal, though new players could emerge with higher bids in Thursday's auction.
Summit and Pinnacle did not respond to requests for comments to CoStar News.
Mamdani took office on Jan. 1. He visited one of the Pinnacle properties at 85 Clarkson Ave. in Brooklyn that afternoon, according to the city's bankruptcy court request, meeting tenants and inspecting building conditions.
The mayor pledged to protect tenant rights and city interests in the bankruptcy proceedings. The city filed a motion requesting the 30-day auction delay to permit the evaluation of Summit's offer and exploration of alternatives.
After the auction takes place on Thursday, a court hearing confirming the sale and bankruptcy plan is set for Jan. 15.