When Aundra McMullen-Clarke, a middle school teacher and sometime beautician, moved to Houston about a month before Hurricane Harvey in 2017, she was overjoyed to find a two-bedroom apartment in a gated compound with a luminous pool in the city’s Westchase district for just under $1,000 a month. Shortly after she moved in, she remembers, management even renovated the clubhouse area, where they would hold parties for all the residents every other month or so. “It was really nice,” she remembers, “especially after living in Miami where a lot of people cram their whole extended family into a house to make rent.”
Courtesy Pashiana Johnson
The pool at the Estates at Westchase a few months after the sale closed
Things started to fall apart, though, sometime after the first months of the pandemic. Tenants moved out in the dead of night as if they didn’t want anyone to see them; eviction notices would show up on their doors long after they’d left. The gym and pool shut down for “safety” reasons; when the building was sold the summer after COVID hit, the latter turned green. According to McMullen-Clarke, phantom surcharges began showing up on every rent bill, but when she called the front office to discuss them the phone would ring and ring; she later learned they’d stopped paying the phone bill. The new management charged $40 a month for “valet” trash service, but canceled its contract with the company retained to pick up trash every evening, so the same overworked maintenance guy who did everything else on the property had to pick up trash as well, and only when he got around to it. “There was garbage everywhere, it was really tragic,” McMullen-Clarke says.
Then last summer, she was undergoing chemo treatments for breast cancer when her air conditioner gave out. This time, she left a message with an investment firm she read online was the building’s actual owner, and this time, they actually sent a maintenance man to her apartment, but it was too little, too late.
Weeds grew, in which new tenants would let their dogs shit without picking it up. Management would shut the water off throughout the entire complex for hours constantly; once a week at first, then just about every other day. But when the water was on, it would leak from 100 different spots and attract ever more pestilence. The rat population exploded, eventually taking up residence in the ceiling above McMullen-Clarke’s bedroom, where they scratched and fought and made it hard to fall asleep. One day as she was ascending the stairway, she noticed a rat sitting contentedly on the handrail for which she’d been reaching. “I took a deep breath and said to myself, OK, one of us is leaving.”
McMullen-Clarke never reached out to city officials for help. Instead, she began touring luxury buildings, set on finding a place on the highest floor of the tallest high-rise she could afford. But she couldn’t escape “the PTSD of Westchase,” the fear that if something went wrong, it was out of her control to fix. While Harvey had taught her she did not want the responsibility of owning a house in Houston, she realized it was the only option. She started looking at Zillow, found a realtor, and had moved out by February, into a townhouse ten minutes away in a section of town called Energy Corridor. But she still worries about her old neighbors. “So many of them are senior citizens on fixed incomes, and they’re trapped by these slumlords who are probably stealing an extra one or two hundred dollars from them every month, and they don’t even realize it!”
WHEN MCMULLEN-CLARKE HAD MOVED into the Estates at Westchase four years earlier, Matt Picheny had been an internet advertising consultant in Brooklyn, Brent Ritchie was selling industrial motors in Canada, and Koteswar “Jay” Gajavelli had been running an IT consultancy in Irving, Texas, that claimed Qualcomm and ESPN as clients. But by the start of the pandemic, all three men had begun rebranding themselves as “finfluencers,” social media mavens who promised their growing audience of upper-middle-class telecommuters whose savings had been temporarily inflated by stimulus checks emancipation from wage slavery through the magic of “passive income” generated by apartment complexes. Like a lot of their peers, they immediately set their sights on Houston, which had topped the national population growth charts for decades and boasted such lax tenant protections that two law professors at the University of Texas at Austin wrote a study in 2018 on the city’s “epidemic of dangerous apartments.”
Gajavelli, Ritchie, Picheny, and friends bought the Estates in a package deal with three other buildings in Houston’s Westchase neighborhood, through Gajavelli’s company Applesway Investment Group. The 1,330 apartments in all sold for $119 million, or just under $90,000 a unit, a steep price for buildings that currently advertise one-bedroom apartments starting at $699 a month. But within a few months, Gajavelli would pay $56 million for a massive but severely dilapidated apartment complex across town in East Houston, where a police officer had just been killed trying to arrest a suspect on drug charges, in a transaction that would fail so spectacularly it would become the subject of city council sessions, newspaper editorials, and a tour from the lame-duck mayor.
As a syndicator of other people’s money, Gajavelli had a strong incentive to overpay for properties. His take of every deal, according to a lawsuit filed by 123 of his investors, was calculated as a fixed percentage of the acquisition price, plus a percentage of the monthly rental revenue, and then a percentage of the resale price. The Wall Street Journal reported last year that syndicators like Gajavelli raised $111 billion for real estate investments during the pandemic, and generally collected commissions of between 2 and 5 percent of each deal. In Houston, valuations surged to more than $150,000 per unit, from about $90,000 pre-pandemic, as transaction volume exploded to nearly $10 billion in the fourth quarter of 2021 alone.
The overheated multifamily market would take a devastating toll on apartment dwellers like McMullen-Clarke and her neighbors when the Federal Reserve began to hike interest rates in early 2022, quickly doubling and then tripling the interest payments on Gajavelli’s floating-rate loans. Sidney Beaty, a researcher with the Austin-based low-income housing information resource Texas Housers who previously worked for the state housing department, says it felt like the state was suddenly awash in squalid, barely inhabitable apartment buildings. “You just had a lot of buildings that maybe had decent inspection scores a couple years ago, that were suddenly so deplorable they’re making the evening news,” Beaty said.
Applesway Investment Group’s Jay Gajavelli in a promotional video for the company
Another Gajavelli property, the Timber Ridge apartments in East Houston, began making headlines just seven months after he purchased them for $56 million from an Austin-based real estate investor that purchased the building eight months earlier for what appears to be a fraction of that price. Unsurprisingly, Gajavelli had trouble paying the mortgage almost immediately, and by summer had stopped paying the trash collectors, causing a section of the parking lot to be veritably vanquished by garbage.
Gajavelli had taken out mortgages on the Estates and close to a dozen of his 20-odd other Texas properties with a Long Island multifamily mortgage empire called Arbor Realty Trust, an affiliate of which had also been the mortgage lender to Timber Ridge’s previous owner. Arbor’s founder, a moderately flamboyant mid-tier oligarch named Ivan Kaufman, had made $125 million in his thirties selling his first business to Bank of America in 1995, and in the intervening years mostly made headlines for extracurricular pursuits, like when he paid the famed “Hollywood fixer” Anthony Pellicano, according to court testimony, to break off his relationship with his pregnant Hungarian mistress—who happened to be the sister of someone who accused Chris Rock in a paternity suit—in 2002, or purchased a 60-acre Hamptons estate with a PGA-rated golf course and a 25,000-square-foot mansion the family rents out for weddings and conferences in 2019, or signed the Anti-Defamation League’s pledge to fight workplace antisemitism last fall.
Behind the scenes and layers of limited liability companies, Arbor has long been in the landlord business; in 2021, Kaufman boasted that his company owned more than 8,000 units from Manhattan to San Antonio. But during the first months of the pandemic, housebound residents of two Arbor-owned buildings in Hyattsville, Maryland, where a two-bedroom apartment rents for more than $1,500 a month, organized a rent strike to protest living conditions relatively indistinguishable from those at Timber Ridge: crumbling plaster, bedbugs, a veritable landfill of uncollected trash. A (successful) class action lawsuit filed by a local civil rights nonprofit followed, revealing that the two buildings had amassed 2,162 building code violations between 2014 and 2017—and that Arbor had used generic LLCs to acquire at least ten more in the area much like them.
Arbor got very little bad press from the controversy, because the tenants had trouble discerning who owned their building, but around the time the rent strike made The Washington Post, Arbor switched its finfluencer-lending business into high gear. Arbor had been courting syndicators since 2016, when it developed a crowdfunding platform, helmed by Ivan’s sons Maurice and Adam Kaufman, to capitalize on an Obama-era law that lowered the net worth thresholds for qualifying as an “accredited investor”—i.e., an investor deemed “sophisticated” enough to partake in ventures like Applesway that haven’t been vetted by the Securities and Exchange Commission. By the time of the pandemic, Arbor had, alongside like-minded trailblazers MF1 Capital and Benefit Street Partners, become the go-to financier for a certain ilk of get-rich-quicksters.
Apartment building valuations throughout most of the country had in the past been largely constrained by the underwriting standards of Fannie Mae and Freddie Mac, which require buyers of such properties to maintain rental income of at least 1.25 times the cost of making each mortgage payment. But Arbor and certain peers got more aggressive, likely reasoning that landlords could extract far higher rents out of tenants in “affordable” markets like Houston and Jacksonville if they could get the funding to make cosmetic improvements. (After all, that formula had made fortunes for thousands of apartment building owners on the East and West Coasts.) Arbor began pushing syndicators to take on so-called “value add” loans, floating-rate mortgages whose servicing costs exceeded existing rental income, which would be easy to refinance into agency loans once the renovations were complete.. Such risky loans dominated the market in 2021, when 59 percent of the nearly $348 billion in apartment mortgages issued were backed by none of the government-sponsored agencies.
Between 2020 and 2021, Arbor’s “structured” loan originations ballooned from about $2.4 billion to nearly $10 billion, according to SEC filings, which also show that Kaufman’s compensation in that period doubled, from $14.9 million to $29 million. By the end of 2023, the lender had built up a structured loan portfolio of $12.6 billion and Kaufman had paid himself another $31 million, making for a post-pandemic haul of $75.9 million.
Arbor’s loan book, as detailed in an entertaining report titled “Slumlord Millionaires” by the short-seller brain trust Viceroy Research, is secured by a far less aspirational portfolio of properties, acquired by a proverbial who’s who of finfluencers. Houston’s Swapnil Agarwal, one of the original multifamily social media stars, whose “life story” video quotes Martin Luther King while surveying the large collection of trophies he has received from various trade publications and has drawn more than a million views on YouTube, took out nearly a half-billion dollars in Arbor loans to acquire 3,774 units in Florida, including one building in Jacksonville that received 80 code violations in 2022 alone. KeyCity Capital, a Dallas-based outfit that recruits investors by hosting free “networking dinners” at country clubs across the country, took out six Arbor mortgages to buy properties like Memphis’s Emerald Pointe Apartments, where the deplorable conditions became the topic of a series of TV news investigations last year. Elisa Zhang, founder of something called the EZ Financial Independence University, teamed up with the real estate podcaster Lane Kawaoka to take out a ten-figure loan on Houston’s Kendall Manor Apartments, where Google reviews describe daily hot water outages, omnipresent cockroaches, junk fees, the story of a pizza delivery man who was shot on the premises, and maintenance crews who fix up apartments between tenants by simply painting over everything (including hair, bugs, and used ramen packages). The photogenic L.A. bros behind Tides Equities, who recruited 600 investors before they turned 30 by claiming to be the “Henry Fords” of building-flipping, got a $100 million loan to buy a 508-unit building in Las Vegas from Agarwal’s Nitya Capital that made the news after a series of massive fires broke out, the last of which killed one tenant, hospitalized six, and displaced 18, one of whom told the station that management had offered them a new apartment with a $500 rent increase.
Fox 26
Garbage piling up at the Timber Ridge Apartments
It wasn’t just finfluencers who paid too much for iffy apartment buildings during the post-pandemic boom. An established South Florida real estate investor called Elandis bought a building down the street from the Estates at Westchase in 2021, into which McMullen-Clarke’s son moved last year. “There was sewage backing up in the tub, the kitchen floors were always wet, they didn’t pick up the trash, and it smelled drastically,” she recalls. “He only lasted three weeks.” But Elandis shared something in common with Applesway and Tides Equities: It got a mortgage from Arbor.
Viceroy analyst Gabe Bernarde has scrutinized hundreds of Arbor’s multifamily loans, and just about every single one is, by his calculation, underwater; while the reported loan-to-value ratio of the collateralized debt obligations is 77 percent, he believes the properties are substantially overvalued, as evidenced by the fact that as the interest rates on their mortgages have soared to 9 percent, virtually all of them have drastically slashed spending on basic maintenance and upkeep.
In thousands of Google reviews, tenants have documented the lengths to which the finfluencers have gone to extract more revenue out of tenants while immiserating their lives. Dozens of Arbor properties the Prospect reviewed appeared to have at some point ceased paying for security, trash pickup, pest control, HVAC maintenance, and water; not a single one we reviewed did not feature tenants complaining about constant outages of water, both hot and lukewarm.
A lawsuit filed against Applesway by the new owners of its foreclosed Cabo San Lucas apartments in Houston contains reports detailing multiple shootings, an incident in which a man drove a stolen car straight through the wall of an apartment, and numerous reports of residents appearing in the front office with terrified children begging for extra security. Sadly, Cabo’s Google reviews do not suggest conditions have improved.
“DO NOT LIVE HERE!! YOU WILL HAVE ROACHES AND VARIOUS BUGS ALL YEAR LONG!!!” begins a review from a Tides building in Las Vegas. “DO NOT LIVE HERE YOU WILL REGRET IT!!!” opens a similar one from an Applesway building in Houston. “DONT MOVE HERE!! This place is the worst place I’ve ever lived and I’m EMBARRASSED to admit I’ve even lived here,” begins a review of an Elisa Zhang building in Phoenix whose “three sparkling pools are constantly green,” the “washer and dryers never work,” and there are “ROACHES EVERYWHERE!!!!”
VICEROY CALCULATES THAT THE AVERAGE DEBT service coverage ratio of the loans in Arbor’s $7.6 billion in mortgage securities is around 0.6. In a “rational market,” every single building that fails to generate enough income to cover interest expenses would go into foreclosure, get snapped up for pennies on the dollar, and rehabbed by opportunistic vulture capitalists hoping to lure in new tenants from neighboring buildings with the promise of first-world amenities like running water and regular trash collection. In the market we have, however, players like Arbor are sitting on so much extra interest income that it appears they can afford to devise elaborate shell games to put off the inevitable, so the foreclosure process has turned into another rigged joke.
When Houston’s Timber Ridge apartments went into foreclosure, a New York–based fund called Fundamental Advisors quickly bought all four buildings in the portfolio for a mere 17 percent discount of Gajavelli’s purchase price—which will hardly make up for the increased interest expenses, much less the plunge in revenue caused by Applesway’s neglect, which a lawsuit claims caused occupancy at one of its buildings to plunge from 94 percent to 54 percent by the fall of 2022. Naturally, Arbor financed the transaction.
Earlier this year, when McMullen-Clarke’s old complex the Estates at Westchase went into foreclosure, another New York firm, the newly incorporated AWC Opportunity Partners, quickly bought the property and the three others in Applesway’s portfolio with another generous $95 million loan from Arbor, representing a discount of just 5 percent to Gajavelli’s purchase price. It didn’t take too much digging for Viceroy to discover that AWC Opportunity Partners had been founded late last year by a longtime Arbor executive named Austin Walker. AWC operates out of Arbor’s Park Avenue office, is capitalized by $23 million in financing provided by Arbor, and recently invested in the buyout of another previously Arbor-owned building called Capitol Square in Maryland; an email to Arbor chief financial officer Paul Elenio inquiring about the deals was not returned. Viceroy’s Bernarde believes there are a lot more insider deals like that one lurking in the 40 loan modifications Arbor has boasted about making so far this year.
Indeed, a pair of lawsuits concerning a series of botched Gajavelli projects suggests the whole syndication frenzy was much more of a shell game from the start than it even appeared. In one, 123 Applesway investors allege that Gajavelli took more than $12.4 million of their funds to put a down payment on an apartment building in uptown Houston, only to reveal months later that he’d actually used the funds for an earnest money deposit on three buildings in West Houston owned by fellow syndicator and Arbor mega-client Agarwal’s Nitya Capital, which in turn allegedly absconded with the funds—possibly to pay off a tax settlement on the property Applesway alleges (in yet another lawsuit) Nitya concealed from it, presumably because the tax assessment valued the portfolio at a $100 million discount to the price Applesway had agreed to pay. (Arbor also bankrolled the Tides Equities purchase of Nitya’s inferno-prone Las Vegas complex.) Neither Gajavelli nor Nitya replied to requests for comment, though a plaintiff in the case against Gajavelli told the Prospect we should call him back “in a few weeks” in case the settlement offer the beleaguered guru had offered the investors did not materialize. “If this falls through I’ll tell you everything,” he said.
“Ultimately what ends up happening is this drawn-out and incredibly depressing process where tenants are just forced to live in substandard conditions until they either leave or, in the best-case scenario, someone finally buys the building for a low enough price that they can afford to fix it up and raise the rent,” says Beaty. “Either way, the end result of these types of deals is always displacement. Only now we’re seeing displacement on an industrial scale.”
