Illustration by Jandos Rothstein
In 2021, an Austin-based real estate finfluencer named Monte Lee-Wen made what was likely the quickest $50 million of his career selling the “Chronos portfolio,” a group of five working-class Dallas-area apartment complexes he’d purchased the year earlier, to a consortium of investors for $201 million, or $188,785 per unit. This was a nosebleed valuation given that nearly half the apartments were studios and one-bedrooms. The buyers, an upstart private equity firm called WindMass Capital Partners founded by a former investment banker and the massive Fortress Investment Group, which owns more than 110,000 units of multifamily housing, were ostensibly sophisticated investors.
But the economics of the transaction made no sense: Even at 95 percent occupancy, the five buildings were only generating 79 cents for every dollar in debt service they owed in early 2022—and that was on an interest-only loan. Even before the 500 basis points’ worth of rate hikes that would follow in the year and a half after the sale closed, the mortgage seemed dead on arrival.
But an analyst with the credit rating agency Morningstar DBRS who visited the five complexes had a rosier view of the portfolio’s future. Management had replaced the cabinet fronts and installed stainless steel appliances and a backsplash in a few dozen of the units, and the refreshes had been “so well received that it planned to market its July renewals at 23% rental increases,” the agency’s presale report noted. More crucially for Morningstar, the properties’ new owners were hell-bent on raising rents across the board, backsplashes or no: “Management quoted target monthly premiums of $100 to $200 and started to use Yieldstar to help monitor market comparable rates.”
By now, you have probably heard of Yieldstar, the private equity–owned software that numerous plaintiff’s attorneys, tenant advocates, and state attorneys general say is actually a front for a sprawling nationwide cartel that fixes rent prices to ludicrous heights and has caused the cost of an apartment to surge between 50 and 80 percent over the past seven years in several of the markets where the software is employed. In theory, and in its early days, Yieldstar offered property managers “recommendations” for pricing and duration of leases based on real-time data on what competitors were offering. But by the time Yieldstar parent RealPage acquired its biggest competitor, Lease Rent Options, from the hotel price-fixing giant Rainmaker in 2017, the algorithm had metamorphosed from a tool for informing pricing decisions into a weapon for systemically and liberally hiking them to “way too high” levels, to quote a leasing manager in one of the many lawsuits. RealPage has also been accused of retaliating against anyone who balked or attempted to circumvent the program, with newer “clients” especially singled out for indoctrination and surveillance to root out “rogue” leasing agents and ensure maximum compliance with the system’s demands.
RealPage not only raised the rent, but it baked eternal rent hyperinflation into the forecasting math of multifamily housing.
Reading the most recent version of a class action complaint, brought by 12 tenants in federal court in Tennessee, it’s easy to see why the FBI is digging into the case. The effect of Yieldstar’s market dominance and discipline has been utterly staggering, and neither RealPage nor its clients betray any uncertainty over the role the company has played in gouging tenants. Since 2016, rents have climbed 76 percent in Phoenix, 63 percent in Las Vegas, 80 percent in Atlanta, 66 percent in Wilmington, North Carolina, and more than 50 percent in Portland, Seattle, Charlotte, Nashville, and Dallas. One multifamily executive quoted in an antitrust lawsuit recalls, “We let [Yieldstar] push as hard as it would go, and we saw increases as high as 20 percent … Left to our own devices, I can assure you we would have never pushed rents that hard.” And in a 2021 promotional video cheering on the nation’s unprecedented 14 percent year-over-year average rent increase, RealPage executive Andrew Bowen said, “I think [Yieldstar is] driving it, quite honestly.”
And yet, to blame RealPage for the fact that rents are too damn high may actually understate the company’s impact on the state of apartment living in America. Because as the Morningstar DBRS report—and multiple others that directly reference Yieldstar—suggests, RealPage not only raised the rent, but it baked eternal rent hyperinflation into the forecasting math of multifamily housing, fueling a dramatic plunge in underwriting standards (and attendant rise in valuations) that lined the pockets of every manner of real estate speculator in 2021 and 2022. This maneuver led to extreme blowback when interest rates—and the floating-rate interest payments owed on the thousands of apartment buildings that changed hands during those years—began to balloon. Perhaps even more insidiously, when mortgage payments rose in 2022 and landlords should have, by conventional market logic, been jumping to fill empty apartments, RealPage instead gave them the tools to extract ever-higher revenues out of powerless renters, no matter how trash-strewn, roach-infested, or crime-ridden their homes had become.
TRADITIONALLY, RENTAL PROPERTY VALUES were constrained by the amount of rental income they are capable of bringing in. Government-sponsored entities Fannie Mae and Freddie Mac will only write mortgages on multifamily properties that generate rental income equivalent to 1.25 times the cost of servicing the debt. Banks lent funds to investors looking to renovate apartment buildings in hot areas under the assumption that they’d be able to increase rents, but only if underwriters assumed the landlords would achieve the 1.25 debt service coverage ratio required to finance into an “agency” loan by the time the loan matured.
But Yieldstar proved landlords could grow their rental revenue without making any improvements whatsoever. One client with 20 properties grew its revenue 21 percent in the first year it adopted the software, according to one of the class action lawsuits against RealPage and 50 landlord co-conspirators. Especially when interest rates were near zero, that kind of unprecedented revenue growth supercharged apartment building valuations, at a time when unprecedented irrational exuberance was fueling speculative bubbles across the economy.
In conferences, seminars, YouTube videos, and on real estate investment platforms like BiggerPockets, small-time real estate gurus crowdfunded down payments on apartment buildings, generally targeting affluent individuals in fields unrelated to finance like engineers, surgeons, and, in the words of a short seller who attended a multifamily investment conference held by the ultra-finfluencer Brad Sumrok last year, “soooooo many dentists.” Thirtysomething WindMass founder Mitchell Voss, who opened up shop in a Dallas office adjacent to Sumrok’s and bought the Chronos portfolio in Dallas and more than 30 other complexes following stints at Goldman Sachs and UBS, was relatively experienced compared to many of his fellow real estate syndicators; nevertheless, he told a podcast in 2020, “I shouldn’t really be able to do what I’m doing with the limited track record that I have.”
But he was assisted by an aggressive new generation of lenders that was increasingly willing to throw traditional debt service coverage standards to the wind. The debt fund MF1 Capital, which was the favored lender of prolific multifamily flipper Tides Equities, and the REITs Arbor Realty Trust and Ready Capital, which financed WindMass’s Chronos purchase along with $10 billion in other loans in 2021 and 2022, were some of the most famously aggressive. But many commercial banks like The Bancorp, a Delaware-based branchless bank best known for catering to fintech startups that counts WindMass and many even greener multifamily investors as clients, also got in on the party. Nearly $700 billion worth of multifamily properties changed hands in 2021 and 2022, the vast majority of it financed by non-agency lenders.
Keeping a robust inventory of empty apartments is at the very core of the philosophy in which RealPage indoctrinates its clients.
Perusing the credit reports from those boom years makes for alarming reading. Many collateralized loan obligations (CLOs), the financial crisis–style securities that made these purchases all work, boasted debt service coverage ratios well below 70 percent even before interest rates surged. A presale report on a CLO of MF1 loans underwritten in 2022 lists an aggregate debt service coverage ratio of 0.34—meaning the underlying properties would literally have to triple their revenue to make their mortgage payments. Of the 15 2021 and 2022 vintage multifamily CLOs issued by MF1 and Ready Capital included in a spreadsheet on the performance of more than 200 commercial real estate CLOs compiled by a small fund manager who shared it with the Prospect, just three were eking out enough rent revenue to cover 60 percent of their debt service, and most of the $6.82 billion in multifamily CLOs Ready Capital issued between 2021 and 2023 are generating less than 30 percent of the income required to cover their interest payments. CLOs reporting DSCR figures of less than 50 percent had also been issued by seven other underwriters, including the private equity giants Fortress and Ares Capital.
Some of the underlying buildings in the MF1 portfolio were still finishing up construction when the report was published, but a newly renovated Lower Manhattan high-rise reporting 85.4 percent occupancy was generating rental revenues sufficient to cover just 40 percent of its mortgage payments, and a Brandon, Florida, complex reporting 86.6 percent occupancy and marred by graffiti, broken windows, and other “evident signs of deferred maintenance” was generating revenue to cover 47 percent of its payments. While noting that the Brandon property’s new owner, a Rainforest Cafe server and college dropout turned social media finfluencer named Zamir Kazi, had paid “a staggering 80.0% premium” to the seller’s acquisition price three years earlier, the Morningstar analyst nevertheless calculated that Kazi would be able to easily raise rents by an average of $550 per unit to $1,700, and thus concluded that “DBRS Morningstar deems the sponsor’s business plan to be achievable.”
The jury is still out: In an update published last week, Morningstar DBRS noted that Kazi had indeed managed to raise the average rent $504. But that gouging came at a cost: Occupancy had plunged to 76.7 percent since the Brandon property had changed hands, meaning 229 of the complex’s apartments are currently sitting empty, an especially shocking state of affairs in a market with one of the lowest vacancy rates—around 4 percent—in the Sun Belt.
But keeping a robust inventory of empty apartments is at the very core of the philosophy in which RealPage indoctrinates its clients, according to the class action lawsuit, in which one former RealPage pricing adviser explains that vacancies were not an “acceptable business reason” for overriding the pricing system, because “the algorithm had already taken vacancy rates into account when making its daily pricing recommendation.” A former revenue officer at Cortland Management, a large institutional landlord and longtime RealPage client whose Atlanta headquarters was raided late last month by the FBI in conjunction with the RealPage investigation, says leasing managers were expected to raise rents by at least $300 per year and were barred from offering discounts or concessions to cope with flagging occupancy outside the slowest weeks of the year.
“It was really hard to work on-site at a property, especially for people with any compassion or humanity,” said the former revenue manager, who did not want to be identified because she is seeking employment in the industry. “Because we would survey all our tenants when they moved out to find out where they were going, and a lot of them would tell you they were moving back in with family. It seemed so unsustainable.”
But such was the revolution RealPage inflicted upon the industry, as one revenue officer and RealPage client explained in 2009: “My generation grew up worshiping the occupancy gods. We learned that if you were not 95 percent-plus occupied, the asset was failing. But that’s not necessarily true anymore … [RealPage] totally turns the industry upside down.”
Indeed, earlier this year, as both rents and multifamily mortgage delinquencies hit record highs, apartment vacancies, too, hit a decade-long peak. This trend is especially pronounced in markets like Atlanta, Austin, Dallas, and Miami, where RealPage controls the pricing of the vast preponderance of available apartments and rents have surged, despite vacancy rates hovering around 10 percent.
IN A “RATIONAL” MARKET, OF COURSE, lenders would foreclose on drastically underwater apartment buildings, write off the losses for a massive tax break, and either sell them for cash or attempt to rehabilitate them while the market recovered. And in the Econ 101 version of reality, large vacancy rates would drive prices down, if excess supply was available. But as the Prospect explained in a recent exploration of Arbor Realty Trust, neither of those things is happening; instead, lenders are using questionable transactions, sometimes with off-balance-sheet shell companies, to extend and pretend away the magnitude of the valuation gap.
The Brandon apartment complex is an exemplar of the waiting game. When the maturity date on its mortgage came and went in May, MF1 granted Kazi temporary forbearance while the two sides engaged in “potential modification discussions.” Though vacancies have soared to nearly 25 percent, and 54 of its current Google reviews mention “roaches,” most of the complex’s recent reviews complain about the leasing office stalling on processing new applications. Residents “lucky” enough to secure housing report paying nearly $2,000 a month for a two-bedroom apartment after about $200 in fees are added to the bill. Twenty-one of the Google reviews mention “fee,” and another 21 complain about paying $250 to submit applications that were then ignored or denied for spurious reasons. A Zillow analysis published last month reported that the Tampa Bay area, where rents rose higher than in any other metro area during the first three years of the pandemic, now boasts the highest discrepancy between median rent and wage hikes in the nation, with rents having ballooned 50 percent since 2019 while wages have risen just 15 percent. Caving to the “occupancy gods” does not seem to be in the cards.
This too is part of the RealPage business model, according to multiple putative class action lawsuits that detail how landlords can use the company’s other applications to extract junk fees out of tenants and non-tenants alike. One complaint filed earlier this year in Minnesota against RealPage Utility Management alleges that the former subsidiary conspired with a large Minnesota landlord to fraudulently charge tenants “about $244 a month” in “bogus” utility fees that bear little relation to the tenants’ real utility usage, then harass and evict those who don’t pay. Another filed this month in Texas against RealPage and Cortland, the Atlanta-based client landlord that was raided last month, alleges that a Cortland building used LeasingDesk Screening to illegally deny the rental application of a prospective tenant on the basis of a background search that dubiously linked her name to an unrelated stranger who had been evicted in Oklahoma. Similar lawsuits filed last month in Georgia and last year in Louisiana make similar allegations about LeasingDesk Screening; in the Georgia case, an applicant named Melissa Spurlin was turned down because the “algorithm” alleged that money owed by someone named Darmeke Cofield might be linked to her.
Back at the Chronos portfolio, the waiting game keeps tenants in purgatory. Online reviews note that one complex’s pool has been closed for two years, trash is collected only sporadically at all of the properties, and cars are routinely stolen and smashed at night. In January, the mortgage was modified, not to reduce the mortgage payments so management can afford to perform routine maintenance but to replace the old management company, Indio Management, with a new one that gets even worse reviews. Neither Voss nor the apartments’ previous owner Monte Lee-Wen returned multiple messages seeking comment.
