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
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
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 lawsuits
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
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 Arbor Realty Trust even greener multifamily investors
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 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
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 raided late last month
“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 a decade-long peak
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
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 analysis first three years of the pandemic
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 complaint alleges Georgia Louisiana
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 even worse reviews
Maureen Tkacik is investigations editor at the Prospect and a senior fellow at the American Economic Liberties Project.
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