19 Market Street in Paterson, N.J., a failed condominium project developed by the Community Preservation Corporation.
By CHARLES V. BAGLI
Published: March 14, 2012
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PATERSON, N.J. — At the height of the housing boom, a luxury development arose here that was carved out of a 19th-century brick-and-brownstone factory building, with 14-foot ceilings, oversize windows and granite countertops.
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Todd Heisler/The New York Times
The Metroplex building in Far Rockaway, Queens, another unsuccessful project developed by the group.
Like many similar condominium projects, this one collapsed with the recession. But the damage rippled far beyond this historic city because of the project's main financial backer: one of the most illustrious nonprofit housing groups in the nation.
The group, the Community Preservation Corporation , which for decades has played a pivotal role in reviving downtrodden neighborhoods across New York City, has teetered at the brink of collapse in recent months after it strayed far from its traditional mission.
Community Preservation, established in 1974 at the initiative of the banker David Rockefeller, had long used capital that it raised from scores of commercial banks to finance the creation or rehabilitation of rent-regulated, multifamily apartments for the poor and working class. But during the boom, it was instead pouring hundreds of millions of dollars into condo projects and a large-scale development.
It did so, in part, through an unusual for-profit arm.
The group's problems suggest how the siren song of the explosive real estate market in the middle of the last decade seemed to warp the priorities of even stalwart nonprofit housing providers. "C.P.C. was tempted into more speculative lending, which harmed the organization financially and left a big hole in the field of lending for multifamily housing," said Brad Lander, a Brooklyn Democrat and housing expert who is on the City Council. "Two-thirds of the city's housing stock are rental units, and that's why we need C.P.C. to return to its core mission."
The investments were spearheaded by Community Preservation's longtime leader, Michael D. Lappin, whose salary and bonuses rose to $1.1 million as he pushed the group into riskier ventures. Some were financed by Community Preservation, others by its for-profit spinoff, which paid part of Mr. Lappin's salary.
At the time, Community Preservation defended the ventures, saying it needed to invest in condominiums and other relatively upscale developments in order to strengthen neighborhoods by creating mixed-income communities. But others pointed out that even if that had been the case, the group should not have allocated so much of its capital to such projects.
At the peak of the real estate boom in 2007 and 2008, more than half of the $1.5 billion in loans originated by Community Preservation or its for-profit arm were for condos.
Mr. Lappin established the for-profit arm in the 1990s to allow Community Preservation to invest directly in projects, rather than just lend money for them. The profits were supposed to be directed back into the pool of money that the group lent. But during the housing boom, the for-profit arm, C.P.C. Resources, took on an increasingly important role in Community Preservation's affairs.
In 2004, C.P.C. Resources bought an 11-acre parcel on the Brooklyn waterfront where a Domino sugar refinery once stood. The $1.4 billion project was supposed to convert the refinery into 2,200 apartments, a mix of luxury and subsidized units. But it repeatedly ran into delays before obtaining government approval in 2010. Last month, C.P.C. Resources defaulted on its $125 million New Domino loan.
Community Preservation also provided a $23 million loan for a luxury condo project called Metroplex on the waterfront in Rockaway, Queens. The 126 apartments had balconies with ocean views, oak floors, Jacuzzis and a gym, but when the project opened, not a single one sold.
Some of the projects had government subsidies that made them affordable to families earning $90,000 to $140,000 a year. But while there is a constant demand for affordable rental housing in the New York region, the market for even subsidized condos, which can take three years to develop, died with the recession.
Late last year, with more than $150 million in loans in default and Community Preservation in crisis, its board and the commercial banks that support it forced Mr. Lappin, 68, into retirement.
Nearly two-thirds of the condo loans were delinquent, according to the nonprofit group's records.
Community Preservation also closed offices in New Jersey and Connecticut, cut salaries for senior executives by 45 percent and dismissed 40 percent of its staff.
In January, the group just barely averted shutting down by working out an extension of its troubled revolving loan program with 72 lenders, including Deutsche Bank and Chase.
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