How An Algorithm' Turned Apartment Pools Green - The American Prospect

20.06.
2024, 14:21 How an ‘Algorithm’ Turned Apartment Pools Green - The American Prospect
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HEALTH AND SOCIAL POLICY AMERICA AND THE WORLD PODCASTS THE PROSPECT ARCHIVE
How an ‘Algorithm’
Turned Apartment
Pools Green
RealPage, the rent-fixing software company
currently under FBI investigation, also has
apps for bogus fees, monetizing vacant
apartments and inflating toxic property
bubbles.
BY MAUREEN TKACIK JUNE 18, 2024
ILLUSTRATION BY JANDOS ROTHSTEIN
https://prospect.org/infrastructure/housing/2024-06-18-how-algorithm-turned-apartment-pools-green/ 1/11
20.06.2024, 14:21 How an ‘Algorithm’ Turned Apartment Pools Green - The American Prospect
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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.
More from Maureen Tkacik
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.
MAUREEN TKACIK
Maureen Tkacik is investigations editor at the Prospect
and a senior fellow at the American Economic Liberties
Project.
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20.06.

ECONOMIC POLICY WORKING IN AMERICA＋ ENERGY AND THE ENVIRONMENT＋

HOUSING AND TRANSPORTATION＋ CIVIL RIGHTS IN AMERICA LAW AND JUSTICE

ILLUSTRATION BY JANDOS ROTHSTEIN

Listen to this article n… 10 10 1.0✕

In 2021, an Austin-based real estate finfluencer named

But the economics of the transaction made no sense:

More from Maureen Tkacik

But an analyst with the credit rating agency

By now, you have probably heard of Yieldstar, the

“ RealPage not only raised the

Reading the most recent version of a class action

RealPage nor its clients betray any uncertainty over the

TRADITIONALLY, RENTAL PROPERTY VALUES were

But Yieldstar proved landlords could grow their rental

In conferences, seminars, YouTube videos, and on real

real estate syndicators; nevertheless, he told a podcast

But he was assisted by an aggressive new generation of

“ Keeping a robust inventory of

Perusing the credit reports from those boom years

MF1 and Ready Capital included in a spreadsheet on

Some of the underlying buildings in the MF1 portfolio

The jury is still out: In an update published last week,

affairs in a market with one of the lowest vacancy rates

But keeping a robust inventory of empty apartments is

“It was really hard to work on-site at a property,

But such was the revolution RealPage inflicted upon

Indeed, earlier this year, as both rents and multifamily

vacancies, too, hit a decade-long peak. This trend is

IN A “RATIONAL” MARKET, OF COURSE, lenders

The Brandon apartment complex is an exemplar of the

highest discrepancy between median rent and wage

This too is part of the RealPage business model,

Back at the Chronos portfolio, the waiting game keeps

management company, Indio Management, with a new

About the Prospect

DONATE TO THE PROSPECT

Copyright 2024 | The American Prospect, Inc. | All Rights Reserved

Built with Metro Publisher™

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