Pinnacle Group Blames Interest Rate Hikes For Driving 5,200 Apartments Into Bankruptcy

More than 5,000 New York City apartments were pushed into bankruptcy last week after the cost to cover their debt service jumped 75% in two years, their owner said in a new court filing.

Companies owned by Joel Wiener, the CEO of Pinnacle Group, owe more than $1.1B combined to Flagstar Bank and Israeli bondholders tied to 93 properties in Manhattan, Brooklyn, the Bronx and Queens, according to a filing in bankruptcy court. Of the roughly 5,200 apartments in the portfolio, 96% are subject to rent stabilization.

Wiener tapped Ephraim Diamond, founder of Arbel Capital Advisors, as chief restructuring officer to oversee the bankruptcy process. Diamond also acted as CRO in the restructurings of prominent Brooklyn developers All Year Management and Brookland Capital, he wrote in the filing.

The bankruptcy was necessary because Flagstar Bank, which holds roughly $564M of mortgage debt tied to the portfolio, filed to foreclose on the properties in March and appoint a receiver to manage them, according to the filing. Interest on the loans “sky-rocketed” starting in 2022, driving the rates from below 4% to more than 10% in some instances, Diamond wrote.

On May 16, a Manhattan judge approved putting 21 of the buildings into receivership, which triggered the need for an emergency Chapter 11 restructuring, which was filed on May 22.

“The Debtors were faced with the potential for immediate loss of control of a sizeable portion of their property portfolio ... which would have caused significant disruption for their tenants and harm to the value of their assets and operations,” Diamond wrote. 

In addition to Flagstar and bondholders, Wiener's companies also owe millions to vendors, contractors and utility providers.

The properties are indirectly owned by The Zarasai Group Ltd., a British Virgin Islands-based company that Wiener used to raise funds via the Tel Aviv Stock Exchange. Pinnacle collects fees for building management of 3% to 4% of their rental income, according to the filing. 

Interest payments have been the portfolio's ultimate undoing, with debt payments rising from $26M in 2023 to an estimated $45M this year, a nearly 75% increase. While the properties still generate enough cash to cover expenses before debt service, their stabilized status prevented Pinnacle from raising rents to cover the increased mortgage payments.

Pinnacle has generated cash flow by converting apartments to condominiums once a tenant vacated, but the 2019 Housing Stability and Tenant Protection Act limited that avenue, and it restricted how much of the cost of repairs a landlord could pass on to tenants and which units could be removed from stabilization.

Wiener met with Flagstar in late 2024 to try to negotiate a way to lower debt payments but was rebuffed, Diamond wrote. Beginning in January, the landlord stopped paying interest, and Flagstar filed a notice of default in March.

The property owner asked Judge David Jones of the Bankruptcy Court for the Southern District of New York to allow it to use the cash generated by the apartments that is being held as collateral for the Flagstar debt, but Jones delayed ruling on the motion, instructing the borrower and lender in a hearing Wednesday to come to a compromise, Bloomberg reported.

In an objection filed Wednesday, Flagstar said rental income has been funneled to a separate holding company to pay bondholders when it should have gone to pay the mortgage. Its attorneys wrote that Wiener's companies have been uncooperative and failed to produce financial documentation.

“No one knows where the rental income went, but it did not go to pay the lenders and appears to have been consolidated to pay bondholders,” the bank said in a filing. “The Debtors’ lack of transparency has been, and continues to be, a major issue.”

Distress has been increasing among owners of rent-stabilized apartments, many of whom lay the blame squarely on the 2019 reform, combined with higher interest rates. For-profit and nonprofit owners of more than 4,000 apartments opened their books to Bisnow to show how the financial performance of the buildings has deteriorated in the six years since the law's passage.

The delinquency rate of buildings with rent-stabilized units tied to CMBS loans hit 16% this year, compared to less than 1% for market-rate properties, according to a new Trepp report.