July 16, 2007
Nothing Like A Little Leverage In San Francisco (So To Speak)
According to J.K. Dineen, the Lembi family (think CitiApartments and Skyline Realty) has added at least 593 more rental units to their housing portfolio (which is now estimated to total almost 7,000 units). “David Gruber, a landlord who owns 13 buildings in the city and is president of the San Francisco Rent Board, called the Lembis an "extremely aggressive buyer" willing to pay prices 16 to 19 times the buildings' gross rent roll. Typically, investors in San Francisco pay less than 15 times gross rents.”
Oh, and “[t]he latest deals come nearly a year after City Attorney Dennis Herrera sued CitiApartments, alleging companies controlled by the family use armed security guards and other means to intimidate and drive out longtime, rent-controlled tenants and that they save millions of dollars by renovating units without permits.”
∙ Lembis pump $200M into growing housing empire [San Francisco Business Times]
First Published: July 16, 2007 3:00 AM
Comments from "Plugged In" Readers
My building in Pac Heights was one that was purchased by Citi/Skyline last year. They have spent an inordinate amount of money doing renovations to the common areas and the exterior of the building. They have also spent a lot on deferred maintenance which IMO the last owners should have done but didn't. Although we have been solicited by Skyline and offered money to move (they're calling it an "incentive program"), we haven't found something to buy so we're holding out a little longer.
I wish I could find fault with Skyline, because I know they are guilty of so many things, but they must be watching themselves with my building. I have never been harrassed or intimidated. My only complaint is that they will not update anything in my unit, obviously because they want me to move out.
As far as permits go, they have correctly filed permits for all the work they are doing in the units that have been vacated by those who took the "incentive" to move.
I'd be interested to hear what others have experienced with this company.
Posted by: Lori at July 16, 2007 9:48 AM
I wonder if they are buying at aggressive prices because they intend to do TIC conversions of some of the buildings in the future. It would make a lot of sense. Buy dilapidated buildings, improve them; then sell the units off as there are vacancies, rather than rent them out. With the differential on per unit prices between rentals and TICs, they could make a fortune. They wouldn't have to do evictions (which would draw the wrath of elected officials). And whereas the complexity of doing this on a building by building basis might dissuade an individual building owner, for someone owning 7,000 units, it would make total sense.
Posted by: Bob at July 16, 2007 10:00 AM
With my building, the vacant units are being completely renovated (standard maple cabinets, hardwood floors, stainless appliances and granite countertops) and then rented out as short-term executive housing. Some of the units are furnished. I understand that an unrenovated (original condition from 1963) 1 bedroom unfurnished goes for about $1,500/mo, but the "new and improved" 1 bedroom is rented on the short term for $4K/mo. That's quite a moneymaking difference.
Posted by: Lori at July 16, 2007 10:14 AM
Citi/Skyline's acquisition binge is the direct result of SF's strict rent control. The more apartments you own, the more likely it is that losses from long-term, rent-controlled units will be cancelled out by units rented at market rates. Moreover, Citi/Skyline has the legal resources to deal with the Rent Control bureaucracy, and yes, the muscle and will to squeeze out long-term renters. None of the above really applies to mom-and-pop landlords. Once again, the unintended consequences of rent control in action.
Posted by: zzzzzzz at July 16, 2007 11:27 AM
The aggressive acquisition business model by CitiApartments and Skyline Realty, which has been outbidding almost all other multifamily property owners in San Francisco, is unparalled in the past 20 years in San Francisco.
There are two possibilities for these purchases at income ratios not acceptable to normal buyers of SF Multifamily buildings:
(1) they are confident that re-financing of their properties will allow re-sales as individual units, bypassing the condo lottery rules, which would place near condo values on each of their apartments or
(2) taking their company public, with also valuing the apartments at condo values.
This activity will certainly attract the attention of the SF politicians, particularly those that are supported by tenant’s rights advocates.
Yet all of this new financing will probably be legal and not subject to SF Rent Control laws.
It's a BIG bet for the Lembi's.
Posted by: Frederick at July 16, 2007 12:34 PM
Couldn't they also just be betting on big rent increases? They own a lot of apartments and I'm sure have a pretty good sense of where the rental market is going. As long as they can churn enough vacancies, the can make a good return. I am skeptical that they are investing this kind of cash on the expectation of turning these buildings into individual TICs- unless of course they already know of a source of (virtually) unlimited financing for all of these new individual TICs. The Supes can make it very difficult to get out of the rental business even with the Ellis Act, and all it takes is a little tenants rights litigation (I'm even envisioning taxpayer funded "non-profits" doing the litigation, with an assist from Daly/Peskin) to delay a conversion by several years. Or perhaps they are making a bet the Prop 90 will pass soon and rent control laws will be obliterated. Who knows, but it seems like a big bet on all of those apartments becoming individual TICs.
Posted by: anono at July 16, 2007 1:18 PM
"Couldn't they also just be betting on big rent increases?"
Could well be. My rent in South Beach has increased about 10% in each of the last three years. Look at leading indicators for the rental market: office space in both SF and the valley is finally becoming tight again. Reverse commute CalTrain passenger volume is by far higher than I've ever seen since the boom, and trains will be lengthened in the near future. Traffic on the 101 looks awful. Assuming this indicates a strong high-end job market, and considering that buying vs. renting has fallen out of favor/possibility for many people, perhaps this will allow higher rent increases than we've currently been seeing. If rent continues to rise at this rate then a $800 - $1000 PSF condo might not look so expensive in the near future. ;^)
Posted by: Gdog at July 16, 2007 2:08 PM
Saw this post in the Noe Valley Voice:
"IN OTHER DEVELOPMENTS: One of Noe Valley 's largest apartment buildings has recently been sold for an undisclosed price. The 40-unit apartment complex is located at 4130 Cesar Chavez, between Castro and Noe streets. The buyer is identified in the public records as "Trophy Properties XII," which is a company controlled by the Frank and Walter Lembi family of CitiApartments and Skyline Realty. Reportedly, they are in charge of more than 5,000 apartments in San Francisco. Reliable sources say the Lembi Company had received over $3 billion from an overseas investor to purchase apartment buildings in the city."
Maybe a Chinesse or European investor wanted to own the property and not just the loan...Pretty interesting indead. Betting the increased rents over the years will increase their yeilds. And you know they are banking on some appreciation over the next 30 years. A better bet than hoping the 10 years gets to 5.5% again? Someone has soo much money that this is turning into to sport, I think Lembi is dialed into the right circles and is not afraid to sell something. I tip my hat to them...
Posted by: Todd at July 16, 2007 2:11 PM
The Lembi's are paying 18X gross annual rent for these buildings. They are outbidding the nearest party by 30%. They are bidding against themselves. They are getting a cap rate of maybe 3% - even less if you factor in some of the maintenance and upgrading they are doing. I looked closely at one building they bought and all of the rents were pretty close to market. There was not much upside (in the near term) even if they could flush all of the tenants. And still they "overpaid" by at least 30%.
Maybe they have billions of yen at 0% interest - but the article said they were borrowing from Citibank and USB. What rates could they get from USB - 8%? With a cap rate of 3%, they are going to lose 5% per year until they jack up rates (or go TIC). Something doesn't add up.
Posted by: anon at July 16, 2007 2:34 PM
I agree - very interesting purchases indeed. I think they are betting on rent increases as well as sustained increases in the overall property value along with the possibility that some of the units may be converted to ownership units at some point. The traditional income valuation models (gross rent multiplier) have missed the main source of investment return on apartments (the appreciation of the asset value). Sure you're only getting a 3% return on your investment from the current income, but if the value of the property rises 10-20% that's where most of your investment return is being made. I think it's an incredibly wise play to assemble a portfolio of apartments all in established neighborhoods of the city where little additional rental housing is being built. And yes, they have some type of Wall Street financing behind them and the rate of the money is probably well below the prime rate.
Posted by: Miles at July 16, 2007 3:36 PM
Clearly the Lembi's must be bullish on rent increases and property appreciation. But it looks like they are going to need a lot of both in order to generate any kind of return on their investment. When you are paying top dollar and way above market (at least way above the rest of the market), it's hard to fathom significant compound appreciation. And, from the Business Times article, those loans from Citibank and UBS look like real debt - not speculative equity. Wouldn't there be pretty hefty cash flow requirements for debt service if they are only generating a 3% cap rate?
As for converting apartment buildings to TIC's, I know that condo conversions are capped at 6 units. How doable is it for turning larger buildings into TIC's.
Posted by: anon at July 16, 2007 5:00 PM
My now deceased friend, lived in a Lembi purchased building on Nob Hill. She had lived there 12 years. I moved her into a condo I own and sent in the 30 day notice along with her last full months rent payment.
We moved out immediately. I returned two weeks later to deal with the rest of her belongings and found the apartment vacant with the kitchen and bathrooms gutted.
Lembi had her personal items removed to a storage room even though we still had legal possession for two weeks.
They returned her full deposit, but this was totally illegal.
Posted by: Thad Partridge at July 16, 2007 5:12 PM
Interesting... I worked for the Lembi's at Continental Savings in the late 1980's. I loved it and it was one of the best jobs I ever had. The old man Lembi sure knows real estate like no one (not even the Feds) can. He has a 6th sense with purchasing property ... always has ... always will.
Some interesting reading here.
Posted by: A Week In The Life of A Redhead at July 16, 2007 7:27 PM
A web search shows that loans for San Francisco multi-family housing purchases have been mixed in with portfolios of commercial loans, so the following could be relevent:
From WSJ, July 12-
Fitch Sees Rising Shakiness
In Commercial Mortgage Arena
"As investing in commercial real estate has surged this decade and sales prices have skyrocketed, lenders competed aggressively to win market share. Some loans used so-called negative leverage -- when a buyer's debt payment is more than the income the property produces. In the past, banks underwrote loans based on current cash flow -- typically the rents landlords receive from tenants. As the market heated up and banks competed against each other to produce loans, some began underwriting loans based on expected future income levels."
So there might not be anything slick going on except for (1)easy money and (2)continued capital appreciation from a rising market- and higher unit rents. But now suddenly raising money is getting more difficult, loan convenants are getting tighter and are being enforced more rigorously. It becomes interesting to watch while our landlord borrowers traverse on the thin ice of high leverage, and to see if they can increase rent revenues enough to pay interest on the debt, or will they again be protagonists of the financial disintermediation that occurs when the loan market tightens and the real estate market slackens. For such a furtive local family business they sure like to be in the center of the maelstrom. What ambition! What destiny?
Posted by: Jim Brown at July 25, 2007 12:14 AM