September 9, 2009

The Chronicle Reports "Dozens," A Plugged-In Source Says Over 100

While the Chronicle reports "dozens more Lembi properties are in play" in addition to the 75 ex-Lembi-owned apartment buildings that have already been given or taken back by the banks, according to our sources the number of Lembi properties still at risk is over a hundred. As in up to 200 of the 300 properties once owned by the Lembi’s could be lost once all is said and done.

Debt swamping Lembi Group, big S.F. landlord [SFGate]
Cash Flows Catch Up To The Lembi Group [SocketSite]
From At Risk To Lost For Another 24 Lembi Properties [SocketSite]

First Published: September 9, 2009 9:00 AM

Comments from "Plugged In" Readers

Oh how the mighty have fallen...

I doubt anybody is crying too hard, other than the Lembis. A reputed slumlord gets their due.

Posted by: Dave at September 9, 2009 9:20 AM

BK filing when?

Posted by: anon at September 9, 2009 10:15 AM

The big question is whether family members executed a personal guarantee. If so, the bankruptcy laws won't provide much help. I would guess they did so, but it's just a guess based on prior articles. I poked around the court filings to see if I could find out more, but there are so many filings against these companies and the family members (as a lawyer, I say, great!), that I did not want to take the time to sift through them all.

Posted by: Trip at September 9, 2009 10:26 AM

I heard the Lembis were part of the savings and loan debacle, one assumes with this many lives they have their loot well hidden.

Posted by: paul_e_ester at September 9, 2009 11:08 AM

Do people like this ever really go "bankrupt" in the sense that us commoners imagine it? I always envision them having a couple of millions stashed away in a safety deposit box or suitcase somewhere.

Plus even if they lose 200 properties, they still own 100 and can build from there ...

Posted by: Jimmy (No Longer Bitter) at September 9, 2009 11:20 AM

"BK filing when?"

They're filing for a Burger King?

Wow. It's worse than I thought.

Posted by: Kurt Brown at September 9, 2009 11:31 AM

I took a client through 1330 Mason and 943 Jackson in Chinatown, which were 2 of about a dozen that hit the market simultaneously. The bank had chosen a potpourri of listing agents, with some of the listings on loopnet, some on the MLS, some on the agents website, some just on flyers... I am hopeful that the new "owners" (UBS, B of A, etc) will demand more consistency of marketing and sales practices; i think more transparency and regularity will lead to quicker sales.

Posted by: Michael Thomas at September 9, 2009 11:33 AM

The big question is whether family members executed a personal guarantee.
I am not a paralegal, nor do I play one on TV, but I did manage to find one here (PDF alert). Looks like they are on the hook for $35 million (on a $132 million note). Nomura Credit and Capital on the loan and BofA, LaSalle Bank, Chase as a trustee for the CMBS -- the fun has just begun.

Posted by: EBGuy at September 9, 2009 11:39 AM

Trip, here is the motherlode of legal proceedings against many of the Lembi properties. From what I can tell, many of the loans had Guaranty Agreements; would be interested in any color commentary you can add. Sigh, looks like the Guaranty Agreement is usually "Exhibit 5", which is somewhere around page 193 of this filing (PDF Alert).

Posted by: EBGuy at September 9, 2009 12:28 PM

EBGuy, nice digging! Even more amazing is that this list is far from everything as the court staff has recorded dozens of variations of "Lembi, Frank" and "CitiApartments" etc. with lots and lots more suits. It's going to take some slick lawyering and negotiating to get around those guarantees. Some big boy firms representing the lenders. Looks like Lembi in-house lawyers are handling it for that side.

As for some of the questions above, there are lots of legal ways to protect some assets from creditors despite a bankruptcy (OJ is living off some of them) but it is a serious federal crime to "hide" assets from creditors in bankruptcy filings, even if they are overseaes.

If these allegations have any truth (I have no knowledge or opinion) then this is, indeed, a crumbling empire.

Posted by: Trip at September 9, 2009 12:45 PM

It shouldn't be long now...

Posted by: gh at September 9, 2009 2:47 PM

trip/eb guy- i have a friend who worked for them, and when i asked if they were going to hire a serious law firm to fend off the city lawsuits against them 2+ years ago (for tenant violations/issues) he said no, they use their inhouse lawyers. this sounded half assed to me.

same thing regarding how they renovate properties-they often 'forget' to take out permits, and basically try to do everything possible on the sly. same thing with their prop mgmt- not serious.
an when i met old man frank, by golly he sounded and acted like a real hustler!

personally i was astonished that they were so unprofessional for an org their size, but i thought the city lawsuit against them would make them change their tune. guess not.

so it sounds like they are still trying to handle all these serious issues inhouse. i dunno, it sounds like they are going to get their asses handed to them with all those personal guarantees.

my guess also is that they were not too sophisticated about asset allocation....i.e. i doubt they have a big primary residence in florida, a la simpson. they also cross collatoralized alot, as these guys were all about SF, and buying as much as possible with easy, short term money. i wonder if they will loose virtually everything. you live by the sword, you die by the sword.

Posted by: 45yo hipster at September 9, 2009 3:28 PM

45yoh, that's interesting stuff. If there is one piece of legal advice for a situation like this that I think I would offer universally, it is never, ever, under any circumstances, sign a personal guarantee for a loan to your company. That defeats the whole concept of a limited liability entity like a corp. or LLC. If you can't get the loan without the personal guarantee, there is likely a reason for it -- pass up the deal and move on.

These guys are never going to be close to the bread line, but it's kind of amazing to put yourself in a situation where you put a sizable fortune that took decades to amass at risk all in one fell swoop. What a Greek tragedy!

Posted by: Trip at September 9, 2009 3:57 PM

^ trip- is a recourse loan the same/similiar to a personal guarantee? If not, how is it different?

Posted by: 45yo hipster at September 9, 2009 4:13 PM

45yoh -- a recourse loan isn't quite the same as a personal guarantee. Typically a personal guarantee is when you make a guarantee for someone else's loan. In the case Trip is describing, the principal of the business is making a guarantee for the business, so if the business defaults, the principal can be liable. There are sometimes good reasons that you'd make a personal guarantee though -- e.g. if you're a start-up business, it may be the only way to get financing. When you "co-sign" a loan, sometimes you are making a personal guarantee and sometimes you are a co-applicant -- depends on how it is structured.

A recourse loan means that you can be liable beyond the actual collateral for your own loan. A non-recourse loan means that the bank can only seize the collateral if you don't pay the loan.

On a side note, typically, in California, a residential purchase money mortgage is non-recourse because banks usually don't judicially foreclose. However, refis are considered recourse, typically, although the law may be uncertain here if someone actually challenged it.

Posted by: corntrollio at September 9, 2009 4:36 PM

hipster,
In the Lembi cases I cited above, the LLCs (owned by Lembi's and their trusts) were the ones who signed for the loans. Ordinarily, it would be difficult to pierce the corporate veil and go after personal assets of the Lembi's. The Guaranty Agreement allows the banks to go after Frank & Walt (as individuals), as well as the trusts and their trustees. The LLCs provide a liability shield for the Lembis as apartment owners, but, it appears they believed their own hubris and signed Guaranty Agreements in 2007 (for the $100+ million loan). Perhaps they were under duress by that time, but the other case I cited shows they signed a Guaranty Agreement in 2004. Hmmmm, wonder if these loans were essentially 'no money down' (highly collateralized and backed by personal guarantees).

Posted by: EBGuy at September 9, 2009 4:42 PM

With all the caveats that you shouldn't consider this legal advice and should consult a lawyer . . .

They are a bit different. A personal guarantee is very simple, a creation of contract. It arises when a loan is made to one person or entity and a different person guarantees payment by the first. So you have two contracts -- the first is the loan agreement between the lender and borrower and the second is the guarantee between the lender and guarantor. The latter just says that if the entity to whom the loan is made does not pay it, the guarantor is personally liable for payment and can be sued individually for payment.

A "recourse loan" generally arises out of statute and relates to the exclusivity of the security (or collateral) that is the subject of the loan. A piece of property, like a home, is the collateral for the loan. The lender can always foreclose on the collateral if the loan is not paid. Most states, like CA, have some sort of "anti-deficiency statute" setting forth when and how the lender can come after the borrower personally if the foreclosure sale does not bring in enough to extinguish the entire loan balance. Even where this is permitted (in CA it is not permitted at all for a purchase money mortgage so we are a "non-recourse" state -- refis are a gray area), the procedures are quite complicated and the lender generally has to bring all enforcement proceedings in a single lawsuit (the "one action rule").

That is all very simplified. But generally speaking, a guarantee affords a much more streamlined process for the lender to come after you. So 45yoh, if you hold your separate properties in the name of one or more entities (which I highly recommend to limit liability), your lenders may have requested a personal guarantee -- this actually could be an appropriate exception to my "absolute" rule noted above! One could have "non-recourse" and guarantee issues all wrapped up in a transaction if the guarantee was to secure payment on a purchase money mortgage (I think the anti-deficiency statute applies for properties up to 4 units). Testing the limits of my knowledge now, but I believe that case law says that the lender cannot enforce the guarantee once it has already foreclosed on the property (again, the one-action rule -- have to do everything at once), but that most lenders include a provision in the guarantee waiving that rule, and that waiver provision would be valid and permit them to come after the guarantor for any shortfall. Hope that helps (and that someone will correct anything I screwed up).

Posted by: Trip at September 9, 2009 4:46 PM

Definitely consult your lawyer, but I believe most everything Trip said should be right.

Typically in a well-written guarantee, the guarantor waives almost any procedural right he/she has to avoid paying up on the guarantee, so I would suspect the one-action rule wouldn't matter.

Posted by: corntrollio at September 9, 2009 5:00 PM

Thanks for all the input corntrollio, eb guy and trip.

As with most RE contracts, it gets complicated! Interesting how one can put props in llc's, only to have a bank demand a guarantee for a future loan (which pierces the llc shield). And there is also profound differences between 1-4 units and commercial, in so far as state statues are concerned.

I think I'll opt for llc's only with commercial props. Right now I make sure my insurance policies are up to snuff and carry an Umbrella liability policy as well.

Posted by: 45yo hipster at September 9, 2009 7:43 PM

The Lembi's just have a small problem compared to the Speyer family in NY.

From the NYT:

"Real estate analysts say that the partnership’s money will run out as soon as December and that the owners are at “high risk” of default on $4.4 billion in loans.
...
A recent report from Realpoint, a credit rating agency, estimates that the property has a value today of only $2.13 billion.
...
At Stuyvesant Town, there is a $3 billion first mortgage, or commercial mortgage-backed security, and a $1.4 billion second loan, known as “mezzanine debt” held by SL Green, the government of Singapore and others.

Finally, there is $1.9 billion in equity put up by Tishman Speyer, BlackRock and their investors."

Posted by: FormerAptBroker at September 10, 2009 7:43 AM

^ stuyvesant town must have been the worse residential buy of the decade! Like the lembis, the speyers were counting on higher rents (in rent controlled bldgs no less) to cover debt service.

OTOH speyers probably have access to alot more cash, OTOH I think their mega purchase is a few magnitudes larger than the lembis buying spree combined.

I'm still wondering how the SF apt market will look in a year or two when everything shakes out. So far their bldgs are selling to other SF apt owners For what? Probably at 2004 apt prices? Of course this is a much more limited market than sfh and condos, so if things go bad it conceivable for apt prices in SF to roll back eve more. There could be some real opportunities in 1-2 years time here, just perfect for my timeframe to make a move.

Posted by: 45yo hipster at September 10, 2009 10:19 AM

Anyone like to conjecture as to what effect, if any, such a large fire-sale of apartment buildings will have on rents?

Posted by: Amen Corner at September 10, 2009 12:45 PM

^ To zeroth order none, since the market for apartment buildings doesn't couple to the market for rental apartments.

To first order, the new owners will have more headroom to lower prices to attract renters, if necessary, since they have been relieved of onerous debt payments.

Posted by: diemos at September 10, 2009 12:49 PM

Just out of sheer curiosity, what does it take to buy an apartment building? What is the LTV required and how does a bank evaluate the loans for these commercial properties.

I'm trying to figure out why anyone would buy an apartment building (except as a vehicle to make mega-leveraged bets with OPM).

But it appears that even for colossal apartment deals, the buyer has to put up significant cash, on the order of 30%. With annual rents at something like 3%-4% of the building's cost, I just don't get it.

Posted by: Jimmy (No Longer Bitter) at September 10, 2009 6:57 PM

Apartment loans are not necessarily dictated by LTV (although there is a max that they won't exceed), but more by the ability of the property to service the debt. A common metric is debt coverage ratio (DCR) which, depending on the lending institution, may range from 1.15 to 1.3 depending how aggressive the bank wants to be. So the building cash flow (income less expenses not including depreciation) divided by debt service payments should be in that range, at a minimum.

Just like all other investments out there apartment buyers seek capital appreciation (long term) and/or current income (with sufficient equity i.e. money down). Appreciation can happen through rent increases, reduction in expenses, and/or compression of the cap rate. Google "cap rate", don't feel like writing about it now. :)

Posted by: whatever at September 10, 2009 9:10 PM

So hypothetically, you buy a building with a loan at 5%, plus 1% in taxes.

Worst case:

-- assume DCR has to be 1.3 because the economy's bad and banks are conservative.

-- you need a cap rate of 7.8% to satisfy the bank, and a GRM of around 7.7, assuming your maintenance and vacancy costs are around 40% of gross rent.

Put another way, a $1M property would have to yield $10,800/month in rent. I doubt most $1M properties in SF yield even $5k/month in rents ... how could this financing ever work?

Other than if the landlord put 50% down in cash.

Posted by: Jimmy (No Longer Bitter) at September 10, 2009 10:16 PM

Down payments are pretty giant in the City right now. The average DP on commercial acquisitions (5+ units) over the past 12 months in SF has been 43% (57% loan-to-value). This excludes those purchases that have been all-cash. This is partly due to tighter underwriting standards from lenders, and partly due to investors trying to avoid selling URLs (asians.com) to save their buildings from going REO.

Posted by: Michael Thomas at September 11, 2009 11:28 AM

Michael: "partly due to investors trying to avoid selling URLs (asians.com) to save their buildings from going REO."

can you elaborate on that? (No comprende amigo.)

Posted by: 45yo hipster at September 11, 2009 2:03 PM

Why sell the good stuff to save the bad/underperforming/bad stuff?

Surely the reason he's having trouble servicing those loans is that the price he paid for the building doesn't make economic sense.

Asians.com, on the other hand, has some *definite* potential. If you're into that sort of thing ...

Posted by: Jimmy (No Longer Bitter) at September 11, 2009 3:02 PM

Ok, got it (saw the Eng thread).

Posted by: 45yo hipster at September 11, 2009 5:17 PM

Contractor turned developer can also do damage, just on a smaller scale. Witness Dean & Dina Alac of Dean Alac Construction:
1592 Golden Gate (3 units). Bought 9/8/2006 for $1.4million. On the auction block tomorrow (9/24) with an unpaid balance of ~$2million.
2466-68 Geary (2 units). Bought 9/11/2003 for $1.05million. Foreclosed by Chase 2/23/09 for $1.692million.
2578-80 Sutter (2 units). Bought 5/2006 for $895k. Foreclosed on 2/20/09 for $783k. Bank suing for possession.
2454 Geary (developed 4 units). Construction(?) loan 3/2006 for $2.17million. Refinanced with a first and second from WaMu on 8/2007 for $2.95million. Foreclosed 8/19/08 for $1.1million.
1726 Page (6 units). Appears at one point to have been a co-developer with David Salma (647 Grand View). Bought for $2.4million on 1/2006. Eventually foreclosed upon for $2.28million 4/2008. Resold by bank for $1.9million in 6/2008. Salma & Alac are defendants in lawsuit brought by a junior lien holder for $766k.
850 Union (2 units). Bought for $2.83million 6/2005. Foreclosed on 11/4/2008. Resold by bank for $2,242,500 on 12/30/2008.
882-88 North Point (4 units). Bought for $3.35million on 1/2006. Foreclosed by bank on 11/2008. Bank resold for $3.5million on 5/2009.
500-04 Page (8 units). Bought 10/2002 for $270k. Foreclosed by bank on 11/4/2008 for $400k.
The Deans are suing United Commercial Bank for predatory lending and defective NOTS related to the loans on 882-88 North Point, 850 Union St., and 500-04 Page.
Information deemed Reliable but not Guaranteed. Corrections or additions welcome.


Posted by: EBGuy at September 22, 2009 7:23 PM

Dean Alac has some Ardenesque reviews on yelp: http://www.yelp.com/biz/alac-dean-construction-san-francisco

Posted by: auden at September 22, 2009 7:40 PM

"predatory lending"

[sniff.] Your honor, they held me down and forced me to borrow millions of dollars from them. I tried to fight them off but they were just too strong.

Posted by: diemos at September 22, 2009 7:53 PM

Here's another landlord deleveraging. Linda Catron appears to have some property in El Dorado County that has already hit the auction block and is the owner of an ongoing concern in Tahoe, the Christiana Inn.
849 Haight (12 units). Owned since the mid-nineties. Deeds of Trusts with many individuals; one of them is trying to foreclose for $290k on Oct. 8 (per PS). But it appears they need to get in line as there is also has a mortgage with WaMu (April 2002) for $1.4million. Chase, which bought WaMu's assets, is seeking judicial foreclosure and receivership.
728-38 22nd (~32units + 2 retail). Inland Community Bank (which merged with Western State Bank) is seeking a judicial foreclosure with deficiency judgement. Loan amount: $1.544million (July 4, 2004).
She's also involved in a lawsuit (PDF) for a $250k loan, which alleges it's backed by a third deed of trust on 1554 Greenwich (3 units). There appears to be a (temporary?) automatic bankruptcy stay in the court record. The Greenwich property was bought in 1997 for $650k; there was a refi (or second) with Countrywide in May 2007.
Her property at 2614 Sacramento (where she lives) does not appear to be in trouble.

Posted by: EBGuy at September 25, 2009 11:24 AM

There is one more foreclosed Dean and Dina Alac building that I missed: 1731 15th Street. This 22 unit property was bought for $2.8milliion in Feb. 2007.

Posted by: EBGuy at September 30, 2009 11:36 AM

wrt Dean Alac, the man is a serial fraudster ... just go to this URL:

http://webaccess.sftc.org/Scripts/Magic94/mgrqispi94.dll?APPNAME=IJS&PRGNAME=CaseSearchProcess22&ARGUMENTS=-A,-A,-N0,-N1,-A,-AALAC\%2C%20DEAN,-A

checkout the list of actions against him for failure to pay ... deposits, mortgages, loans, salaries the list goes on ...

Posted by: Larry Cable at May 11, 2010 1:30 PM

Good luck suing United Commerical Bank.
UCB is out of business.

Posted by: Kathleen at June 8, 2010 3:07 PM

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