Tenant Groups Advise Wells to Tread Lightly in East Palo Alto
Submitted July 23, 2011, 1:31 PM
The winning bidder for a huge East Palo Alto portfolio of rent-controlled apartments is finding itself in the crosshairs of tenant-rights organizations before the deal is even closed.
Housing advocates from San Francisco to New York City are warning banker Wells Fargo & Co. not to take the portfolio down its previous path by insisting the winning bidder pay such a high price that the only financially viable business model is redevelopment and aggressive landlord efforts to push rents up as fast as possible.
At least one statewide tenant organization has begun to pressure the bank to disclose the names of the leading bidders, so East Palo Alto residents can understand and possibly influence the outcome.
“There are a lot of eyes on Wells beyond East Palo Alto in terms of how they deal with this portfolio,” said Dean Preston, executive director of Tenants Together, a statewide nonprofit advocate for tenants with San Francisco offices. “It is enormously important. This is the only city with a strong rent control and eviction-control ordinance in the South Bay.”
Of concern, Preston said, would be a purchase price that is not premised on current rents. “Here Wells has an important role to play to make sure that the buyer is buying at a price that allows them to maintain the current use,” he said.
Two independent sources with direct knowledge of events have told The Registry that the bank has selected three large institutional investors as the finalists to acquire the more than 1,800 units: San Francisco’s Prime Residential, AREA Property Partners and Equity Residential, a huge real estate investment trust.
High-ranking executives for each company met July 14 and July 19 with a small clutch of local elected officials, both from the city of East Palo Alto and San Mateo County. Wells representatives and representatives of real estate investment banker Eastdil Secured also attended the meetings.
Neither Prime or Equity returned calls. AREA, through a spokesman, declined comment. Wells also declined to confirm bidders’ names.
“We remain committed to selecting an owner who has a long-term perspective and will be able to work with the community in addressing concerns about affordability,” a spokeswoman for the bank said in a prepared statement.
San Mateo County Supervisor Rose Jacobs Gibson, who also met with the bidders, declined to make herself available for interview. East Palo Alto is in the supervisor’s district.
Wells foreclosed on the apartments after borrower Page Mill Properties defaulted on its $240 million loan in 2009. The California Public Employees’ Retirement System lost $100 million of equity in the foreclosure, and 19 wealthy Bay Area investors subsequently sued Page Mill and others based on a loss of approximately $30 million in equity.
When Wells opened bidding for the portfolio at the foreclosure sale in early 2010, it set the low bid at $142 million—well less than half the equity invested. No one bid.
The current proposed purchase price is unknown.
The sale includes 17 single-family homes and a smattering of small commercial buildings, which Page Mill also acquired as part of its buying tear in 2006, 2007 and 2008.
While Page Mill was never straightforward about its goal to redevelop the properties, court documents and some of the purchase prices paid make abundantly clear that was the case. The apartment buildings are generally a rag-tag collection of disparate unmatched properties in poor condition. By and large, they were constructed in the 1950s, ’60s and ’70s, and some may be suitable only for demolition, the town’s mayor said.
Nonetheless, their location on the west side of U.S. 101 north and south of the University Avenue exit is highly desirable, and there seems little doubt that the generally low-rise, low-density structures are far from the highest and best use from a purely economic perspective.
Page Mill, led by developer David Taran, engaged in a series of legal and court-room attempts to thwart the East Palo Alto rent-control ordinance. The long-running litigation tested the city’s financial stability, and several officials said that many tenants were forced out. The experience has left the community wary and eager to guard against a repeat.
Of the three finalists, AREA Property Partners, the former Apollo Real Estate Advisors, drew strong and sour commentary from rent-control advocates in New York City. From 2005 to 2009, private equity-backed developers bought an estimated 100,000 units of rent-regulated housing, almost 10 percent of New York City’s rent regulated housing stock, according to a Nov. 2009 report by the Association for Neighborhood and Housing Development in New York.
In many cases, the business model and purchase price were premised on evicting current tenants so rental rates could be raised, in some cases to market rates, said Benjamin Dulchin, executive director of the organization. “If you are looking for neighborhood stability and affordable housing, you don’t want to be partnering with Apollo,” he said.
East Palo Alto voters have endorsed the city’s rent-control ordinance on six separate occasions in the last 27 years, said Mayor Carlos Romero.
In early community meetings with the bank, residents vigorously encouraged Wells to break up the portfolio among multiple buyers and even to sell portions to non-profits or affordable housing developers, Romero said. But as an affordable housing developer himself, Romero said he acknowledged and understood that the public assistance to make such plans economically viable is not available today.
Still, he said, seeing another large, powerful and wealthy owner step into the shoes that Page Mill so recently left is not reassuring. “It causes grave concerns when I look at it from a concentration of ownership perspective,” Romero said.
The units in question—1,832, including 17 single family homes—represent more than two-thirds of the city’s rent-controlled housing stock and a quarter of the city’s entire housing stock, including rental and owner-occupied, he said.
Romero, who along with East Palo Alto Councilman David Woods met with the three bidders, said he emphasized to all three that the units were generally not in good condition and suffered from significant deferred maintenance.
With time, he believes the community is likely to come around to the notion that it could trade preservation of some of the housing in return for developer-paid improvements such as a new park or improved streets.
“There might be a way for a developer interested in working with the community over the long haul to get the community to say, ‘Yes, we would be willing to allow some number of units to leave the portfolio and allow greater density to get a community center,’” he said.
“But I could be foolhardy and wrong,” he said.
