Real estate mogul stonewalls its tenants and the city as the banks foreclose
One of San Francisco's largest and most notorious landlords and the many shell corporations under his control have been withholding money from their tenants, the banks that financed their rapid real estate acquisitions, and even San Francisco's public treasury.
But while the banks have acted, seizing property from the delinquent borrowers, city officials have let Skyline Realty, CitiApartments, Lembi Group, and related corporations stonewall the city and pay far less property taxes than they should have owed, depriving city programs of hundreds of thousands of dollars.
The various corporations run by real estate mogul Frank E. Lembi (who has not returned our calls seeking comment) have earned a terrible reputation in San Francisco, even as they've expanded their rental property holdings in recent years.
An award-winning, three-part Guardian series ("The Scumlords," March 2006) documented how the companies used intimidating goons and an arsenal of nefarious tactics meant to drive out low-income tenants from rent-controlled units, prompting City Hall hearings and an ongoing lawsuit against the enterprise by the City Attorney's Office.
Then, earlier this year, many tenants joined a class action lawsuit against the Lembi enterprises, alleging the landlords have been illegally withholding deposits from departing tenants as a routine business practice, even after admitting that the tenants were entitled to full refunds (see "CitiApartments once again accused of mistreating tenants," Politics blog, July 15).
Attorneys for the firm Seeger Salvas LLP filed the complaint, which tells several appalling stories, including that of Joy Anderson. When Anderson went to retrieve the deposit she was owed, CitiApartments employees allegedly threatened her in front of her eight-year-old son, telling her that if she wanted her money back, she should talk to a lawyer.
Yet in that lawsuit and the one filed by City Attorney Dennis Herrera, which deals with harassment of tenants and other business practices that the city contends are illegal, Lembi's empire has refused to cooperate, employing a variety of delay tactics. The city's lawsuit has been stuck in the discovery process for years.
A court filing by the city alleges Lembi's enterprise has participated in "well over a year of discovery gamesmanship." New counsel for the defendants has promised to speed things up, but Herrera told us it is still an ongoing battle. "It has been incredibly hard to get documents and information in this case. He's been stonewalling us," Herrera told the Guardian.
Seegar Salvas attorney Brian Devine said six defendants named in his complaint didn't respond to discovery requests and were found to be in default by the judge, meaning they basically opted not to contest their culpability. Meanwhile, 75 other defendants did respond but haven't turned over any documents to the plaintiffs, dragging out the discovery process.
"It'll take sometime for anything to happen," Devine told us. "There's no Matlock moment where it all comes to a head. There are a lot of procedures to go through."
And apparently the Lembi enterprises know a little something about how to use legal and bureaucratic procedures to hang onto their money for as long as possible, judging from how they've worked the process to avoid paying the full amount of property taxes on their holdings.
At last count, there were 13 property foreclosure lawsuits pending on Lembi properties because he couldn't pay the loans. The banks have seized many of his properties and started selling them off. But while the banks are getting their due, the Assessor's Office and city taxpayers seem to be getting stiffed.
Lembi has been on the radar of city officials for quite awhile, but he is still managing to avoid getting some of his recently purchased properties reassessed, according to a Guardian investigation of city records. For example, one Lembi-controlled corporation Trophy Properties X snatched up a Russian Hill parking garage for $4.7 million in 2007.
Under Proposition 13, that property should have been reassessed when it was purchased, but it wasn't. The current taxable price tag on the property is still slightly more than $443,000, a gap that costs the city upwards of $50,000 a year in taxes.
In general, property is reassessed at fair market value when there is a change in ownership, increasing the taxes owed on the property. According to the California Board of Equalization, the purchase price is the basis for reassessed value in most cases, although officials can also take into account comparable sales and other factors to increase value even more.
Yet nearly three years later, this property still hasn't been reassessed.
Assessor-Recorder Phil Ting told the Guardian the reason for the delay is because Lembi hasn't been cooperative in providing the information needed to do a reassessment. We obtained an October 2007 letter sent out by the Assessor's Office requesting Lembi's limited liability corporation provide information on the acquisition of the property and statistics on the garage itself. That letter and others went unanswered.
Common sense suggests that the sale price be used to reassess the garage and be done with it. Yet Ting said he fears that using that price would result in an inaccurate reassessment, which in turn might screw up the amount of taxes the city could ultimately collect. Then again, simply waiting on the unresponsive Lembi enterprise has resulted in less taxes being collected on the parking garage last year and again this year, according to public tax records.
"We try to get it right the first time. If we don't get it right the first time, then oftentimes it creates a lengthier appeals process and a much lengthier, more adversarial [relationship] between us and the taxpayer," Ting said. "We absolutely don't want to reassess that property too low because of Prop. 13. You only get one chance, so you have to be high."
Ting told us that the only recourse he has with an uncooperative taxpayer like Lembi is to reassess using information from similar properties in the same area. Once this is done, the negligent taxpayer can either agree with or challenge the new market value, a move that would switch the burden to Lembi. But that wasn't done for the Russian Hill parking garage.
"That's the only recourse we have, meaning that we can't fine them; we can't subpoena them; we can't force them to give us the information," Ting said. "By law, they're supposed to give us the information. But there are no real enforcement powers behind it."
According to Section 480 of the Revenue and Taxation Code, the assessor does have an option and can levy a penalty if a property owner fails to file a change in ownership statement, which can be up to 10 percent of the taxes due on the newly appraised value.
Several other Lembi-controlled properties have been reassessed recently after a delay, including 19,650-square-foot apartment building down the street from the parking garage at 2238 Hyde St. Before the reassessment, the property was valued at a little over $1 million. The current value is $11.7 million, which amounts to a tax bill of more than $137,000 this year.
Lembi bought the building in December 2005, and the Assessor's Office got in just under the wire of the four-year statue of limitations for reassessments. Last year the taxes paid on the building came to a little more than $13,000, based on its previous $1 million value.
Then there is the 31,812-square-foot apartment building on 1735 Van Ness Ave. that Lembi bought back in June 2006. According the city records, the taxes paid last year on the property were nearly $48,000 based on a market value of $3.9 million. Recently the building was reassessed with a value of $9.6 million. This year's taxes amount to more than $114,000. Whether or not the Van Ness Avenue building is a case in which the Lembi Group also withheld information is currently being looked into by the Assessor's Office.
Yet on the Russian Hill parking garage, Lembi is still getting away with withholding the necessary documents for an accurate reassessment and time is running out. In a little over a year, the statue of limitations runs out and the city will no longer be able to collect anything from Lembi.
Further complicating the city's efforts to collect is the fact that some other the properties in question have been foreclosed on.
When the Russian Hill garage and other Lembi properties went back to the banks, the Assessor's Office looked into what could be done to collect the city's lost revenue. Its solution: a transfer tax. But that was not an option because the bank held the main mortgage, so it wasn't considered a change of ownership.
Even though the parking garage and other properties have slipped out of Lembi's control, he is still responsible for the taxes on them during his period of ownership, according to Ting. But given the experiences of others who have tried to collect money from Lembi, that could be a long, expensive process.
While the Lembi enterprises may be stingy in giving the city and tenants their money, they haven't had a problem making political campaign contributions. Taylor Lembi, grandson of Frank, gave $500 to Mayor Gavin Newsom's reelection campaign in 2006, according to public campaign contribution records, although Newsom's campaign offices returned the money exactly two months later (Newsom's campaign office didn't respond to our questions about the contributions or reason for returning it).
Skyline Properties, parent of Skyline Realty, also donated $100 to Newsom's initial mayoral campaign in 2003, and supported Mayor Willie Brown before that. Lembi continues to be a prominent landlord, the subject of a sympathetic profile by the San Francisco Apartment Association in August 2008.
Yet with lawsuits mounting, the banks foreclosing, and the real estate market slumping, the multigenerational Lembi empire that once controlled more rental units in San Francisco than any other entity appears to be in trouble.
And lest anyone slide under its control unaware, the Lembi empire's many enemies have organized into a group called CitiStop, supported by groups that include the San Francisco Tenants Union and Pride at Work, which argues that "nothing frightens CitiApartments more than knowledgeable tenants."