The Lembi Group - also known by its related incarnations as Skyline Realty and CitiApartments - announced last week that it was putting 12 more San Francisco properties up for sale. This follows Lembi's recent loss of 51 buildings, and is separate from the 40 properties facing possible foreclosure. While tenant activists and the San Francisco City Attorney's Office have condemned the Lembi's strategies to increase values by displacing long-term tenants, the unseen villain here - as in the city's prior major real estate speculation scandals involving Guenter Kaussen and Zev Ben-Simon -are the banks. In each of these cases, financial institutions loaned money for projects whose economic viability required illegal evictions and the violation of tenant protection laws. Yet lenders avoided public or legal responsibility, a scenario that must change when the next wave of speculator evictions comes.
The San Francisco housing market has finally come down to earth. This gives activists some time to devise new strategies for preventing the next wave of speculator-driven tenant displacement.
Based on the past 25 years, this means focusing greater attention on those who fund such speculation - rather than simply on the landlord- implementers.
Consider the Lembi's. While activists cheer the Lembi Group's decline, a key fact about its actions over the past few years must be understood: the Lembi's paid such a high price for some properties that even if they had successfully displaced all of the existing tenants, and achieved 100% occupancy at 2007 sky-high market rates, the buildings still would have lost money.
Think about this.
Successful real estate speculators buy low, and then take actions - upgrading units, displacing long-term tenants, raising rents on existing tenants - to produce quick profits. But the Lembi's were buying properties at such excessive prices that they could not pencil out under any scenario - yet lenders did not think twice before financing deals.
During Lembi's buying spree, a major real estate figure told me that when an owner wanted to sell a property, they simply called the Lembi's rather than a listing agent to put the building up for sale. Lenders ignored the questions raised by the Lembi's purchasing virtually every twelve-plus unit apartment building in San Francisco month after month, an unprecedented pattern that did nothing to slow the onslaught of money from New York financial institutions to the Lembi's.
This means that lenders recklessly financed transactions that virtually required illegal evictions and/or tenant harassment just to break even. Yet their wrongdoing remained covert, and the names of those who funded the Lembi's buying spree remain unknown.
Opponents of speculator evictions cannot let this happen again.
The next time, tenant advocates and groups like the Skyline organizing group, Citistop, that emerged to battle the Lembi's, should identify the lenders and wage public protests at their offices and homes. The history of mass tenant displacement strategies in San Francisco shows that lenders - not landlords - hold the cards, and that this former group should be a chief focus of tenant attacks.
Guenter Kaussen: World's Biggest Slumlord
Prior to the Lembi's, in the early 1980's San Francisco saw Germany's largest property owner suddenly acquire 23 properties, including 14 and over 1100 units in the Tenderloin alone. As I describe in The Activist's Handbook, Kaussen's scheme relied on an "every 6th month rent free" deal that artificially inflated rent rolls. The roll would say $600 ($7200 per year) but under the deal, tenants really paid only $500, or $6000 annually, a big difference in the large buildings Kaussen owned.
Inflated rent rolls increased the paper value of Kaussen't properties, enabling him to continually refinance properties and then use the proceeds to buy others. Like CitiApartments, Kaussen had a "Mr Apartment" free rental service for tenants looking for apartments - but all of those listed were Kaussen owned.
After I got the Center for Investigative Reporting to dig into Kaussen's shady financing, and the media began covering it, Kaussen's lenders became skittish. They stopped accepting Kaussen's rent rolls at face value, and his once limitless pool of refinancing dollars soon dried up. In a remarkably short time, Kaussen's entire international real estate empire crashed, and the man once known as the German Howard Hughes committed suicide.
Kaussen was the largest of many speculators attracted by lenders virtually giving away cash to those promising to gentrify the Tenderloin. As with the current banking shakeout, these lenders got their comeuppance (recall the 1987 Savings and Loan crash), but not before they had gotten away with wreaking havoc on thousands of tenants' lives.
Zen Ben-Simon: Securing Loans Without Collateral
It was only a few years after Kaussen that Zev Ben-Simon arrived from Israel and quickly acquired multiple properties with plans to build multiple luxury condo projects through his development engine, "Taldan Investments." Among his plans was a massive rehabilitation scheme for a building at 1405 Van Ness that was filled with long-term tenants paying below-market rents. I got to understand Ben-Simon's game after my office, the Tenderloin Housing Clinic, got involved representing the tenants.
Due to a fluke meeting with a woman who once worked for a bank where Ben-Simon sought financing, I had learned that the alleged Israeli financier actually had no money. That's right. His assets were so highly leveraged - the same trick used by Kaussen - that he, in the banker's words, "did not have two cents of his own to rub together."
Unfortunately, our efforts to expose Ben-Simon's speculator strategy were hampered by his large campaign donations to key politicians, including then-Mayor Art Agnos, and by his hiring as an attorney the city's leading legal fixer, the late Bob McCarthy. He also donated money to sympathetic nonprofit groups, building a strong edifice of respectability to protect against critics.
I tried to get some of the same media outlets that exposed Kaussen to look closely at Ben-Simon's finances, but that stopped when he threatened to sue one for defamation. So we were left on our own to spread the word that his real estate empire was built on sand, continually facing questions as to why we "had it in" for the wonderful philanthropist Ben-Simon.
Fortunately, the declining real estate market prevented Ben-Simon from succeeding with his plans. As his highly leveraged investments crumbled, his financial malfeasance became known to the San Francisco District Attorney's Office.
In 1993, Ben-Simon was indicted for pocketing money used for construction loans, having defrauded banks of over $20 million. Ben-Simon fled to Israel to avoid prosecution, but after a law change allowed him to be prosecuted for his San Francisco crimes there, he was sentenced in 2001 to five and one-half years in prison.
My banker contact was correct: Ben-Simon had no real money of his own. But that didn't stop him from becoming a grand man around town in San Francisco, with his projects routinely winning City approvals.
Had we pressed lenders more directly, rather than relying on the media to do so, we might have stopped Ben-Simon sooner.
The Lembi Group's experience again confirms that when the next speculative wave hits, activists should target the lenders first. We must demand they explain why they are promoting illegal tenant displacement, and make them pay a steep personal and business cost for the hardships they are causing to San Francisco tenants
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