Palo Alto developer Page Mill Properties and CalPERS, its equity partner, may lose control of more than 1,700 apartments acquired since 2006 as part of a more than $340 million play in East Palo Alto.
Lender Wells Fargo said late Wednesday that it will seek court approval to appoint a receiver to manage the units after days of media coverage of their deplorable conditions.
San Francisco-based Wells inherited the loan against the properties in its purchase of Wachovia. The loan was valued at $243 million in June 2007 when it was made.
“While our discussions with the borrower are confidential, we want the community to know that we take the situation very seriously,” Wells said in a prepared statement. “[We] will continue to monitor it to understand the issues facing the tenants and properties.”
Page Mill, which is headed by veteran Bay Area commercial property landlord David Taran, lost a critical legal decision Sept. 1 undermining its ability to raise rents in the portfolio and revoking all but a fraction of rent increases already imposed.
San Mateo County Judge Steven Dylina also told Page Mill attorneys that the company is likely to fall under East Palo Alto’s stringent rent-control ordinance when the lawsuit is fully adjudicated. If so, the landlord would be subject to annual rent increases of no more than the consumer price index, severely impacting its ability to reap attractive returns on the properties. It is a fate that Page Mill has fought vigorously to avoid.
Four lawyers from at least two San Francisco law firms argued on behalf of Page Mill and Taran at the hearing. Taran himself did not appear. The tenants living in Page Mill’s largely C-quality units, the plaintiff’s in the case, were represented pro bono by two attorneys from Hogan & Hartson in Palo Alto.
Receivership is not tantamount to foreclosure but often precedes an owner’s loss of property, said Tony Theophilos, a real estate attorney with Starr Finley LLP in San Francisco who has acted as a receiver on many occasions over many years. He is currently the receiver for San Francisco’s 250 Montgomery building. He is not involved in the Page Mill matter.
Lenders seek a receiver after a property owner goes into default on its loan to ensure the property is properly maintained. Judges are prone to appointing receivers if there is any suggestion of a threat to public health or welfare, he said. There is little notice to the borrower and a hearing can happen within days or even hours and without the borrower or its counsel being present.
Receivers are agents of the court and act solely at the court’s direction, he said. In his experience, borrowers cure the loan default and regain control of their property only 10 percent of the time. In the current economic environment, given the huge loss in commercial property values and tight credit, he would put the odds even lower.
“There is going to be a huge flood of these kind of loans come due over the next several years, and the lenders will say, ‘We will extend your loan, but only if you pay it down,’” Theophilos said. In most cases, the borrowers will not be able to come up with the money, he predicted.
The lawsuit is one of many that Page Mill has become involved in since it began buying up the apartments in East Palo Alto. Throughout, Taran has kept an incredibly tight lid on information that would give insight into his investment strategy. Court records have been redacted to the point of making them unreadable, and settlement agreements and business records have been filed in court under seal.
The California Public Employees’ Retirement System also has remained stubbornly mute on Page Mill’s activities or plans. CalPERS invested $100 million in the Page Mill fund. According to public record, it has written down the value by $40 million.
Still, as anyone who watches commercial real estate knows property aggregations such as Page Mill’s often precede a redevelopment effort. In the current case, the apartment buildings and duplexes that Taran has acquired are old and in generally poor condition. But, they sit on the west side of U.S. 101 immediately adjacent to Palo Alto, one of the most desirable addresses in the South Bay. They also are located on either side of an ‘A’ class office and hotel center called University Circle. The project, completed in the last 10 years, is East Palo Alto’s redevelopment crown jewel.
Tenants in the units, some of whom have lived at their addresses for many years, fear such a scenario and have banded together to fight Page Mill.
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