San Francisco’s Wells Fargo & Co. has begun foreclosure proceedings on more than 100 parcels and 1,800 apartments in East Palo Alto. The properties back a more than $240 million loan extended to Silicon Valley’s Page Mill Properties during the height of the commercial real estate boom. The loan has now gone into default.
Meanwhile, a San Mateo County Superior Court judge has agreed to sign an order that will install a Pacific Palisades receiver to manage the enormous property portfolio until it can be sold, in whole or in parts, once the foreclosure is complete. That will not happen before year end, as by law, the borrower has up to 120 days after a notice has been filed to cure a loan default. The bank filed the notices of loan default Sept. 25 with the San Mateo County Clerk Recorder.
According to public record, Page Mill and its chief, David Taran, would have to pay more than $243 million to Wells to stop the foreclosures and a trustee sale. That outcome seems highly unlikely.
The California Public Employees’ Retirement System is an investor in the project. It committed $100 million to a fund called Page Mill Properties II in July 2006. Another $20 million of equity was raised from high net-worth individuals. Page Mill itself was expected to invest 2 percent of the total capital raised as a co-investment with an amount not to exceed $10 million. This ended up being $2.4 million.
At the end of the first quarter, CalPERS had reduced the value of its investment to $60 million. The one-year return for the pension fund at that time was -22 percent. The performance is well below what CalPERS projected.
Judge John L. Grandsaert signed a temporary restraining order Sept. 9 agreeing to install receiver David D. Wald to manage the properties temporarily. Page Mill had until Sept. 18 to file documents formally contesting the receivership. That did not happen.
On Wednesday, Grandsaert agreed to sign an order that the bank has negotiated with Page Mill attorney Bruce Speiser of Pircher, Nichols & Meeks. The order, which the judge stipulated should be filed no later than Oct. 1, is expected to include various provisions. In particular, it will direct the receiver to create a plan to handle roughly a dozen lawsuits and a number of administrative actions involving the city of East Palo Alto’s rent-control ordinance. Taran and Page Mill will have the opportunity to approve the receiver’s proposals, but if the parties cannot agree, the judge will have the ultimate say.
Speiser insisted on a deadline for the plan’s preparation, suggesting Oct. 14. Lewis said that without speaking to the receiver she could not agree to that time. The judge directed the two attorneys to negotiate the timeframe and to include their decision in the proposed order.
In addition, Wells attorney Marjorie Lewis said the receiver has identified various necessary “repairs beyond regular maintenance” including new roofs that need to be completed. She also said the receiver sought a legal declaration from the properties’ former manager, an entity she believed affiliated with Page Mill, that it had turned over to Wald all records including rent payments and lease documents related to the 1,800 units.
“When the receiver got possession of the property-management office it had been stripped bare,” Lewis told the court. Hard drives had been removed from computers and file cabinets had been emptied, she said.
“The receiver is very concerned that he has not gotten all of the books and records with regard to the properties’ management, and he wants a statement saying he has gotten it all,” she said.
Speiser distanced Page Mill from the property managers, noting that they were a “third-party property-management company,” but said he would work with Lewis and the receiver to secure the requested statement.
After the hearing, Lewis spent nearly an hour answering questions from a dozen East Palo Alto tenants’ advocates affiliated with a group called Youth United. She assured them that the bank sought to resolve litigation and disputes involving the city and tenants. Under questioning, she said the receiver may have the authority to scale back or even eliminate rent increases that Page Mill had imposed. On Monday, San Mateo County Superior Court Judge Steven Dylina signed an order in a separate case requiring Page Mill to roll back rent increases on a small subset of its properties affecting less than 100 apartment units.
Lewis also said that she has not been involved in any discussions with CalPERS.
Finally, Lewis said the loan is a nonrecourse loan, meaning that no deficiency from the sale of the properties between the amount owed to the bank and the amount paid by a buyer could be sought from the original borrowers.
Clark McKinley, a spokesman for CalPERS, said the pension system is monitoring the situation through its consultants and that “when the time comes when we need to take some action we will.”
“We are hoping for a good outcome [but] we don’t know what that would be,” McKinley said. He declined to say if CalPERS has resigned itself to the complete loss of its equity.
The portfolio is widely viewed as a valuable holding by those in the commercial real estate industry, though only as a redevelopment vehicle. It sits on the southwest side of U.S. 101 immediately adjacent to Palo Alto and a cluster of some of the region’s most prominent employers including Hewlett-Packard Co., Facebook, Tesla Motors and many others. That said, it is unclear if it is worth the outstanding loan amount. Currently, rents produce revenue of $16.8 million a year or $1.4 million a month, according to public record. Yet, given the public anxiety that Page Mill’s repeated confrontations with the city has created, it seems clear that only a developer with astute social and political skills could hope to ever gain permission for wholesale change.
Jon Peterson contributed to this report.
FAIR USE NOTICE. This document may contain copyrighted material the use of which may not have been specifically authorized by the copyright owner. Tenants Together is making this article available on our website in an effort to advance the understanding of tenant rights issues in California. We believe that this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the U.S. Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond 'fair use,' you must obtain permission from the copyright owner.