Veritas, San Francisco’s largest and most controversial landlord, is scrambling to raise capital after defaulting on a $448 million loan.
Last week, the Fitch Ratings reported that the property owner was in default on a $448 million loan, which is secured by a portfolio of 1,734 rent-controlled units in 62 building across San Francisco.
The default shows the challenges that San Francisco real estate owners will grapple with as loans become due. Many properties — office buildings, hotels and apartments — were financed with 10-year loans in 2013, which means that debt needs to be paid back this year, according to John Manning, a veteran real estate financing executive with Marcus & Millichap.
But with office buildings empty, rents down and apartment complexes riddled with vacancies, investors will likely increasingly not have the cash flow to pay off the maturing loans. Meanwhile the combination of current high interest rates and San Francisco’s slow recovery is making it hard to borrow or find new capital partners willing to invest.
In a statement, Veritas said “the multifamily real estate sector is facing many of the same financial challenges as have been reported on for other asset classes including office, retail, and hotel-hospitality right now, including the spiraling costs of debt.”
“While we’ve all seen the stories about office usage going down in the wake of hybrid work, multifamily operators in San Francisco must contend with even more challenges, including increased city regulation, increased taxes, more pandemic impacts, and the rising cost of doing business here,” the spokesman said. “Recent corporate layoffs and relocations have affected apartment demand too.”
The spokesperson said the company “remains committed to San Francisco,” and is working with the lender “about resolving the loan impasse to something acceptable to the parties.”
The Veritas predicament comes as more commercial mortgage backed security loans, known a s CMBS, are in default. In December, the CMBS delinquency rate increased slightly, according to Fitch.
While it’s unclear how much Veritas and its partner owes, the loan is a kind that is all paid off except for a single final payment that is typically significantly larger than the previous payments.
Janan New, executive director of the San Francisco Apartment Association, said the city’s inability to recover from the pandemic has left left many landlords with buildings that don’t produce enough revenue to cover debt payments.
“The real estate industry is cyclical – we have up cycles and down cycles and we are clearly in a very severe down now brought on by an exodus of workers during the pandemic,” said New. “Folks across the board are suffering. We don’t have people moving into San Francisco. We are not creating jobs that people to be here for. Instead we are losing jobs. ”
New said some residential property owners are seeing vacancy rates as high as 35% in rental buildings.
“We have to figure out a way to bring back jobs,” she said.
Veritas was founded in 2007 by Yat-Pang Au. During the Great Recession the company bought a portfolio of bank-owned buildings that had been owned by companies affiliated with the Lembi family, which went bankrupt in 2010. Since then, the company has been sued multiple times by tenants groups that argue that the company and it’s affiliates are engaged in illegal business practices based on improperly evicting rent-controlled tenants and replacing them with tenants who pay higher rents.
Brad Hirn, an organizer with the Human Rights Committee, a tenant advocacy group, said Veritas’ unwillingness to pay what it owns represents a double standard.
“The basic business plan requires a steady increases in operating income from these buildings. Here they are talking about the spiraling cost of debt but at the end of the day, when their tenants can’t pay their rent, through no fault of their own, Veritas refuses to negotiate,” said Hirn. “We have 25 Veritas members in eviction court for rent debt.”
“If you’re business plan requires you to constantly raise rents in order to pay off the loan, maybe that is not compatible with what San Francisco is trying to do in terms of homeless prevention,” he added.
J.K. Dineen is a San Francisco Chronicle staff writer. Email: jdineen@sfchronicle.com Twitter: @sfjkdineen
Read More:S.F.’s largest landlord defaults on massive loan. What does it mean about the future of city’s real estate?
2023-01-13 01:00:33
