Would-be Chinatown landlords hiked SF rents

Bay area tenants had rent controls, but renters at Kuhio Gardens do not

Genevieve Collejo of Villas Parkmerced Apartments in San Francisco remembers when hotel heiress Leona Helmsley, "The Queen of Mean," ran the place with its 3,483 rental units sprawling over 144 acres near Lake Merced.

"Leona Helmsley was a wonderful landlord," said Collejo, who has lived in the affordable rental project for 38 years. "She took care of the place and painted it, and never passed through any charges to the tenants. Nothing like these new owners. They hiked rents."

In 1999, Helmsley sold the project -- home to Collejo and about 7,500 residents -- for $324 million to Carmel Partners. Based in San Francisco, Carmel Partners is a private real estate firm that is emerging as the likely buyer of Kukui Gardens, an 857-unit rental project on the edge of Chinatown built with federal housing money 36 years ago.

For weeks, Kukui Gardens' tenants and tenants' advocates have been protesting the sale. They argue that Kukui Gardens Corp., the nonprofit that built and operates the affordable rental housing complex, has been secretive about the identity of the new buyer because they are redevelopers. Many tenants believe a redeveloper will jack up rents to drive tenants out and then raze the project for upscale housing.

In statements, Kukui Gardens has repeatedly said the buyer must be approved by the U.S. Department of Housing and Urban Development and that it will not hike rents or convert to luxury housing.

Many of Kukui Gardens' 2,500 residents are elderly immigrants or people on fixed incomes who would likely add to the mounting numbers of homeless, say advocates for the homeless.

Under the 40-year mortgage with the Federal Housing Authority, the new buyer must keep rents affordable until 2011. Cheryl Fukunaga, project manager for HUD, has said that once a buyer is selected, HUD will decide whether to approve their assumption of the loan. If the buyer tries to prepay the loan, she said HUD would likely insist they sign a use agreement requiring them to keep rents affordable until 2011.

Fukunaga said "after 2011 we don't have any other mechanisms to control affordability."

Unlike the tenants at Kukui Gardens, those at Parkmerced were not protected by HUD. However, they were protected by the San Francisco Rent Control Board. The tenants of Parkmerced fought rent increases and pass-throughs in more than 20 hearings before the board over a six-year period.

"But there isn't anything like rent control in Hawaii," said Laura Thielen, executive director with the Affordable Housing and Homeless Alliance. "Other than some tenants associations and groups, there is very little help out there for tenants."

Thielen said San Francisco, which faces a larger homeless population, also has a costly housing market like Honolulu.

In the end, the rent board still allowed Carmel to increase some rents and pass-through costs to the tenants of Parkmerced. Tenants of Kukui Gardens fear the same will happen to them after 2011.

"It's true, Leona Helmsley didn't pass through costs for capital improvements," said Delene Wolf, executive director of the San Francisco Rent Control Board.

"The tenants got an improved property (when Carmel came in), but the downside was that the tenants didn't expect to pay for it," said Wolf.

"There was nothing nefarious about any of this," said Joseph Bravo, an attorney who represented Carmel Partners at more than 20 hearings with the rent board.

Bravo said "these were legitimate costs and pass-throughs" to the tenants.

"These guys are not slumlords. They have properties all over the country and are very professional managers," said Bravo, an attorney who represents landlords as well as tenants.

"They come in, fix a property up and make it a nice place to live. They're not like robber barons coming in and laying waste to everything and then moving on," he said, adding, "If you don't spend money on property, it falls apart."

Bravo said Carmel typically takes over properties that have not been maintained and upgrades them. After about five years, he said, they sell it.

Carmel began investing $35 million to update the project -- built for returning World War II veterans -- with new landscaping, a fitness center, a small movie theater, fountains, irrigation, a new administration building and even a $1 million Montessori school.

To defray some costs, Carmel sold 153 units to neighboring San Francisco State University for $20 million, according to news accounts.

But it also turned to tenants.

Collejo, head of the Parkmerced Tenants' Association, said once Carmel took control, there were rent hikes and pass-through charges to tenants to pay for a range of costs from new landscaping, irrigation and utilities to laundry room costs.

The first wave of rent increases and pass-through expenses for operation and maintenance went through 14 hearings at the rent board. On the table, the tenants were facing a rent increase to absorb about $7 million of Carmel's debt service for buying the projects and other maintenance expenses that ranged from garbage bills to pest control.

San Francisco attorney Neil Eisenberg was so personally outraged at the hikes, he took the case pro bono.

"I argued that the rent raise did not comply with the rent control (ordinances), but I lost," he said adding, "We brought in extremely high-paid experts to do pro bono work, and we couldn't beat the system."

Then the San Francisco District Attorney's Office got involved. In January, Carmel Partners settled with the District Attorney's Office, which found the firm was illegally passing through utility costs to tenants. Some $310,000 went into a fund to give about 3,893 current and former tenants refunds.

Assistant District Attorney Max Peltz, who worked on the case, said, "The rent board allows landlords to pass through certain increases, but they have to meet notice requirements and follow precise calculations."

"Carmel handled things on a piecemeal basis. We got involved so they would fix things on a more global, propertywide basis," Peltz said.

Just before the settlement, Carmel sold the project for $700 million to a partner of Stellar Management of New York and Rockpoint Group.

Eisenberg said his concern is that people living on fixed incomes -- as they do in Parkmerced and in Kukui Gardens -- are going to have trouble with any rent increases.

"I don't see how low-income people living on the margin are going to manage if they get socked with rent increases. It may be just $20, but to them that might be the co-pay on their blood pressure medicine."