by Calculated Risk on 12/11/2009 04:00:00 PM

Since it is Friday, here are a couple of articles from San Francisco Magazine on some "not-so-smart" apartment loans ... the first on the lender, the second on the borrower.

From David Johnson: When smart money said "no more," not-so-smart Marin bank loaned the Lembis $41 million. (ht Eric)

The Lembi real-estate implosion (see “War of Values,” December 2009) is on the verge of claiming another casualty: little Tamalpais Bank of San Rafael, which lent $41 million to the Lembi family and has now declared virtually its entire portfolio of commercial mortgages to be in default.

... Walter and Frank Lembi, the father and son behind the CitiApartments rental behemoth, used more than $1 billion in financing from international investment banks and purchased more than 170 San Francisco apartment buildings between 2003 and 2008, bringing the total number of buildings they owned to 300 ...

Tamalpais Bank made most of the Lembi loans between December 2007 and April 2008. ... by this past September, the Lembis had defaulted on all except one of their loans, leaving Tamalpais Bank with a $38 million hole in its portfolio. The size of the loans was equivalent to more than 75 percent of the bank’s total capital.

“Lending that much of the bank’s capital to a single borrower is inherently reckless, imprudent, and simply unsafe and unsound,” said Richard Newsom, a retired San Francisco bank regulator. “Originating such a huge concentration of credit to one borrower in that period is beyond unsafe and unsound, because the commercial real-estate market was already starting to crack at that time.”
emphasis added

And from Danelle Morton: War of values

Since 2003, the [Lembi] family, through its various corporate entities, had acquired more than 170 properties—close to $1 billion in real estate—on top of the 130 or so they’d already owned. This briefly made them the largest private landlord in a city where 65 percent of residents are tenants.

There seemed to be no pattern to their acquisitions. They bought everything from grande dames, like the Park Lane on Nob Hill, to ratty dumps in the Tenderloin.
...
The Lembis were primarily interested in properties built before 1979: In other words, buildings covered by rent control. The reason is spelled out in a confidential document prepared by the investment bank Credit Suisse in winter 2008. The document focuses on the group of 24 properties that included the Carlomagno buildings. It shows, unit by unit, how the Lembis planned to replace 85 percent of the tenants. The family had set aside $9 million for “relocation costs,” and another $13 million for renovations. Once the apartments were fixed up, the document states, CitiApartments planned to raise rents by an average of 59 percent.

This is similar to the strategy of the buyers of Peter Cooper Village and Stuyvesant Town in New York; the plan was to somehow remove the rent controlled tenants and increase the rents significantly. It worked about the same.