Time to Pull the Plug on Parkmerced Project

by Dean Preston on February 3, 2011

The Planning Department’s website prominently features beautiful pictures of what is envisioned for Parkmerced. At Planning Commission hearings, Michael Yarne of the Mayor’s Office of Economic and Workforce Development testifies with great zeal in favor of the project. There’s no daylight between Yarne, who is paid with public funds, and the developer on one thing: both are committed to making sure this project happens.

But the glossy photos and sales pitches cannot obscure one inconvenient truth about the proposed project at Parkmerced: It will never happen – at least not as it is being promised. The question is whether city leaders have the vision and courage to protect San Francisco from this ill-conceived project, and whether they will act now to prevent the displacement of thousands of tenants and the destruction of this unique rental community of approximately 8,000 residents.

The proposed project is so massive that it is hard to know where to begin in analyzing it. It takes a while to wrap your brain around what is being proposed. When you do, you’ll find many aspects of the proposal disturbing.

First, there is no solid phasing plan and no detail on when demolitions will occur. Second, there is no adequate explanation for how the project, as proposed, makes any financial sense, unless one believes that they will be able to sell $800,000 high rise condo units at Parkmerced and attract financing for a project that City consultants conclude isn’t financially viable.

Third, the project threatens the very existence of a unique, historically significant community, triggering objections from a broad range of preservation groups. Fourth, the project proposes to demolish over 1500 units of rent controlled housing in violation of common sense and city policy. Fifth, there are serious questions about the enforceability of the promises being made to tenants about their right to rent controlled replacement housing, including what happens if the owner, or subsequent owner, invokes the Ellis Act to kick out all tenants.

This project is a fairy tale from a prior decade – a time when investors naively believed everything they were being promised by real estate speculators. If approved, there is no doubt that the current owners will sell off the project with the entitlements. If they find a buyer, it will be a buyer who will only be able to attract funding by reneging on the promises made to tenants and the city.

Background – What is Going On At Parkmerced?

Parkmerced was built by the Metropolitan Life Insurance Company (MetLife) after World War II. Met Life also built similar complexes in New York City (the Riverton Houses, Stuyvesant Town and Peter Cooper Village) and other large U.S. cities. For decades, these developments have provided stable housing for middle-class renters in increasingly expensive urban real estate markets.

In 2005, a partnership of Stellar Management and Rockpoint Group purchased San Francisco’s Parkmerced and New York’s Riverton. The complexes were purchased for sums that could not be justified by the existing rental income on the properties. Instead, as noted in a recent New York Times article, “just like Riverton and Stuyvesant Town, the owners of Parkmerced sought to take advantage of a roaring market to replace rent-regulated residents with tenants able to pay far higher rates.”

These schemes, called “predatory equity” deals, were popular among investors when the real estate market was booming and developers promised huge returns that would be made on the backs of rent regulated tenants. Due to a combination of tenant resistance and a crashing real estate market, nearly all of these speculative projects ended up defaulting on their mortgages.

Parkmerced’s owners defaulted on their loans in 2010. Foreclosure was apparently averted by an October 2010 investment from Fortress Investment Group, which reportedly acquired a controlling interest in the ownership group, so the project is on life-support for now. The owners continue to press development plans, knowing that obtaining entitlements to this project will help them sell it before they go belly up.

Parkmerced is the largest rent controlled complex in San Francisco. There are a total of 3,221 rental units at Parkmerced, including 1683 units in eleven 13-story towers and 1538 units in two-story townhouses called the “garden apartments.” Nearly two thirds of the Parkmerced units are 2-Bedroom or bigger. The proposed development promises a total of 8900 units – some owned, some rented — by increasing density.

The developer’s website describes its vision for the project as follows:

The New Parkmerced Vision. Imagine a once-in-a lifetime opportunity to transform an aging housing complex and the surrounding area into a vibrant neighborhood. Imagine a shared commitment to turn a blighted landscape into an international model of urban sustainability. Imagine that vision is becoming reality. Parkmerced will become a cleaner, safer, healthier living community that residents will be proud to call home, and will have a significant, positive impact on the city and the residents of San Francisco.

Touting the “green” nature of the development, while promising community benefits, appears to be the strategy. City officials, under pressure to meet green development goals, are receptive to this type of pitch.

The owners’ characterization of Parkmerced as a “blighted landscape” leads one to question whether they have actually visited their own property. Certainly the word choice is designed to make it seem as if demolition would be a good thing for this community. The developer echoes this theme at hearings.

However, the residents know that Parkmerced is not blighted and that it already is a vibrant community. Supervisors who will end up casting votes on the project should visit the site and see for themselves whether this is a “blighted” community.

The Proposal Lacks Critical Details: No Meaningful Phasing, No Estimated Time for Demolition

The Parkmerced project is projected to take 20-30 years. While there are extensive promises about what will be built in the end, there are few details about what will occur when. The developers would be free to develop any part of the project at any time. This is unheard of for a project of this magnitude.

The consultant’s review notes that although phases are addressed in the proposal, “the draft Parkmerced Development Agreement specifically provides the developer flexibility in the order and timing of the proposed private development, including allowing discretion in what amount of net new development will be included in each.”

Why is strict phasing not being required of this project? The question has caused concern for at least one Planning Commissioner, Kathrin Moore, who has emphasized this flaw in the proposal. Why not divide the project into clearly defined phases, grant authorization to move forward on Phase One only (preferably a phase with no demolition), and condition approval of any future phases on compliance with all conditions of the first phase? Remarkably, no such plan has been proposed to date.

Likewise, there is no timeline presented for the demolition of the currently occupied housing. Michael Yarne, the Mayor’s Office official most knowledgeable about the project, recently acknowledged that he could not even tell the residents in what decade their home would be bulldozed. Yarne assures them they will have a place to move into, but cannot inform the tenants if their homes will be bulldozed in two years, ten years or twenty years.

The Project Is Not Financially Viable

This project fits squarely in the category of speculative real estate deals that have been crashing around the nation. Clearly something is wrong when even the City’s consultant concludes that “based on current and reasonably foreseeable short-term market conditions, the Project may not be economically feasible.” City officials should take a close look at the consultant’s report.

The report concludes that the Internal Rate of Return (IRR) is approximately 17%, a figure far less than the 20-25% typically required in the industry to attract investment for this kind of project. Absent the rent control commitments, the IRR rises to approximately 19%, providing ample incentive for the owners, or future owners, to shirk their obligations and drive out rent control tenants. In addition, the projections are based on the developers’ assumptions that they will be able to sell high-rise condo units at Parkmerced for nearly $800,000 each. This is wildly optimistic.

Why should tenants care if the project is not financially feasible? One answer is that as the financing falls apart, the pressure increases on the owner (current or future) to find ways to displace low-rent tenants. Thus, regardless of what is promised to tenants, an unscrupulous owner will harass tenants to push them out.

Anyone who experienced the Lembi’s (CitiApartments) regime in San Francisco understands this all too well. Lembi overpaid for properties, paying rates that only made sense if they could successfully harass tenants into moving out. The same thing happened in East Palo Alto, where Page Mill Properties displaced a massive number of tenants in a predatory equity scheme to redevelop rent controlled properties.

Given that the city is justifying this project by the supposed benefits it will bring, it is entirely appropriate to look at the likelihood that the developer will ever be able to deliver on the promises. This inquiry needs to happen before permission is given to bulldoze this community and its 1500 rent controlled homes.

Project Threatens a Unique, Historically Significant Community of over 8,000 people

As the tenants of Parkmerced know, this is a vibrant community of working families, seniors and tenants from every walk of life. Parkmerced has a unique mix of larger apartments, allowing families more rental options. Parkmerced has treasured open space. Tenants have lived for decades, some over 50 years, at Parkmerced. Despite the self-serving claims by the owners to community groups that there was no significant opposition to the project, Parkmerced residents have turned out in force to oppose the project at recent Planning Commission hearings.

It is not only tenants and housing advocates who oppose the project. In a letter to the Planning Commission dated January 28, 2011, six preservation organizations asserted their concerns about this project. The National Trust for Historic Preservation, California Preservation Foundation, San Francisco Architectural Heritage, The Cultural Landscape Foundation, Northern California Chapter of DOCOMOMO-US, and Northern California Chapter of Historic American Landscape Survey wrote “the historic preservation community remains deeply concerned about the destructive impact of the Project on the Parkmerced Historic District.” The letter continues:

Parkmerced was determined eligible for the National Register of Historic Places and the California Register of Historical Resources as a significant example of planned residential development in San Francisco and the work of master landscape architect Thomas Dolliver Church and his celebrated colleague Robert Royston. According to the Cultural Landscape Foundation, Parkmerced is one of only four remaining examples of large-scale, pre- and post-World War II residential developments in the country and is without question of national significance. The Foundation has identified Parkmerced as a potential National Historic Landmark candidate — an elite group of less than 2,600 such properties in America. As one of Thomas Church’s largest and most publicly accessible works, Parkmerced is also an important community resource.

The six undersigned local, state, regional, and national historic preservation organizations urge the City of San Francisco to adopt Project alternatives or components of alternatives that maximize preservation of the Parkmerced Historic District and retain its eligibility for the California Register of Historical Resources and the National Register of Historic Places. We question the consistency of the proposed Project with San Francisco’s Planning Code Priority Policies and urge the City to require additional, more substantive mitigation measures for the severe impact to historic resources that could result from the Parkmerced Project.

Despite the historical significance of this community, the project has not even been before San Francisco’s Historic Preservation Commission. Apparently, the rush to have this project approved has precluded meaningful review of the unique, historical resource at stake.

Project Would Demolish Over 1500 Units of Sound, Rent-Controlled Housing

The demolition of 1500 sound, rent-controlled units is the craziest part of the project. With our city’s rental housing scarcity, San Francisco needs to preserve, not demolish, its rent-controlled housing units. That’s why San Francisco has a policy against demolishing sound rent-controlled housing. The City’s Planning Code makes this clear.

The City’s Planning Department reiterates the point: “Under requirements of the General Plan, the Department is predisposed to discourage the demolition of sound housing.” Yet Yarne of the Mayor’s Office at a recent meeting acted more like an interrogator of tenant advocates who dared to challenge the wisdom of the demolition than a public servant “predisposed to discourage the demolition of sound housing.”

Remarkably, the City has not even required the developer to propose, as an alternative, a project in which new units were developed without the demolition of the garden apartments. We are asked to believe that such an alternative is not feasible, without ever having such a proposal developed.

The problem is compounded by state law. As discussed below, there are serious questions about the enforceability of promises to apply rent control to newly constructed housing. Unless and until state law is clarified, the city should not even consider approving the large-scale demolition of sound, rent controlled housing.

If this project to demolish over 1500 units of rent controlled housing were proposed anywhere else in San Francisco, it would be dead on arrival. But because Parkmerced is physically removed from much of the city’s densely populated areas, this project remains under consideration.

Promises to Tenants May Not Be Enforceable

Now that California’s Court of Appeal has expanded the Costa-Hawkins Rental Housing Act to bar most rent-restrictions on new housing, even as part of inclusionary housing laws, proposed rent restrictions on replacement housing would likely be challenged in court by the owners, or subsequent owners, of Parkmerced. While Costa Hawkins recognizes a limited exception for certain types of development agreements, the 2009 Palmer v. Sixth Street court decision shows that cities cannot rely on the Courts to interpret Costa Hawkins to allow rent-restrictions on new housing.

Furthermore, regardless of the promises, the San Francisco Rent Board will not have jurisdiction over these units, meaning they would be an inferior class of “rent-controlled” units when compared with what the tenants currently have. Tenants would not be able to obtain relief from the Rent Board for decreased services, illegal rent increases, wrongful eviction attempts, improper capital improvement pass-through charges and other issues.

City officials have also been curiously silent about the possibility that the Ellis Act could be invoked at the property.

The Ellis Act and Parkmerced

Lost in the discussion of the project to date is California’s Ellis Act, a draconian law that has been misused repeatedly by real estate speculators and expanded by the courts to nullify tenant protections in rent control jurisdictions.

As a result of a 2009 court ruling, the City’s ability to stop a developer from invoking the Act at Parkmerced is uncertain, even where the developer agrees to waive rights under the Ellis Act. In Embassy v. City of Santa Monica, the Court held that a landlord’s written waiver of the right to invoke the Ellis Act was invalid.

According to the court, only contractual waivers between landlords and cities that fit within the narrow exception to the Ellis Act can be enforced. Those are contracts where a city is providing a direct financial incentive for the project, something absent from the Parkmerced proposal. Even if San Francisco tries to satisfy this exception by including a token payment to the developer to try to ensure that the developer’s waiver of Ellis Act rights is enforceable, there is no way of knowing how a court will view such an arrangement. History teaches us that the state courts will expand the scope of the Ellis Act at every possible opportunity.

Lincoln Place Déjà vu

Yarne acknowledges that there is always risk, but claims that the risk of rent control promises not being enforced is so small that it is outweighed by the project’s benefits. He insists that tenants and housing advocates are being unrealistic – compares us to climate change deniers – by focusing on what he views as the remote possibility that the developer will violate promises in the Development Agreement.

The problem, of course, is that the real world experience gives cause for concern. For example, in Los Angeles, AIMCO abused the Ellis Act in circumstances much like Parkmerced proposal. AIMCO acquired the Lincoln Place complex, obtained project approval based on a written agreement with the city not to displace residents, and then invoked the Ellis Act in 2005 to evict hundreds of rent controlled households. The trial courts denied the tenant association’s efforts to stop the evictions and refused to allow individual tenants to defend against evictions based on AIMCO’s promises. Hundreds of tenants lost their homes. At Parkmerced, it would be thousands.

As San Francisco considers approving the demolition of over 1500 rent controlled homes based on a developer’s promises to keep residents housed, every city official should watch this video from 2006 about the Lincoln Place situation: http://www.youtube.com/watch?v=UngEHGXlHb0.

The law has grown worse since the Lincoln Place fiasco. State courts are increasingly hostile to tenants’ rights. The Embassy case, while unclear in its scope, shows that the court is perfectly willing to throw out contractual waivers of the right to invoke the Ellis Act. If the fate of Parkmerced residents ends up in a California courtroom, the tenants are in deep trouble.

It is time for Mayor Ed Lee, the Board of Supervisors and the Planning Commission to take a hard look at this project and pull the plug before it is too late.

Dean Preston is the Executive Director of Tenants Together, California’s statewide organization for renters rights. For more information about Tenants Together, visit www.TenantsTogether.org.

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