The San Francisco Business Times reports today that the ever-expanding Lembi real estate empire added another 15 apartment buildings to its portfolio in February. This brings the number of San Francisco apartment units controlled by CitiApartments (aka Skyline Realty) to 6152. The investor groups controlled by the Lembi family paid $137.6 million for the properties, which are located throughout San Francisco. The purchases renew questions as to the impact Lembi’s increased control of the San Francisco apartment market, as the group was sued by the City Attorney’s Office in August 2006 for unfair business practices. Is an ownership group charged with violating city rent control laws driving law-abiding landlords out of the San Francisco? And what are the implications for tenants when one company exerts dominant control over the city’s 40-120 unit rental market?

San Francisco Business Times reporter J.K. Dineen came up with another major scoop today, revealing further expansion of the Lembi/CitiApartment/Skyline real estate empire. The February 2007 purchases adds 452 units to the company_s portfolio. While the properties were bought by four separate limited liability corporatons (LLC’s), all shared CitiApartments’ 2099 Market St. address.

The buildings include a 114-unit building at 825 Post St., a 51-unit building at 982-990 Post St., a 33-unit building at 3649 Market St., a 40-unit building at 4130 Cesar Chavez, and 35 units at 808 Leavenworth St. The properties span every neighborhood on the eastside of San Francisco, including Nob Hill, Noe Valley, the Marina, Western Addition, Russian Hill, and Pacific Heights.

In November 2006, Skyline purchased ten apartment buildings. Dineen of the Business Times reported then that Skyline will often pay 16-18 times the building’s gross rent – whereas most investors refuse to pay more than 13 times gross rent..

City Attorney Dennis Herrera sued CitiApartments in August of 2006, alleging that the Lembi-controlled properties could pay higher prices for apartment buildings due to its strategy of illegally driving out longterm tenants and then dramatically increasing rents. The city alleged that the Lembi’s even used armed security guards to “convince” tenants paying below-market rents that moving out was in their self-interest.

The Lembi’s increasing domination of the San Francisco rental market raises two critical issues.

First, CitiApartments could be creating unfair competition with law-abiding landlords so as to put pressure them to similarly violate city rent control laws. It’s like what happened when Nike shifted production of its sneakers to overseas sweatshops ---it began a “race to the bottom” that led all shoe companies to pay inadequate wages and to maintain unhealthy and oppressive work conditions.

While CitiApartments’ control of over 6000 units does not equal Nike’s market control over the shoe industry, the Lembi’s may already have San Francisco’s largest supply of vacant rental units. This market domination over vacant units could enable CitiApartments to largely dictate rent levels for vacant units in large buildings in San Francisco. And if the company is overpaying for properties, then it must boost rents to cover their increased mortgage costs.

Some may ask: how can Skyline/CitiApartments/Lembi charge more than the market will bear? The answer is that a company controlling a large share of the city’s vacant units determines the rental market.

CitiApartments is heavily marketing to people who have moved to San Francisco and quickly must find a place to live. If one landlord has nearly all of the available rentals---and uses business practices that encourages turnover---then people either pay what Skyline wants or live outside San Francisco.

The Lembi’s are pursuing the strategy that made WALMART so successful. WALMART overpays for sites calculated to drive competitors out, and once that occurs, raises prices through its control of the market. CitiApartments is not at risk of anti-trust violations because it does not exert major control over San Francisco’s overall rental housing supply; but it achieves the same result by exercising dominant control of the stock of rental units that are immediately available to newcomers to San Francisco.

As law-abiding landlords see their rents fall well below Skyline buildings, pressure will rise to follow the Lembi’s “successful” business practices. This means that tenant-landlord relations in San Francisco’s 30-120 unit apartment buildings could soon become rocky.

Skyline’s market consolidation is also likely to increase alliances between tenants in Lembi buildings. Large buildings with a single owner facilitates tenant organizing around issues of mutual concern. The San Francisco Tenants Union has begun building alliances among Skyline tenants, and tenant organizing in Skyline buildings will likely increase as the company continues its rapid expansion.

San Francisco has a long history of real estate investors coming into town, buying a bunch of properties, and then losing them to foreclosure as their speculative scheme fails. Skyline fits part of this description, but has a long if ignoble history in San Francisco and can likely weather short-term turbulence in the rental housing market.

This means that Skyline is likely to continue expanding its control over San Francisco’s rental market, and that tenants living in these properties should be prepared. These tenants are strongly encouraged to learn about Skyline’s practices at http://citistop.org/, or call 282-6656

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