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In Silicon Valley, a New Investment: Eviction

By John Gittelsohn and Heather Perlberg
April 07, 2014 4:56 PM EDT 259 Comments
Ivan Lopez, 13, and his brothers Eduardo, 10, and Brandon, 3, play outside their building, which is owned by Equity Residential in East Palo Alto, California.
Photographer: John Gittelsohn/Bloomberg
Ivan Lopez, 13, and his brothers Eduardo, 10, and Brandon, 3, play outside their building, which is owned by Equity Residential in East Palo Alto, California.

Virginia Valencia earns $12 an hour working the morning shift at Tesla Motors Inc. (TSLA) headquarters in Palo Alto, California, where she serves food and drinks to the staff and billionaire co-founder Elon Musk.

After work, the single mother of three goes home to the one-bedroom rent-controlled apartment she’s struggling to keep in East Palo Alto’s Woodland Park, an 1,811-unit complex bought in 2011 by Equity Residential, the largest publicly-traded U.S. landlord. The company, founded by real estate magnate Sam Zell, owns more than 70 percent of the regulated apartments in the only city between San Francisco and San Jose with a rent control law.

Valencia has been fighting eviction since she fell behind on her $1,064 rent payment in November. And she’s not the only one. Each month, as many as 300 Woodland Park residents receive notices from Equity Residential giving them three days to pay or vacate their homes, according to an employee’s sworn testimony in a lawsuit.

“I’m alone and I don’t have a family to fall back on,” said Valencia, 32, who works for a contractor that operates Tesla’s food services. “It seems like they just don’t want us here.”

Declining Affordability

East Palo Alto is the last haven of low-rent housing in a region where companies like Tesla, Facebook Inc. (FB) and Google Inc. (GOOG) have minted at least two dozen billionaires and thousands of millionaires. Woodland Park is where Silicon Valley’s cooks, janitors and housekeepers live, often working second jobs to hang on to their homes as rents soar and wages stagnate.

Affordable housing is becoming harder to find as communities like Woodland Park disappear from cities across the country. One in four renters now spend more than half of their income on housing, up from one in five a decade ago, according to a 2013 report from the Harvard University’s Joint Center for Housing Studies.

“It’s not a problem that’s just unique to those high-cost markets,” said Christopher Herbert, research director at the center. “It’s felt in a lot of communities across the country. We do see it even in low-costs markets, reflecting the big disparity between what it costs to provide housing and what low-income people earn.”

Demand for leased housing has increased after about 5 million owners lost their homes to foreclosure since 2008. Rents across the U.S. have risen 16 percent in the past five years, according to apartment-research company Axiometrics Inc., based in Dallas, Texas.

Rents Surge

U.S. rents are expected to increase 4.2 percent this year compared with a 2.7 percent gain for home purchase prices, according to the Fannie Mae National Housing Survey released today.

The surge in rents has been acute in Silicon Valley, where a thriving technology industry is fueling economic growth and higher property values. In Palo Alto, rents have jumped more than 45 percent in the past five years to an average of $2,604.69 in February, Axiometrics data show. East Palo Alto limits increases in its rent-controlled units to 2 percent for leases renewed during the year beginning July 1.

City Council

Rent control’s a point of pride for Ruben Abrica, a 15-year member of East Palo Alto’s city council. Last week, the council gave preliminary approval to a Tenant Protection Ordinance that will make it harder to demolish low-cost rentals and easier for tenants to organize against property owners.

“We’re fighting landlords who have money and power,” said Abrica, 65, a leader of the campaign to incorporate the city in 1983. “They don’t like anybody standing in their way.”

Equity Residential (EQR) has filed 236 unlawful detainer, or eviction, cases that have been unsealed in San Mateo County Superior Court since December 2011, according to the court website. At least 160 cases -- or 68 percent -- ended with a writ of possession of real property, giving the tenant 24 hours to move out.

Equity Residential is managing its property in complete compliance with all applicable laws, Marty McKenna, a spokesman for the Chicago-based company, said in an e-mail.

“We bought this property fully aware of the Rent Stabilization Ordinance and operate the property in full compliance,” he said.

Apartment owners often try to evict residents paying low rents after they acquire properties, according to Jeffrey Langbaum, a Skillman, New Jersey-based Bloomberg Industries analyst who covers real estate investment trusts.

Deed Restrictions

“Landlords can use evictions as a means of getting below-market rent tenants out in order to increase rents to market,” Langbaum said in an e-mail. “This is not Equity Residential-specific and is not uncommon.”

Rents for one-bedrooms at Woodland Park started at $1,565 as of last week, according to its website. That’s 47 percent more than Valencia pays under the lease she signed in 2011.

About 76 percent of East Palo Alto’s renters pay more than half of their income for shelter, according to data collected for the city’s new general plan.

East Palo Alto has always been a place apart on the San Francisco Peninsula. Blacks and Hispanics settled there after World War II, when they weren’t allowed to buy property under many deed restrictions across the San Francisquito Creek in Palo Alto, a city established by Leland Stanford, the 19th-century railroad baron and founder of Stanford University.

Equity Residential

“We’re the pool of service workers for the other side -- landscaping, housekeeping, cooking, nannies,” Abrica said.

The neighborhood around Woodland Park, which sits right on the Palo Alto border, used to be called Whiskey Gulch because of the profusion of liquor stores on the edge of the city, which was founded as a dry town. In 2006 many of them were demolished to make way for a Four Seasons hotel next to the apartment complex.

Equity Residential acquired Woodland Park, a hodge-podge of 101 apartment blocks built mostly in the 1950s and 1960s, in December 2011 for $130 million from Wells Fargo & Co. (WFC), which had foreclosed on the previous owner. The company spent almost $7 million on the buildings after its acquisition, according to a filing.

Equity Residential has about 110,000 units across the U.S., with monthly rents as high as $9,900 for a four-bedroom in Manhattan. Its chairman and founder is Zell, 72, a billionaire who heads a real estate empire that has included a publicly traded mobile-home business in the U.S. along with homebuilders and real estate companies in Brazil, China and Mexico. Zell, through a spokeswoman, declined to comment for this story.

Tenant Ordinance

David Neithercut, chief executive officer of Equity Residential, said on a February 2012 call with investors that Woodland Park was one of its “assets that needed repositioning.” He didn’t provide details.

East Palo Alto residents grew concerned in 2011 that gentrification would push out low-income residents after Facebook expanded and moved to Menlo Park, two miles (3.2 kilometers) north, and Equity Residential started attracting higher paid technology workers to Woodland Park, according to Abrica.

The Woodland Park evictions prompted East Palo Alto’s city council to consider the new Tenant Protection Ordinance, which won preliminary approval with a 4-0 vote on April 1. More than 200 people, half of them forced to stand, packed the council chambers on the night of the vote. Many carried hand-lettered signs in English and Spanish saying “Tenants United” and “Affordable Housing for All Incomes.”

Rent Control

The ordinance requires landlords to replace demolished or renovated rent-controlled units with an equal number of low-income apartments and to compensate tenants who are displaced.

The landlord’s attorney, Corinne Calfee, the only one of 16 speakers at the meeting to criticize the ordinance, said the new law discriminates against the property rights of apartment owners. She said it requires them to get permission to demolish their buildings and bear costs that other investors don’t face. She declined to comment for this story.

Trying to preserve affordable housing with rent control has the unintended effect of discouraging new construction and makes it harder for low-income people to find housing, according to Doug Culkin, CEO of the National Apartment Association, an industry trade group.

“Rent control constricts supply, which negatively impacts affordability,” Culkin said in an e-mail. “The effects of rent control fall disproportionately on low-income households.”

The high cost of housing nationwide is prompting politicians to champion affordable living for their low-income residents.

New York

New York City Mayor Bill de Blasio won the election in November vowing to close the growing income gap and increase affordable housing. His administration said it wants to direct $1 billion of city pension funds to construct lower-rent apartments and legalize some basement units to create additional housing opportunities.

Boston Mayor Martin Walsh created a task force last month to help find ways to generate more housing for low- and middle-income residents there.

In Portland, Oregon, Mayor Charlie Hales last month proposed spending $20 million more on affordable housing in parts of the city. His announcement came after the Portland African American Leadership Forum demanded that a development project including a Trader Joe’s grocery store on a vacant lot be stopped or re-formed with the addition of affordable housing. Trader Joe’s later canceled its plans to open the store.

Garage Shelter

The planning commission in East Palo Alto is studying how to permit living in garages and other secondary dwellings. Valencia said she applied to move with her sons -- Alex, 14, Robert, 11, and Junior, 7 -- to a garage that rents for $1,000 a month. The owners turned her away.

“They said I had too many children,” she said.

Where housing is less affordable, the gap between rich and poor is more extreme, according to a March report by real estate research firm Trulia Inc. (TRLA) Income inequality is increasing in cities including San Francisco, New York and Boston, the report showed.

It would take almost three years for Valencia, who said she makes $12 an hour, to buy a Tesla Model S, the battery-powered cars that start at about $71,000.

Tesla declined to comment for this story, according to spokeswoman Shanna Hendriks.

Income Inequality

“Incomes aren’t rising at the low end,” said Laurie Goodman, director of the housing finance policy center at the Urban Institute in Washington. “Income inequality is growing. It’s a huge problem and it’s growing over time.”

A native of Jalisco, Mexico, Valencia came to California in 2009. She gained legal residency through a U visa, granted to victims of crime who cooperate with law enforcement, according to her attorney, Larisa Bowman. Valencia said she fled from an abusive husband and hoped to start a new life for herself and her sons.

She moved into Woodland Park in April 2011 and began reporting maintenance issues a year later. She complained to management about peeling paint, missing window screens, door and window locks, clogged drains, pest infestations and a broken mailbox, according to a court filing.

In October, Valencia said, her 2005 Jeep Cherokee was towed from her assigned parking space because a security guard thought it was inoperable. It cost $380 to reclaim the Jeep and left her unable to pay the full amount of her November rent, she said.

Overdue Rent

Her first eviction notice was sent on Nov. 8. Valencia said in a court filing that the action was in retaliation for her complaints about the towing.

“No one is retaliated against,” Equity Residential’s McKenna said. “This is an 1,800-plus unit property. We send notices to residents who have not paid their rent on time.”

After Valencia challenged her eviction in court, Equity Residential agreed to allow her to stay, as long as she caught up with her overdue rent and made monthly payments on time, according to a Dec. 11 judge’s order.

She still owes about $280, according to the landlord’s calculations, including late charges that Valencia disputes. The company has been sending her monthly notices to pay or face eviction, most recently one dated March 12.

“Every month, they add $50 for late fees,” she said in Spanish, holding up a copy of her latest notice.

Three Days

Equity Residential has been issuing about 200 to 300 notices a month that give delinquent tenants three days to pay rent or face eviction, said Norma Jaimez, senior accountant at Woodland Park, in a November deposition by Bowman, a lawyer with Community Legal Services in East Palo Alto. Tenants are considered in default for rents not paid as soon as the first day of the month and some are subject to $50 late charges, according to Woodland Park leases in court files.

“I have the right to three-day them after the first day after when their rent is due,” Jaimez said in the deposition as part of a tenant challenge to an eviction.

Woodland Park’s turnover was about 30 percent, compared with 55.6 percent for all Equity Residential properties in 2013, according to McKenna.

“Turnover generally runs lower at rent-controlled assets compared to market-rate assets,” he said.

Equity Residential declined to say how many tenants it has evicted since taking over the property.

Settling Cases

Many tenants voluntarily vacate their apartments after receiving the three-day notices rather than challenge them in court, Bowman said. She said Woodland Park tenants, some of whom are undocumented immigrants, often don’t seek legal help because they’re intimidated or fearful of being deported.

“One of the challenges we have been facing is that they are either aggressively evicting people or making their lives so difficult that the vacancies increase,” Bowman said.

Former Woodland Park residents have been forced to move far away in search of lower-cost apartments: to San Jose, 18 miles south; Oakland, 31 miles northeast; or Manteca, 73 miles east.

Bowman has represented Woodland Park residents in about 70 cases against Equity Residential. She said the majority have ended in settlement, with the tenants getting to stay in their homes. Court records remain sealed in almost all of those cases to protect the tenants’ identity, she said.

Maintaining Apartments

Attorneys have helped residents ward off eviction by presenting evidence they said shows possible violations of the rent stabilization ordinance, including instances when the landlord raised the rent more than once during a 12-month period, according to Bowman. They’ve also presented evidence that they said demonstrates Equity Residential had been aware of flaws in units, such as broken heaters or missing door locks, and did not correct them within a reasonable time frame.

“When we buy properties, we intend to own and operate them over the long term,” McKenna, the spokesman, said. “It is not in our interest as owners to neglect the repairs and maintenance of our assets.”

East Palo Alto’s city council still must consider whether to extend a construction moratorium that expires in November for the neighborhood that includes Woodland Park. Equity Residential hasn’t decided what it would do with its property.

“We have no immediate plans,” McKenna said. “But we, and others, have recognized that some of the buildings at Woodland Park are becoming functionally obsolete and will need to be replaced at some point.”

Police Trouble

Valencia has a second job so she can afford to stay at Woodland Park for now. She earns about $300 extra a week working Friday, Saturday and Sunday nights selling tamales and tacos she prepares in a friend’s garage. Customers line up to pay $5 for the meals served in Styrofoam boxes packed with lettuce, tomatoes, potatoes, meat-filled tacos and enchiladas smothered in cream and salsa.

Last year, her oldest son got in trouble with the police and a social worker told her she should consider spending more time with her kids. It’s a choice Valencia doesn’t have if she wants to keep her apartment.

“I work a lot for my children,” she said. “How can I leave my job with the rent what it is?”

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Heather Perlberg in New York at hperlberg@bloomberg.net

To contact the editors responsible for this story: Vincent Bielski at vbielski@bloomberg.net; Kara Wetzel at kwetzel@bloomberg.net Kara Wetzel

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