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VOL. 10 | NO. 22 | Saturday, May 27, 2017

The Buying And Selling Of Memphis

The perils of dirt-cheap real estate and investors who buy sight unseen

By Bill Dries

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Even before he went to federal prison for 25 years on a racketeering conviction in 1995, Danny Owens had a real estate portfolio. The strip-club kingpin who defined the industry in Memphis across a 20-year period owned the old Memphian movie theater and made possible its 1986 sale to Playhouse on the Square by donating $160,000 toward its purchase.

(Houston Cofield)

In several decades of wide-open nightlife, controversy and court cases, Owens always had other business interests, including a package delivery service.

Owens is listed as the owner of 25 pieces of property today – mostly single-family homes and some vacant lots – according to listings from the Shelby County Assessor of Property’s office. Some he bought in the 1980s, others bought as he stood trial on the racketeering charges in 1994, still others bought while he was in prison and some bought after his release from prison last year.

With the exception of two properties, the tax bills are sent to an office on Millbranch Road that is the headquarters of O’s Realty Inc. O’s is a home rental business, specifically single-family houses. And O’s website says it has been in the business since 1981 both owning and managing properties.

The company’s office phone number goes to a voice mailbox that is full.

Owens is like many buyers of single-family homes for rental purposes in the Memphis market in that he bought some of them sight unseen.

Of all of the single-family home sales in Shelby County in 2016, 25 percent were sold to investors or non-occupants, according to Chandler Reports, a division of The Daily News Publishing Co. Inc.

Owens at least has some familiarity with the parts of town where his properties are.

And his portfolio is relatively small and selective compared to investor groups that buy dozens and hundreds at a time – single-family and multifamily apartment complexes – in a city that is losing population but retaining its large land mass. It can be easy to forget about an old house here and an old house there especially when you are a thousand miles away.

THE BLIGHT CONTAGION

Leaders of the city’s anti-blight effort who are experienced developers and real estate professionals say the city’s problem with blight stems in part from real estate portfolio investors who see low prices for single-family and multifamily apartments in a city they’ve never been to.

Archie Willis, the president of Community Capital who is also part of the nonprofit Neighborhood Preservation Inc. (NPI), talks to them frequently.

“You’ve got your guys who come in and buy these for $9,000, $12,000 – whatever it is a unit – and that’s a bargain for them coming from Florida, New York and other high-cost housing markets,” Willis said. “When they get here and realize what the economics are – it may be $12,000 but you can only rent it for X and you’ve got to spend way more than you think to make it habitable, and the math doesn’t work.”

The goal then is to find another portfolio investor that is just as clueless or just doesn’t care and sell it to them.

The impact on neighborhoods is incalculable.

“They will milk it. They will get it for whatever they can rent it for, do minimal improvements and obviously spiral downward,” Willis said of the owners. “They will keep renting it, the rents go down. Eventually it will be only people who have no options. … Then eventually it goes totally vacant and they try to sell it.”

If they can’t sell it, they walk away. And it can be difficult to track them even if there wasn’t the thicket of complex and confusing regulation and red tape that NPI is trying to clear away by 2020 as one of its goals.

“The ownership is always structured 100 percent of the time virtually … where you can’t reach through to the owners,” said George Cates, the retired founder of Memphis-based Mid-America Apartment Communities and also a founder of NPI. “The standard form in real estate is an LLC. … There’s nothing wrong with an LLC. It’s been around for a long, long time. When it’s used properly, it serves a very honorable and legitimate purpose.”

But “LLC abuse” is when each and every property has a separate, freestanding LLC to shield owners.

“It’s virtually judgment free,” said Willis.

NPI director Steve Barlow is a 20-year veteran of the local blight fight as it is often called. And while there is, at times, frustration that the effort is untangling red tape and chasing LLCs at the expense of actually saving properties, Barlow is clear about NPI’s reach.

“We clear the path for revitalization of neighborhoods. We’re not going to be the one that does redevelopment work,” he said. “But what we’re doing is we’re identifying barriers to revitalization. And those barriers are very often policy barriers. … What we want to do is remove the legal and systemic barriers that are holding back neighborhoods so that it’s easier for anyone to do more in the neighborhood.”

CHANGE IN SCENERY

Until recently, Cates said there was little in the way of code enforcement pressure to demand that out-of-town or out-of-state investors pay attention to their Memphis properties that are decaying.

“Code enforcement is for the first time in a long, long time, if ever – they are just putting the screws down on those guys. The ball game has been to run it in the ground, cash out, walk away,” he said. “Suddenly you can’t just run it into the ground, and have to bring it up to a standard for the first time ever.”

And Willis, through Community Capital, is trying to “build capacity” in neighborhoods where investors see dirt-cheap prices and locals who know the area see what might be a one-of-a-kind project that demands a smaller scale. A “boot camp” for those small developers is already in place and running.

“Part of what we are trying to do is to increase capacity there and it can come from the small developers,” Willis said. “Everybody wants to be a developer anyway … But more important, you’ve got people in these neighborhoods that see an opportunity to do some development and also do good.”

A group of millennials fresh from the boot camp are looking at small projects in the Carver neighborhood in South Memphis.

Meanwhile, Community Capital is creating a nonprofit to buy property that Willis says could bring in a new type of investor in such projects – the philanthropic community – a world of programs and capital campaigns but not ownership.

“We want to start building an economic system for individuals in the communities as well as nonprofits to really understand what it takes to develop, facilitate and to give them the tools to build a different ecosystem so they become a significant player in this whole fight against blight,” Willis said.

That includes working with community development corporations like the Frayser CDC.

“We think that probably 90 percent of the sales (in Frayser) in the last several years have been to investors,” said Frayser CDC director Steve Lockwood. “And some of those are good investors and some are predatory investors.”

Another dynamic in Frayser, where the average single-family sales price is $33,000, is that banks have been unwilling or unable to lend within the $30,000 to $50,000 range because of regulators, Lockwood said. But he has seen banks change their tune on those kinds of loans.

“I could show you a couple of houses on Frayser Boulevard that were simply abandoned for 10 years and one of the investors whom I happen to respect picked them up and totally fixed them and put families in there,” Lockwood said. “We don’t have the capacity to fix all of the empty houses in Frayser as a result of foreclosures.”

Momentum in lending in Frayser has led to sales prices going up 35 percent in the last year there by Lockwood’s estimate.

“There’s a steep escalation going on for the last five months running,” he added.

OWNERSHIP MATTERS

The New Horizon apartments at 3619 Kingsgate Drive in Whitehaven is what Cates describes as the “anti GMF” – a reference to trouble-plagued Global Ministries Foundation, the Memphis-based multifamily company with a national reach and a mixed portfolio that relies heavily on apartment complexes where all of the renters depend on federal rent subsidies.

New Horizon is owned by Capital Equities LLC, a New York-based real estate investment company with a contrarian model and philosophy – meaning its investment philosophy is to go against prevailing sentiment in a given market.

“Without being critical, our company practices the principle that there is no such thing as a bad community,” said Dragan Kocic of Capital Equities. “There is only bad ownership and bad management. We are looking for a good, viable, realistic plan.”

That plan includes wrap-around social services for residents as well as jobs, starting with fixing code enforcement problems. That work on-site and at neighboring apartment complexes provided jobs to 200 New Horizon residents.

“There was a lot of work to be done,” Kocic said. “We are very, very proud that we have a network of minority companies who are still on the property. It is a perpetual project. Every month we have to turn 30 to 50 units no matter what the occupancy is.”

Kocic was among the group at Apollon Group LLC of New York that came to Whitehaven and the airport area in 2007 with apartment-to-condo conversions at the height of the housing bubble, just before it burst. Apollon’s apartment complexes in the area, New Horizon and Kimball Cabana, were rehabbed and quickly sold.

Even in those heady days before the recession, Apollon founder George Fakiris expressed caution in a 2007 interview with The Daily News.

“In Memphis, you can buy right, but you have to know what you’re doing,” Fakiris said at the time. “A lot of people buy there, but in three months they go bust. I know a couple of people from New York who bought there and they thought they were going to be rich overnight, but it doesn’t work like that.”

New Horizon has not only been a contrarian, but stubborn investment in terms of reversing decades of indifferent ownership.

Capital Equities bought the 904-unit apartment complex with 760,000 square feet of rentable space in 2004 and renamed it New Horizon. Capital Equities sold the complex in 2006 to a company that changed the name again to Montera Park. By 2012, General Sessions Environmental Court granted a nuisance order motion from the District Attorney General’s Office barring Montera Park from taking new renters.

Capital Equities became the owner again, building back up what it had started earlier.

It invested $23.4 million in renovations and “helping the community come together again,” Kocic said.

Capital Equities also bought a neighboring 248-unit complex at 3539 Cazassa Road from MFC Funding LLC of Paramus, N.J., and paid for the demolition of that complex.

MFC was among the defendants in Mayor A C Wharton’s first wave of lawsuits in 2010 under the state’s Neighborhood Preservation Act. It was another four years before the demolition of the Spanish Oaks apartments on Cazassa Road – one of two apartment complexes next to New Horizon reflecting Whitehaven’s late-1960s early-1970s deep dive into multifamily.

“We haven’t found anyone who is in favor of blight,” Cates said. “We have helpers everywhere, but the coordination of that has often been lacking.”

NPI has adapted for Memphis a property data hub used in Cleveland. It coordinates a range of data from code enforcement violations to tax data to utility connections and cut-offs. The Blight Authority of Memphis is using maps from that data that show patterns in different parts of the city – and creating a strategy for intervention that is easier to monitor.

“It will always evolve. It’s for the first time all there,” Cates said. “The property hub is big league stuff and I will say … we’ve got probably the best property data system in America.”

Meanwhile, NPI is working with the University of Memphis Center for Applied Earth Science and Engineering Research. The center is known for its work on mapping ground water in the Memphis aquifer, but also uses GIS technology for a variety of mapping projects.

With the center’s help, NPI is preparing a list of the top 10 code violators.

“We’ve found that there were 10 owners who on average had more than one code violation on average for the properties they own and some of them own hundreds,” Barlow said. “The code violations are one of the good indicators of whether they are taking care of business.”

They aren’t ready to unveil the list just yet. But Barlow and Cates say the Owens properties are in the top 10.

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 47 47 1,046
MORTGAGES 83 83 1,278
FORECLOSURE NOTICES 0 0 152
BUILDING PERMITS 0 0 1,653
BANKRUPTCIES 66 66 701
BUSINESS LICENSES 0 0 298
UTILITY CONNECTIONS 0 0 392
MARRIAGE LICENSES 0 0 82

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