Peter Pays Paul

San Francisco Magazine has an article detailing the rise and now fall of the Lembi family’s real estate empire in San Francisco. It is a long but interesting read.

The abundance of low cost money from Wall Street allowed the Lembis to acquire properties at an unbelievable rate. Now much of the portfolio is in default.

Walter Lembi, on the other hand, was willing to go all in.

It’s not clear how and when the Lembis and Citi­Apartments started taking advantage of this wild new market, but by 2005, they were in the thick of their record expansion. Like Frank at the beginning of his career, Walter put very little of the Lembis’ own money into their real-estate purchases. Most of the financing was in the form of short-term, interest-only loans. Sometimes, the family financed more than 100 percent of the purchase price covering everything from closing costs to interest payments to the cost of future renovations—using buildings they already owned as collateral.

…

One effect of buying so much real estate in a neighborhood: “The Lembis were setting their own comps,” says David Gruber, whose family owns more than a dozen apartment buildings and who serves as president of San Francisco’s rent board. He is referring to the comparable prices for buildings sold recently in the surrounding area—the basis on which buyers, sellers, and agents set the price for other properties. Every time the Lembis paid top price for a building, they provided a precedent for the next sale, driving up the paper value of all their holdings. When it came time to refinance or take cash out of a building, they could use these higher values to get bigger loans.

The loans on the Lembis’ new purchases were then bundled into CDOs assembled by leading investment banks, such as J.P. Morgan. A July 2007 CDO, worth $5 billion, included some Holiday Inn Express hotels in Ohio and North Carolina, as well as the Health Net headquarters in Connecticut. The Lembi piece of this was loan number 11, the Lembi Portfolio, a $90 million loan for 662 apartments.

(HT: Square Feet)

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