Let's Talk Turkeys

Let's talk turkey about Minneapolis real estate developers Drew Levin and Danny Perkins. Levin and Perkins acquired the nickname the "Turkey Guys"after their successful restaurant and catering business, Turkey to Go. They have gained national fame and adulation as the stars of the HGTV reality series, "Renovate to Rent."  They are major investment property owners in the city of Minneapolis.

Turkeys overrunning a neighborhood.

As developers, Levin (real estate broker) and Perkins (contractor) are on a steam-roll in the Wedge.Let's trot out some numbers: As mentioned in the previous post, Levin and Perkins, using several LLCs (KLP Realty, D&D Reality Holdings, DDMZ Real Estate, Lotterman-Madan, 2817 Girard Avenue, Farkas Wagner), have gobbled up 25 properties in the Wedge, with six of these already wrecked and a seventh slated for demo. Public records show that since their first purchases in the aftermath of the 2008 banking crisis, under the names of their various legal entities, they acquired over 80 properties in Minneapolis, taking out many millions of dollars in mortgages and loans. 

Levin and Perkins have taken out a total of $5,692,000 in loans for their Wedge properties. From public records, it's impossible to say how much of the debt has been paid off, how much is secondary financing, and how much of the bundled mortgages relate to Wedge properties. Steven Kalin is their most frequent lender, but they have also received substantial financial banking from these community banks: Merchants Bank, Anchor Bank, and Western Bank. They have also been bankrolled by regional Bremer Bank and Wells Fargo, a large national bank. Anchor Bank is their primary Wedge financial backer, lending them $2,651,500. (It would be interesting to find how much Anchor has loaned to individuals for home mortgages in the Wedge.)

KLP's (Levin and Perkins) first acquisition in the Wedge was 2613 Bryant Ave. S., purchased from Moneyapolis, LLC, for $215,000 in September 2008. This was the month that saw the collapse of Lehman Brothers, a sprawling global bank, a collapse which almost brought down the world’s financial system. The industry was saved by huge taxpayer-financed bailouts. But now chary of lending to individual home buyers, the "too-big-to-fail" banks have turned their corporate eyes to greener pastures, namely investment in real estate development.

2613 Bryant Avenue South

1.2 million people lost their homes through foreclosure during the 2008-2009 banking crisis. Investors quickly jumped on the opportunity to leverage a fortune out of the misfortune of others by buying up these properties  As indeed they brag on the HGTV website, starting in 2008, Levin and Perkins went out in search of foreclosed properties. A big bank is listed as the owner of four of the properties they bought in the Wedge: 2113 Bryant (Wells Fargo), 2612 Colfax (Capitol One), 2621 Colfax (US Bank), and 2814 Colfax (Bank of America). For another five properties the seller is listed as an LLC (Moneyapolis, Simple Living, Properties Ideal, Shree Investments, and TDL Properties).

In addition to their 25 Wedge properties, Levin and Perkins currently own 58 investment properties in Minneapolis, for a total of 83.  The owners of their current holdings are listed as one or more of the LLCs listed above, most commonly KLP.  On property purchases city-wide, 16 were from big banks; 8 purchases were from Fannie Mae, and 16 were from other LLCs. In some cases, one of their LLCs sold the building to another of their LLCs. And so these properties are transferred from one faceless entity to another, with a bewildering number of mortgages and other loans from banks, LLCs, and individuals.

No clear profile emerges of KLP when you look at public information associated with their properties: the addresses, buyers, sellers, loan amounts, and lenders. The list is filled with LLCs. Some properties have a series of five mortgages associated with them. Entities buy and sell the properties, passing them around, appearing at one address as a buyer, another as a seller. This befogged tangle of names and numbers is impossible to penetrate. 

The enormous number of properties that changed hands during the 2008-2009 financial crisis has created a nightmare for title companies that continues to this day. When a property is sold, title companies often have to sort through a list of owners, loans and liens, to determine if the property can be sold with clear title. This title mess creates more obfuscation of who's buying, who's selling, and who's financing a given property. It contributes to the confusing blizzard of data found in public records related to investment real estate. 

Graphic courtesy History of Economics Playground: Capitalism

In the 1960s much of the Wedge was absentee-owned. The 1963 upzoning brought dramatic changes. On just about every block, houses were wrecked for walkup apartment buildings. Absentee-owned houses became crash pads. One evening, an old couple, watching from the house they had occupied for 50 years, counted 400 revelers pouring in and out of the house next door. A drugged-up young man sprayed his neighbor's house with automatic weapon fire. A guy on LSD leaped from his apartment into the second-story window where a child was sleeping next door. Tenants rode motorcycles up the staircases of houses.

Thankfully, those awful days are long gone. Run-down houses were bought by homeowners who rehabbed or restored them. Condemned apartment buildings were made into Section 8 (low income) housing. Homeowners and renters banded together to stop crime, monitor absentee properties, and generally improve the quality of life in the neighborhood.  The Wedge was eclectic, funky, economically diverse, with affordable rents in a wide range of building types. Some have called this process of cleanup and rehab "gentrification", and in some ways, it was. However, it was nothing compared to the process of upscaling and gentrification under way right now.

A one-bedroom apartment in this older building on 26th and Bryant rents for $695.

Today the Wedge is being transformed into a high-density, absentee-owned area. Each home turned into investment property raises the number of renters. The most recent figures available show that 800 of the 3900 housing units in the Wedge were owner-occupied in 2013. Since then, scores of units have been added and are still being added on the Greenway, and now, with Michael Lander's and KLP's new apartment projects within the neighborhood, even more rental units will be available to rent. Obviously, the proportion of owner-occupied units to renter-occupied units is getting smaller and smaller.

These new apartments are "market rate" (what the market will bear), not by any stretch of the imagination "affordable." As more new apartments come on line city-wide, rents have increased by an average of 4.8 percent to $1,098 per month in 2015. Compare this average figure to rents in new Wedge apartments, for example, $1,795-$2,745 a month for a two-bedroom (877-1161 sq. ft.) in Flux Apartments on the Greenway, or $1,745 monthly for a two-bedroom unit (683 sq.ft.) in Motiv Apartments on 24th and Colfax. Thanks to these new apartments, in the Wedge the percentage of rent increase is likely higher than the city average.

One-bedroom apartments in this new Wedge apartment building rent for between $1539 and $2445 monthly

The duplexes next to my house and across the street were owner-occupied for decades. No longer. Turning family homes into rentals and new infill development raises rents and the value of the property as land (i.e., building sites), but lowers the value and attractiveness of older houses nearby. I've heard comments from two owners who sold their beautifully restored single-family houses and moved out of the Wedge that they saw "the handwriting on the wall." Not wanting to deal with increased congestion, construction chaos, and more absentee-owned buildings on the street, they felt they were gettin' out while the gettin' was good.

Increasing absentee-owned rental units in a neighborhood undermines a sense of community. Many renters are just passing through. The 2013 figures show that in that year, 35% of Wedge residents had lived there less than one year. It's hard to build relationships with your neighbors when they change so frequently. Knowing your neighbors is the key to community pride, including crime prevention and a sense of civic investment.

To return to where we started: It's very difficult to parse what all the figures and data about KLP's real estate investments mean. Just looking at all the loans, the addresses, the numerous banks, LLCs and private financial backers for KLP is enough to give anyone a migraine. It's a murky swamp of data that's impossible to see into. Economics is not an exact science, and there are many conflicting points of view. And certainly, one hesitates to accept the word of City officials who clearly are supporting their agenda. If residents protest, they are tarred with the NIMBY brush. The attitude of the City is: "This is going into your back yard, whatever argument you make. Whatever you say, we won't listen. If you don't like it, leave."

So, what can we see beyond the smoke and mirrors, political rhetoric and bureaucratic gobbledygook? One thing is as clear as the handwriting those fleeing the neighborhood saw on the proverbial wall: The Wedge has been targeted as a haven for investors, a place where owner-occupants are a rapidly dwindling demographic. Whether or not this is seen a good thing depends on whether you are an investor or resident, I suppose. It remains to be seen if these changes will make the interior of the Wedge more or less attractive to prospective tenants as well. From what I hear from my renter neighbors, they find the old, funky Wedge a great place to live.

On 28th Street, old and new buildings of compatible scale and design.

Around the corner, KLP's "sore thumb" infill (center) of incompatible scale and design.

One day, sooner or later, this latest apartment building boom will cease. By the time that happens, will the Wedge still be the Wedge or will it be just another nondescript absentee-owned real estate investment farm?

What is that thing blocking out the sun? It's the latest infill multi-unit apartment building! It's HUGE!

 --T.B.

Condominium Disequilibrium

Wedge housing has gone through a lot of changes since the neighborhood was platted in the 1880s. The first major change came after the Columbian Exposition of 1893. The "White City" of Colonial Revival style buildings made the fanciful, ornamented Queen Anne style unfashionable. By the early 20th century, the fairly new, large Victorian houses built along the streetcar lines in the Wedge were being abandoned by their original owners for newer homes in newer neighborhoods. Large apartments became the rage for upwardly mobile Minneapolis residents. On and around Hennepin Avenue, handsome brick apartment buildings starting going up. Many of these apartment buildings still line Hennepin, sharing the street front with commercial buildings.

In the early  20th century, two smaller apartment buildings were built on Emerson Avenue South near the corner of 25th and Hennepin: 2417 in 1905, and 2421, in 1907. 2417 contained eight units, 2421 had nine units. When new, they were the homes of the affluent. But as the years passed, the units grew shabbier, the maintenance minimal.  By 1970, the year that LHENA was founded, 2417 and 2421 had been made into one dwelling unit each, split up into 24 rooms with shared baths and kitchens, the equivalent of large rooming houses. The buildings had fallen into a serious state of disrepair with substandard living conditions for the numerous tenants.

2417-2421 Emerson Avenue South in 1978

In 1977, the two buildings were condemned. The next year, Kreisler Companies acquired the buildings and began rehab under the HUD Section 8 program for low-income housing. Each building was separated into a mixture of one-bedroom units for the elderly and two-bedroom units for families. A small children's play lot was added. The wooden fire escapes in the back were replaced by elevators. In 1979, applications were taken for low-income tenants, and the buildings became homes once again.

Twenty years later, when the condominium market was red hot, the buildings were converted into condominium units roughly the size of the original apartments. In 2000, units in the newly renovated buildings went on sale. Today, the units in these buildings are valued in the low-to-mid-$200,000s. For example, a 1800-square-foot, three-bedroom condo in 2421 recently sold for $246k ($135/sq.ft.).

2417-2421 Emerson Avenue South today

The Wedge has quite a few condominium units in a range of housing types from older duplexes and apartment buildings, to nearly-new construction. Currently, Zillow shows 9 comdos/townhomes for sale in the neighborhood. Five of these are pre-1970 construction; four were built after 2000. Two of the four newest condos are in foreclosure.

A 2bd/1ba, 950 sq.ft. condo in this building on Lyndale is listed at $175k

The least expensive condo ($99.9k) for sale in the Wedge is a 1bd/1ba 568 sq.ft ($176 sq.ft) unit in a 1959  2-1/2 story walkup on the 2700 block of Aldrich. Nearby on the 2800 block of Bryant Avenue is the most expensive at $450k. Built in 2005, this top-story 3bd/2ba, 1700 sq. ft. condo has been on the market for nearly 10 months. The price has been lowered by $15k since it went up for sale.

Listed for sale at $450k: The upper unit in this 2005 condo building .

Why is this condo so slow to sell when the housing inventory in Minneapolis is at its lowest since 2004?   For one, if a buyer can afford a home in the $400-450k bracket, there are some potentially more attractive options. For example, in nearby Whittier neighborhood, a 1912 foursquare house with 4bd/1.5ba, 2300 ft./sq., went on the market a few days ago for $410k. They are very different kinds of housing, but they are priced similarly, of similar size, in similar condition, within walking distance of each other.

You can bet that the Whittier house will not be on the market for nearly a year. One reason that the house will sell fast while the condo won't is the difference in lifestyle and taste of potential buyers. Condominium buyers can find similarly priced units in quieter, less congested areas of the city. Another important reason is value. The condo at 2421 Emerson of similar size mentioned above sold for $200k less than the Bryant condo. The 1907 building and the 100-year-old house in Whittier with original woodwork and appointments are simply more inviting to many than a modern minimalist apartment.

Dining area in the 2005 modern condominium

Formal dining room in the 1912 house.

Then there is the comparative cost of ownership. Monthly expenses for the condo will set a  new owner back about $2600 a month, not including utilities, whereas the house would cost about $1800--assuming similar down payments and mortgage interest rates.

When the housing the market tanked in 2008 after the global banking crisis, the real estate market went cold. It's gradually recovering, but is inhibited by the big banks' disinterest in lending money to individual homeowners when they can make so much more lending to corporate developers. The banks that were "too big to fail" are backing big, new developments, like apartment and condominium buildings and hotels.

According to Broker Sandy Loescher of Sandy Green Realty, another factor in the slow recovery of the housing market has been the effect of the banking crisis on those middle-aged people who lost their investments and homes at that time. Parents who once could afford to help their children with down payments for real estate and help paying off student loans now need financial help themselves.

One can't help but wonder in this volatile economy where all this is going. How long will the banks and government keep promoting the big and corporate over the small and individual? As long as the current group of officials remain in office.

 --T.B.