Lembis's San Francisco Sale
Stirs Up Some Questions

After five years as the most aggressive buyer of apartment buildings in San Francisco, the Lembi family has -- for now -- become the city's biggest seller.

The 18 buildings up for sale are a pittance of the family's 307-building holding in one of the country's hottest rental markets. But the listings have aroused speculation about this most-watched but little-understood local empire: Is the move portfolio-shaping to take advantage of a run-up in prices that the Lembis largely created or is it a sign they are overextended?

"We're not under any pressure to sell," said Walter Lembi, managing director of Lembi Group. He said the closely held group, whose main units are Skyline Realty Inc. and CitiApartments Inc., is seeking to take profits on buildings that it "successfully turned around, fixed up and earned higher rents."

But Mr. Lembi acknowledged that the tight commercial-mortgage market has crimped the group's ability to fund acquisitions and refinance highly leveraged properties.

"We've been through many tough markets before, and from a financing standpoint, this is one of the toughest," he said. "All the lenders I have are working with us, giving us extensions on loans that are coming due." He said the discussions involve refinancing, not restructuring, loans that are due "in a year or two" as the group looks to "reduce short-term debt." Mr. Lembi declined to comment on the amount or composition of the group's debt and whether rental income covers debt obligations.

The Lembis' predicament is being closely followed in San Francisco because the family is the dominant residential landlord in a city that brokerage firm Marcus & Millichap forecasts to be the country's most attractive apartment market this year, based on an expected 7.4% increase in market rents. "The Lembis are a barometer of the market," said James Devincenti, senior vice president of investments at Marcus & Millichap in San Francisco, who represents the family on two buildings for sale.

He said the Lembis have spent more than $1 billion since 2003 buying apartment buildings in the San Francisco area, including some $491 million last year alone. Mr. Lembi confirmed the figures, and said the family's holdings total more than 8,200 units.

The group's expansion was fueled by easy credit and the securitization of commercial mortgages. The Lembis typically financed multiple acquisitions simultaneously through cross-collateralized loans that would be packaged by Wall Street banks. As the commercial mortgage-backed-securities market dried up in the second half last year, so did the Lembis' financing pipeline.

Mr. Lembi said about seven contracted purchases fell through. In December, the family put the 18 buildings up for sale for more than $127 million combined.

The family's apartment holdings range from gritty neighborhoods to tony areas such as Nob Hill, where it bought the 33-unit Park Lane for $38 million in 2005. The family's appetite has helped drive the local purchase price of apartments up 60% since 2003, to $303 a square foot last year, according to Marcus & Millichap.

The Lembis' strategy hinges on accelerating tenant turnover, through buyout offers and other means. Their approach has aroused the ire of tenants' groups and San Francisco City Attorney Dennis Herrera. He filed a lawsuit against Lembi-owned companies in 2006, alleging a pattern of illegal business practices that ranged from intimidating tenants to vacate to making renovations without city permits. Mr. Lembi denies any wrongdoing.

Rival landlords are miffed by the economics of the Lembis' business model: pay top dollar and then spend more to entice tenants to leave and then to renovate.

The Lembis are testing the market with high listing prices, some of which they have reduced because of weak interest. One deal has entered escrow, Mr. Lembi said, and the price for the crown jewel on offer, a 118-unit building, has been cut $5 million to $35 million.

Email your comments to rjeditor@dowjones.com.