Image: Foreclosure's wrath on renters, Nicholle Krause, Chandler, Ariz.
Pat Shannahan for msnbc.com
Chandler, Ariz., police officers confront residents of the Alante at the Islands apartment complex last week at a meeting called to discuss what the renters would do next.
By Kari Huus Reporter
msnbc.com
updated 3/26/2009 4:55:36 PM ET 2009-03-26T20:55:36

Nicholle Krause first noticed the weeds sprouting in the usually well-manicured grounds of her 320-unit apartment complex in Chandler, Ariz., in December. Soon, signs of neglect began multiplying: Garbage spilled over from the dumpsters, the water in the swimming pool turned a slimy pea green and the grounds were infested by swarms of bees — especially alarming because Krause is severely allergic to bee stings.

“I couldn’t even go outside to enjoy where I live,” said Krause, a 21-year-old office worker who pays $827 a month for a one-bedroom apartment with garage space. “I shouldn’t have to pay $800 a month to live in a … hole.”

It wasn’t until early March that Krause and other residents learned why the complex – the alluringly named Alante at the Islands — was rapidly going to seed. The property owner, Irvine, Calif.-based Bethany Holdings Group, had abandoned the complex and a dozen other large rental properties in the greater Phoenix area after defaulting on hundreds of millions of dollars in loans.

As panicked renters in Arizona began holding public meetings to explore whether they could walk away from leases, recoup security deposits or sue, it became clear that the scale of the mess was far larger than they had realized. Companies under the Bethany umbrella owned at least 60 — and possibly many more — large residential complexes across the nation, all of which are now believed to be in bankruptcy or receivership, potentially affecting tens of thousands of renters.

The Bethany Group meltdown highlights how few protections exist for renters caught in the foreclosure crisis. That’s a situation that some experts say is becoming much more common.

“People were paying attention to the single family resident market, the 100 percent, no-down loans,” said West Coast real estate investor and broker Virgil Hobbs, who is bidding on some of the distressed Bethany properties on behalf of clients. “And then beyond that wave is the commercial market, which is what you’re now seeing now."

When commercial residential properties change hands, tenants typically don’t feel much impact. But in this case, where properties were simply abandoned, the situation was chaotic.

Threats of utility shut-offs
In one abandoned Bethany property — the 500-plus-unit Granite Bay in Phoenix — tenants were served notice by the water company on March 6 that their water would be shut off in five days because of an outstanding $64,000 bill. Alarmed residents only found out shortly before the deadline that a Las Vegas company, 707 Management Services Inc., had been appointed as receiver for the property and would see that the water remained on.

Other Bethany complexes were threatened with gas or electricity shut-offs due to non-payment of bills. And staff at many of the Phoenix area properties said they had not been paid for a month or more before courts began appointing receivers to assume control of the complexes.

The precise size of the Bethany rental empire is difficult to establish because the company owns apartment complexes both under its corporate name and numerous affiliated companies.

At least 18 related entities — limited liability companies, or LLCs, registered in Delaware that own  properties in Texas — filed for Chapter 11 bankruptcy this month, leaving open the possibility that they will reorganize and try to pay creditors.

But many other Bethany properties are now in the hands of court-appointed receivers, indicating that Bethany has essentially abandoned them. The receivers — appointed to represent creditors —are charged with preserving any remaining value of the assets, managing them during foreclosure and recovering whatever they can for lenders, typically by selling at a deep discount.

Bethany CEO Greg Garmon could not be reached for comment. Answering services at Bethany’s main line and Garmon’s office said voicemail boxes were full. The Bethany Group’s Web site no longer works, though the cached version of its introductory page still asserts that “It’s all about people and their homes.” The main office number at Alante at the Islands no longer works.

San Diego company handling 24 properties
San Diego based Trigild Inc. has been appointed receiver for 24 of the Bethany properties, including seven in the Phoenix area. Just 13 of the properties under Trigild’s supervision represent more than $500 million in loan defaults, according to Trigild President Bill Hoffman. Those cases are being handled by five different courts in Arizona, California, Colorado and Florida. Five other large properties in Phoenix are in receivership under 707 Management.

Hobbs, the real estate broker, said he approached Bethany several months ago to inquire whether the company was interested in selling some of its properties after hearing rumors that the company was in trouble. He said he was toldthat the company’s portfolio contained more than 80 properties. But he said the company denied it was experiencing any financial difficulty.

“We walked away scratching our heads, saying they either got their heads in the sand … or they don’t care about (thousands of) tenants,” he recalled. “Don’t tell me they are just going to let the ship sink.”

Hoffman, of Trigild Inc., which is now responsible for Alante at the Islands among other Bethany properties, said the appointment of receivers by the courts should be seen as good news by tenants.

"The tenants are going to be better off with us,” Hoffman promised. “They will see improvements very quickly. The properties will be clean, and functioning properly within a few days.”

As a practical matter, a receiver has a strong incentive to keep tenants happy. They are the source of a property’s cash flow, and occupancy rate is a key factor in determining value. And by the second week of March, some upkeep issues had been addressed at the Bethany complexes. The Alante swimming pool was cleaned and trash pickup resumed. Trigild also is paying former Bethany employees who stayed on in the complexes, according to Hoffman.

But by law, Hoffman said, the receiver is not liable for security deposits from renters who signed leases before the receivership went into effect.

“There is no obligation for the receiver or the lender to give (tenants) deposits that they don’t have,” said Hoffman. If the deposits had been handed over to Trigild it would be different, he said, “but that owner (Bethany) has obviously spent that money or done something with it.”

Chances that tenants will get back the deposit are slim, said Ed Valenzuela, executive director of the Arizona Fair Housing Center.

‘Most of the time, the tenant is out of luck’
“They could go to court and sue (Bethany) for it but if the property is in foreclosure where is the money going to come from?” he said. “Most of the time, the tenant is out of luck.”

That’s especially true in Arizona.

A recent report by the National Law Center on Homelessness and Poverty ranked the state among the worst in the nation for renters living in a property that is foreclosed upon.

For example, in Arizona and at least 30 other states, there is no legal requirement to notify tenants that the property is going through foreclosure, it said. And only New Jersey and the District of Columbia explicitly preserve tenants’ rights in the lease after a foreclosure.

The report, co-sponsored by the National Low Income Housing Coalition, warned that renters affected by foreclosure are at greater risk of homelessness, and called for federal and state governments to beef up protections. Legislation to do that has been introduced in Arizona, but it has not yet been acted upon.

Until now, the biggest problem facing renters has been summary eviction following a foreclosure. But the demise of the Bethany group raises different problems, since the new owner would have a wide range of options with a commercial property.

“The real issue is who is going to take over the property and what are they going to do with it?” said Ken Volk, who runs the Arizona Tenants Advocacy and Association in Tempe and has been advising some of the Bethany renters. “These tenants, if they leave, they could be held to the lease if the new owner wants to run it as a rental. If they don’t want to, the landlord could terminate the lease and say you have to get out, very often within five days.”

Volk has been organizing residents at the Bethany complexes to press for better treatment and has helped others legally break leases — a service for which he charges a fee.

That incenses Hoffman, who argued that such activities could amount to illegal interference.

“If he’s going to advise people to break the lease I’ll have him before the judge,” he said. “He’s certainly not going to interfere in any way with our possession and control of the asset.”

A confrontation with police
Trigild called Chandler police last week to alert them to a meeting at which Volk and about 100 Alante at the Islands residents were discussing possible next steps on property adjacent to the apartment complex. According to witnesses, eight or nine officers pushed their way into the crowd to disperse it, prompting a shouting match among tenants, police, the apartment manager and Volk before the meeting broke up.

“It was intimidating,” Volk said of the confrontation. But he said he will continue working with the tenants and dismissed Trigild’s criticism that he is intervening simply to profit off the tenants’ fears.

“I might make a little,” he said. “But the motivation is to help people. It’s what I do.”

He said the primary service he provides is to help renters understand how to legally break leases.

“By and large tenants … have no clue what to do,” he said. “They figure the morality of their situation will carry them over into the legality, and it doesn’t. There are very precise legal requirements. Unless you address them very carefully, a lawyer on the other side will get in your way.”

Nicholle Krause, the Alante resident, found that out the hard way. She threatened to withhold her March rent when her complaints about the poor condition of the property were ignored. That prompted the complex manager to threaten her with eviction, which would make it harder for her to rent elsewhere.  She backed down, and paid.

She then sent the manager a letter stating that she would move out in 10 days because of the landlord had not fulfilled its obligations to keep the property in livable condition. But an attorney for the company responded that her letter did not meet legal requirements for breaking the lease.

“I want to leave … but I would need an attorney,” said Krause, explaining that even with order returning to Alante, the uncertainty of not knowing what a new owner might do with the property continues to plague her. She said she intends to move out when her lease expires in June, if not sooner. “I don’t know if the cost and the exhaustion (that it would entail) are worth it.”

As the foreclosure crisis continues to expand, many other renters around the country are likely to find themselves in the same situation as Krause.

“We have a bunch of apartment complexes around the country,” said Hoffman of Trigild, Inc. “We haven’t got anywhere near the bottom. … If I look at our pipeline, it would normally be about 12 (to) 15 properties. We’re looking at a couple hundred at this stage.”

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