Rental housing: Extraction or survival?

The uncertain economics of real estate investment through the Great Recession

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Photos by Carolyn de Berry

This is not a classic investigative story that’s set up like a prosecutorial brief, where the journalist sets out to make a case against a wrongdoer. It’s more of an exploration of a contentious topic in the vein of the popular podcast “Serial,” where the audience gets to follow along as a journalist pursues leads through a thicket of often contradictory pieces of evidence, including informational dead-ends and data points that raise more questions than they answer.

This particular story starts with a tantalizing premise about a particular real estate investment group extracting value from a large holding of low-income rental properties based on the assertions of a source with solid credentials. There are anecdotes based on interactions among a prospective buyer, tenants, tenant advocates and property managers that lend credence to the premise. Data from tax valuations also appears to support the premise.

But any reporter who has waded into a county tax revaluation can tell you that there’s a certain subjectivity to tax assessments that can make the data squishy. They’re subject to appeal, and property owners can and do argue with the numbers. Maybe sales data or private appraisals, which is respectively more scarce and not typically public, provide a clearer picture.

Triad City Beat’s commitment to reporting on housing is well established. We’ve reported on a municipal code enforcement process that was broken and resulted in thousands of dollars against landlords being waived, about a real estate company that was accused by former employees of committing fraud by invoicing the federal government for Section 8 reimbursements of vacant low-income housing units, and historical patterns of discrimination that trap primarily African-American residents in poverty. We’ve written about gentrification and the increasing scarcity of affordable housing. Our commitment to incisive reporting on housing makes us interested in the track record of property owners who invest in housing as an income-generating business.

The motive of profit is intrinsic to any ownership group that invests millions of dollars in real estate. Yet the vast majority of investors who earn revenue from rental housing are committed to providing safe and affordable housing; most of them want to do the right thing. The track record of particular investors is often subject to a bewildering array of opinions and anecdotes by tenants, tenant advocates, property managers and the owners themselves.

Beyond meeting minimum housing standards set by the city, whether a particular owner has the ability to invest more into their properties depends on whether they have a profitable business or personal resources available to commit to the enterprise. The profitability of a privately-held business is difficult to determine from the outside, and dependent on a complex array of factors, including mortgage borrowing rates, market conditions, property management and maintenance costs.

The truth is often murky, and particularly so in matters of housing and real estate. Unlike “Serial,” where journalist Sara Koenig ultimately concludes that she wouldn’t have voted to convict Adnan Syed, this story finishes with no such judgment. Is Blade Properties III LLC a bad actor or a good steward? It would be gutsy to signal our view. Yet honesty is the paramount value of journalism, even over courage, and in this case, with the various countervailing signals, it’s best to lay out all the evidence and let readers decide for themselves.

The five houses on the 1800 block of J Avenue in the Piedmont Heights neighborhood of Greensboro — utilitarian frame structures built in the early 1950s — looked like a good investment prospect to Stephen Sills. Tucked behind a shopping center anchored by a Food Lion grocery and situated within walking distance to Glenwood Recreation Center and Peck Elementary, they had location going for them, and they fell in Sills’ price range.

A sociologist by training, Sills leads the UNCG Center for Housing & Community Studies, which provides technical assistance to governments and nonprofits through research into fair housing, market trends, poverty and community health, among other topics. He’s also a real estate investor, with one property in Glenwood.

In the summer of 2016, Sills arranged through a broker to look at three of the properties up for sale on J Avenue.

“I went and looked at them and decided they needed far more work than I had capital for,” Sills recalled. “Hearing from the tenants, I understood there were a lot of problems: backing-up sewers and water in two of the houses, leaks in the plumbing in one of the houses. They had problems like holes in the foundation, leaks in the roofs and heating systems malfunctioning. They had been through numerous property managers. The tenants said they were always complaining to the property manager, and having little to nothing done.”

The J Avenue houses were part of a portfolio of 29 properties acquired for $1.3 million by five local investors in July 2005. The seller was a company set up by the Weaver Group, one of the city’s storied real estate firms that emerged during Greensboro’s postwar housing boom. The portfolio of 29 properties also included 24 properties in an area carved out of NC A&T University’s northwest corner that is slated for demolition to accommodate the university’s planned expansion. The neighborhood is located across Lindsay Street from the old War Memorial Stadium and catty-corner to the Greensboro Farmers Curb Market.

The five investors — neighbors in Greensboro’s exclusive Irving Park neighborhood — were and are local corporate power players. J. Nathan Duggins III, who organized the investment group, is a managing partner of the Tuggle Duggins law firm. Gray McCaskill was CEO of Senn Dunn Insurance before the company was bought out by Marsh & McLennan Agency in 2014; he served on the board of directors for Carolina Bank up until 2009. Jay Robinson would become president and chief financial officer of Burkely Communities — an apartment operator — through a merger, and now serves as vice president of the board of directors for the Piedmont Triad Apartment Association. Duggins organized the investment group under the name Blade Properties III LLC, which also initially included property manager Bobby Akin, who separated from the company sometime around 2010, according to filings with the NC Secretary of State. Dean Norman was also an initial member and remains part of the investment group.

The investment group went on a buying spree from 2005 to 2007, including an additional portfolio of 15 single-family residences for $500,000, while snapping up loose properties in A&T’s expansion zone, along with apartment complexes in Greensboro and High Point. In all, the investment group acquired 89 properties, with most of its purchases tapering off before the housing crisis hit in 2008 and propelled the country into recession.

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Beginning in 2009, the investment group managed to sell off 18 of its properties. A review of 14 of those properties with complete sale and tax appraisal information by Triad City Beat found that the investment produced a modest 2.8 percent profit while depreciating in value by 11.3 percent between the 2004 and 2017 Guilford County tax revaluations. The county tax assessors recently notified property owners of the new values, which are still subject to appeal. It’s not surprising perhaps that a sell-off in the wake of the housing crisis yielded underwhelming results, and the numbers support a contention made by many business owners: that profitability is far from certain and often marginal.

The tax values of the remaining 61 single-family homes in Blade III’s portfolio have declined by 23.4 percent, in contrast to a sample of properties randomly selected in a one-to-one comparison on the same blocks, which only dropped by 14.4 percent.

Sills said the investments by Blade III are “a perfect example” of what he calls an “extractive” business model. In a previous interview with Triad City Beat for a different story, Sills likened rental housing to an extractive resource industry comparable to the mountaintop-removal method of coal mining.

“I know from those tenants [on J Avenue] that little to no investment other than the purchase of that home had happened, and that the ownership was resistant to repairing and keeping up the properties, much less investing in improvements to the property,” he said.

Nathan Duggins III declined on behalf of the investors to comment for this story.

  • Al McMullin Walle

    The city costs the not-so-well-off even more should someone unconnected do something that the status quacks find out about–and they always do given the time on their hands that the rest of us lack plus their buddies in black who keep ’em updated on what went down while they were away on vacation again; such slander gets distributed online via your friendly “neighborhood association” who claim to be looking out for everyone’s interests when they’re really roasting someone to raise property values and their own egos–both are in a dead heat.