Rental housing: Extraction or survival?

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.

Some might question the reliability of the tax valuations as a proxy for actual value. A private appraisal, which includes a visual inspection of the interior and exterior of the property, is generally considered the most accurate indicator of value short of an actual sale.

Private property appraisals for the five J Avenue properties completed in 2013, which were obtained by TCB, do indicate that the properties are worth more than the most proximate tax revaluation, which took place in 2012. Compared to the 2012 tax valuation of $227,300, the five properties were privately appraised at $268,000. But comparing the 2013 private appraisal with the 2005 purchase price of the five properties — an estimate based on their share of the $1.3 million Weaver Group portfolio — the properties depreciated by 16 percent. During roughly the same time period — from the 2004 to 2012 tax revals — the tax valuation of Blade III’s five J Avenue properties dropped by 21.2 percent, compared to an 8.2 percent decrease in a comparative neighborhood sample.

Tenants who spoke to TCB on condition of anonymity gave mixed reviews of the responsiveness of the property managers contracted by Blade III. One tenant on J Avenue said the property management company isn’t typically responsive to requests for repairs and that she doesn’t bother to contact them anymore. She said she paid out of pocket for a new screen door, for pavers to make a pathway from her driveway to the front door, and to put in new grass in her front yard.

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In contrast, another tenant who has rented a house in the Textile Drive area in northeast Greensboro for the past two years said he has nothing but good things to say about his experience with the property management company. On two different occasions when he called in a maintenance request — for a leaking roof and a clogged drain — the repairs were made within 48 hours, he said.

The tenant on J Avenue told TCB that in the six years she’s rented her house, five different property managers have handled maintenance. Rent-A-Home of the Triad took over management of the properties in December 2015, according to Kerri Person, the company’s president and CEO. She said her company prioritizes repairs based on urgency.

“I would say that we are very responsive to tenants’ reasonable requests,” Person said. “If they don’t have heat we will react very quickly. We will react quickly to a plumbing leak or sewer blockage. If a house needs a new HVAC system or a new roof, that’s more subjective. Trash in front of a house — we’re not going to drop everything and rush over there.”

The J Avenue tenant said she recently complained to Rent-A-Home about a pile of trash in the front yard of one of the other properties, located at 1806 J Avenue. The trash has been there since before Christmas, she said, adding that a new family moved in with the mess still in the yard, and then abruptly moved out after only two weeks, but the trash has remained.

Person said she doesn’t recall receiving a complaint on the property, and in any case she said the house at 1806 J Avenue is actually occupied by a tenant. She added that while her company might look into the matter, it would be the responsibility of the occupant of the house to clean up the mess.

The high turnover in property managers is more likely a reflection on the owners than the professionals that handle day-to-day maintenance, said Brett Byerly, executive director of the Greensboro Housing Coalition.

“Just about every major property-management company in Greensboro that I know of has held this portfolio,” he said. “I believe the property managers get fed up with the owners because they’re not willing to make the investment to keep the properties properly maintained.

“I know a lot of property managers who don’t want to represent substandard properties,” Byerly added. “It hurts their name.”

Byerly said he first encountered Blade III’s properties in 2010 when Greensboro received more than $1.5 million as part of the federal stimulus program to subsidize housing for people who had recently become homeless or who were at risk of becoming homeless. A company called Emerson was handling property management at the time.

“My job was being the housing locator for the program,” Byerly recalled. “I had to go find landlords who were willing to take a chance on people with criminal-record barriers and credit barriers. It was difficult. We had to do an inspection. Because we weren’t using federal recovery dollars to move people into substandard housing, I would make Emerson fix it up before we moved anyone in. With the Blade properties, Emerson said, ‘The owner doesn’t want to invest any more money.’ I said, ‘Well, then we can’t rent it from you.’”

Later, in 2014, when the housing coalition assisted tenants who were displaced from Heritage House with finding new housing, Byerly said he encountered a similar resistance to his insistence that Blade III make the necessary investment to bring the properties up to snuff before he referred new tenants to them.

Since Rent-A-Home took over the contract for property management in December 2015, Kerri Person said the company has sent out notices to tenants asking them to list needed repairs, and the property management company has identified Blade III properties with vacancies so they can fix them up and put them back on the market.

“We’ve done very good with that,” she said. “Blade has been good to work with. It doesn’t do them any good to have a house in poor condition. For any investor, it doesn’t make sense for a house to be in poor shape.

“Many people think landlords are really wealthy and can afford to make significant investments,” Person added. “That’s not always the case.”

Without the ability to review monthly rental revenues and outlays for repairs and maintenance, it’s unclear whether the Blade III investors have made a profit from their real estate investments, but there’s little doubt that the members would be considered wealthy by most definitions. Beyond the salaries that typically go with executive positions in prominent law, insurance and real-estate firms, the Irving Park homes of Nathan Duggins III and Jay Robinson are respectively valued at $696,300 and $543,200 on the Guilford County tax rolls.

“People have to find a balance where they’re doing the most they can do, but they’re spending money wisely,” Person said. She said Blade III “absolutely” has demonstrated a willingness to make necessary repairs.

“We wouldn’t have taken on the properties if they didn’t,” she said.

Blade III has invested upwards of $200,000 to remove lead from its rental properties, including two of the houses on J Avenue, through a federal grant in which the city of Greensboro provided matching funds, the city confirmed on Tuesday.

By outward appearances at least, the properties owned by Blade III in the A&T area — mostly a tidy collection of one-story structures with minimal landscaping — are far from the most challenged in the neighborhood. The vast majority of the housing stock in the neighborhood has flipped from owner-occupied to rental, and there’s little incentive for owners to make significant investments. During a recent visit to the neighborhood, the most conspicuous deficiencies in houses owned by Blade III were missing fascia board, roofing shingles and siding.

“I haven’t seen a house in this neighborhood that doesn’t have five exterior violations,” Byerly said.

Commenting on Blade III’s holdings, he added, “Not that the houses look great, but they’re not the worst ones in the neighborhood. They may actually be the good guys here.”

Here is where a firsthand observation corroborated by a source countervails and even calls into question the central premise of the story. This kind of flag should at least cause a sense of unease for any good reporter. The imperative is to do additional reporting, including interviewing more sources and running more data analysis. Just as important for a good-faith investigation is seeking out information that would tend to disprove the hypothesis. Sometimes the persons who are the focus of the story can provide information that casts their activities in a better light. In the absence of comment from the persons at the focus of the story, reporters often use back-channel sources of information to unearth information to balance their reporting. The accumulation of additional reporting sometimes shows the initial premise of the story to be misguided or lacking in credibility. Or additional reporting might tend to stack up in support the initial premise, with new information discounting or overriding the outliers of doubt. The evidence rarely falls 100 percent in either column, and sometimes the available evidence provides a murky picture.

Notwithstanding the relatively stable appearance of the houses, the 26 properties owned by Blade III in the A&T area have depreciated more severely than a comparative sample owned by other landlords in the neighborhood, with the tax valuation of Blade III’s holdings dropping by 25.9 percent from 2004 to 2017, compared to a drop of 16.4 percent by comparable properties.

But the houses on the frontlines of A&T’s expansion that Blade III has sold to the state tell a different story, and the data bears out that they have retained their values favorably compared to their neighbors. The Blade III properties dropped in tax value by 13.9 percent, compared to a drop of 22.1 percent by the neighboring properties. While both sets of properties sold on average for about $45,000, the Blade III properties sold for 50.4 percent above tax value, while the other properties only sold for 18.9 percent above tax value. The discrepancy suggests that the Blade III properties were more significantly under-valued in the county tax valuation than those of their neighbors. Taken together this would suggest that Blade III has being a good steward of its properties and not dragging down values in the neighborhood.

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The six properties sold to the state by Blade III netted the investors $40,339 on an initial investment of $235,661. A 17 percent return is not exactly a killing, and in the absence of hard numbers about how much the owners spent on repairs and routine maintenance over the life of their investment it’s difficult to know how much of the profit was canceled out.

“To extract a fairly high amount of cash out of your properties, the trick is to continue to extract as much rent as possible without making much investment,” Sills said. “There’s a tax depreciation that some owners can get. I don’t know if Blade has it. You depreciate a property over a course of several years. It’s treating a property as a tool, as an instrument or a piece of equipment that gets worn out over time by renting it out. At the end of a depreciation cycle, property owners might choose to re-invest — to take out a new loan and fix the properties up. Or they might choose to divest themselves for as much as they can get. In good market prices, you’re going to get more out of it than you put into it.”

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While declining to share specific rents for the Blade III properties, Kerri Person, with Rent-A-Home, characterized them as at market rate or below.

“The rental amounts on a lot of their properties are very reasonable,” she said. “You can’t afford to make a lot of changes. We’ve done a lot to do what’s necessary to keep them in good repair.”

A&T’s intentions for the area are no secret: The university’s master plan, entitled “A&T Preeminence 2020,” includes a scale map depicting the area where Blade III’s properties are located — roughly bounded by Lindsay, Dudley, Salem and Laurel streets — as an “acquisition site.” The university proposes to replace the neighborhood with a “Global Village” that includes mixed-use retail and housing, a performing arts center, a school of nursing and life science, intramural fields and a parking deck.

With the state of North Carolina already holding a band of property a block to the north of Bluford Street and a block to the west of Laurel Street for A&T’s expansion, it’s only a matter of time before the rest of the neighborhood goes on the market. Based on its 17.1-percent return on investment for six properties in the neighborhood that sold to the state in 2014 and 2015, Blade III could potentially earn a net profit of $177,922 from an initial investment of $1 million on the sale of its remaining 26 properties in the neighborhood.

Sills pointed out that the cost of rehabbing a house might run into the tens of thousands of dollars, with a new roof costing anywhere from $5,000 to $10,000 and a new heating system costing around $3,000. It can be hard to justify the additional investment on a house that’s only worth $30,000. In contrast, paying an annual tax bill of $450 is relatively painless, he said.

When the housing is likely going to be torn down in the next 10 years it’s even harder to justify significant investment. The value of the property hinges more on the potential for reuse than the quality of the asset.

It sounds corny, but a mystical appreciation of the truth is a requirement for anyone who wants to practice journalism. There’s an inherent tension between the requirement of a story to arrive at a conclusion with a definitive set of facts and the eternal quest for truth and willingness to evaluate new facts. Sometimes the questing journey must take precedence over the arrival.

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