Credit: Darrow Montgomery

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The dozen tenants left at Terrace Manor—a derelict 61-unit property in Southeast, near D.C.’s border with Maryland—are raising concerns about landlord Sanford Capital‘s plans to sell the affordable complex to a third-party buyer for $5.86 million as part of a Chapter 11 bankruptcy case now underway in federal court.

Through its attorneys, the tenants association at the property has submitted a motion requesting an accelerated legal discovery process in the matter, with a judge expected to make a decision on a central aspect of the debtor’s bankruptcy plan on July 5. The debtor, a Sanford Capital affiliate, seeks to sell Terrace Manor to an affiliate of a development firm called Equilibrium. Those two entities entered a purchase contract last June. Sanford’s attorneys say a court-sanctioned deal would let the affiliate that controls the property pay off some $3 million in debt to its creditors, including its main lender, EagleBank. They also say a successful transfer would give the tenants what they want: new ownership of the property.

But the tenants counter that they do not have sufficient information to believe that Terrace Manor is worth the proposed $5.86 million selling price or to know how Equilibrium plans to renovate the site to safe and habitable standards. They’re asking for broad authority from the U.S. Bankruptcy Court for D.C. to obtain documents relating to the potential sale of the complex from Sanford and its subsidiaries. The association’s lawyers also want to depose the company’s former top property manager, its former chief financial officer, and Aubrey Carter Nowell, its current principal who co-founded Sanford Capital over a decade ago with Patrick B. Strauss.

The company’s bankruptcy attorneys did not respond to a request for comment about the tenants’ motion.

Sanford owns more than 65 buildings across D.C. that mostly house low-income tenants of color. District Attorney General Karl Racine is now suing the company in D.C. Superior Court over conditions at two of its Southeast properties: Terrace Manor and a second surrounding the Congress Heights Metro station. Broken locks, lack of heat, vermin, and shoddy maintenance are common across the company’s portfolio.

At Terrace Manor, standing water filled basements as recently as April, and many of the property’s vacant units across its 11 buildings are covered with mold. An outside expert called a receiver is to refurbish the complex up to code—at Sanford Capital’s expense—under an agreement between the company and D.C.

The Terrace Manor affiliate applied for bankruptcy in late March. If achieved, bankruptcy would eliminate the tenants’ rights to buy or pick another developer for the site via D.C.’s Tenant Opportunity to Purchase Act (TOPA). The property represents a test case for how local landlords might sell neglected properties at a profit and avoid TOPA altogether.

The Sanford affiliate bought Terrace Manor in December 2012 for $3.15 million. At that time, more than 50 households occupied the property—a number that has shrunk due to evictions and poor living conditions.

Left unclear is whether Judge S. Martin Teel Jr. will approve Terrace Manor LLC’s “disclosure statement,” a standard document in bankruptcies where debtors must provide “adequate information” on finances to all creditors in a given case. Teel may also deny the tenants association’s motion for expedited discovery.

In their motion last week, the tenants’ attorneys say Sanford “failed to comply with TOPA and the sale was never consummated,” adding that the association has concerns about “the validity of the Sale Price.” They point to “conflicting statements” by Nowell regarding Terrace Manor’s value and when the latest appraisal of the complex took place. “There is a serious lack of candor in this chapter 11 case,” the tenants’ lawyers claim. “The Association and other parties in interest have a right to understand how the parties arrived at the Sale Price and what exactly the [parties] intend to do, both before and after consummation of the sale to Equilibrium (assuming it ever closes), to rehabilitate the Property and make it habitable for the tenants.”

Equilibrium director Sofonias Astatke has said his company remains interested in buying Terrace Manor, although an attorney for Equilibrium said at a court hearing in May that the $5.9 million price “may need to be adjusted” as the contract and associated agreements are a year old. “Financing commitments are like fruit: They have a shelf-life,” said Bruce Henry, the attorney. “And if you don’t eat ’em, they rot in the bowl.”

“Is [the price] going to be adjusted in a way that’s harmful to the creditors?” he added. “No. If it’s harmful to someone, it’s going to be the debtor.” In other words, the price is likely to be lower than it was last year.

The tenants are also worried that the deal between Sanford and Equilibrium could fall through. “In various pleadings, the Debtor has consistently stated that the Sale Price is subject to higher and better offers, yet it has provided no mechanism for parties to participate in such a process,” the association’s lawyers write.

Meanwhile, in the Superior Court case on Terrace Manor, Racine’s office earlier this month asked a judge to compel Sanford Capital and its subsidiaries to produce “basic important documents,” including the rent payments former tenants made, company emails, and contact information for employees. In part, Racine wants to recover back rents for Terrace Manor tenants who lived under conditions Sanford promised to fix. The case exemplifies novel consumer-protection litigation the District is pursuing in landlord-tenant affairs.

Attorneys for Sanford in the Superior Court case did not respond to a request for comment. An order on D.C.’s request hasn’t yet been entered, and a hearing is set for June 28, according to the court’s docket.