Arlena Chaney, president of a tenants’ association in Southwest Washington, wasn’t sure what to do when a guy from Urban Investment Partners rang last month saying they were under contract to buy her building.
She didn’t call back right away. Instead, she convened the residents of the New Capitol Park Towers at 3rd and G streets SW—a diverse group with many elderly folks who’d lived there for decades. These tenants were used to fighting their landlord, having sued three times since 2006 over housing conditions and rent increases, and worried that the next owner might be just as bad.
Meanwhile, UIP sent a series of marketing postcards with lists of enticing promises: a new roof deck, new appliances, heating and air conditioning upgrades, all with no rent increases—or a cash payment if you chose to leave.
The New Capital Park Towers tenants, just like any in the District, had some power. Because of D.C.’s Tenant Opportunity to Purchase Act, they had right of first refusal once the building was for sale. Chaney rounded up enough signatures to exercise that right, so now tenants had the option of either trying to convert the building to condos themselves or bringing in another developer to compete with UIP’s offer.
Chaney didn’t know whether to trust UIP, so she asked people who’d dealt with the company before to come speak at her meetings. She had plenty to choose from: UIP has exploded in the past decade, going from zero to more than 3,000 units over 50 properties, with six acquisitions last year alone (most they own themselves, a few they manage for others, and a few have been sold as condos). Their investors, based in New York City and the Netherlands, have an insatiable appetite. “We’ve never seen a building that we didn’t want to own,” says founding principal Steve Schwat.
Schwat specializes in dumpy, mid-century century brick buildings subject to rent control, which landlords usually treat like an imposition on their constitutional rights. Instead, UIP’s succeeded by making tenant protections work for them, too: They get residents to waive their rights to buy the building, in exchange for substantial renovations financed by large rent increases down the line. That preserves affordable rental housing for the people who live there now. But it also means there’s less of it in the future.
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Schwat, the driving force behind UIP’s rapid rise, doesn’t seem like a patient man. He fills a room—sometimes raising his voice even in friendly conversation—with a tendency to talk over people. The Great Neck, N.Y., native’s tour of the company’s Cleveland Park office takes about 10 minutes, but packs in a fairly comprehensive overview, with introductions and complete job descriptions delivered at a rapid clip.
Schwat moved to Washington in 1980 to major in marketing at George Washington University, and after graduating, sold pagers for a year and a half before starting a business selling promotional products. (Those postcards the New Capitol Park Towers people got were no accident; the company’s lobby is stocked with pens, pins, and packs of jelly beans that declare, “Living in a UIP Building is Really Sweet.”)
Without quitting the promo business—he’s still CEO of his first company—Schwat bought his first apartment building on Capitol Hill in the 1990s and converted it to condos. Then he started buying more of them, in low-to-middle class neighborhoods around the city like Twining, Brightwood, Petworth, and Columbia Heights, as well as higher-end Dupont Circle. In the mid-2000s, he teamed up with Kees Bruggen and Wout Coster, who brought in tens of millions of dollars from Dutch investors. They went after portfolios of buildings owned by longstanding land barons looking to downsize, like C.C. Dudley and William Calomiris. Last year, UIP also picked up several properties at auction from the Tenacity Group, which had attempted several condo conversions in the go-go 2000s only to see them founder in the recession. “They don’t see the real estate as people’s homes,” Schwat says. “They have no debt, and they just see the real estate as a parking meter.”
Schwat thinks he’s on the side of angels, working with tenant associations to preserve rental housing, rather than kicking renters out or pushing through condo conversions. But the way UIP goes about its business—while it might help some existing residents in the buildings they buy—can still wind up undermining the District’s protections for renters.
Here’s how the company works. The typical UIP purchase, built in the 1930s or 1940s, has a lot of issues: rusted pipes, faulty air conditioning, leaky windows. To fix all that—and add other amenities, for which future tenants will pay more—the company’s in-house general contractor sometimes needs to pump millions of dollars into renovations. Existing rents below market rates make that hard to pay for.
So UIP uses what are known as “voluntary agreements,” deals signed by at least 70 percent of tenants that have to be approved by the District’s rent administrator. The terms usually include small rent hikes, or none, on renters already in the building. But the lease prices for empty apartments can soar. Tenants who don’t want to stay can take buyouts—in the case of a building near 14th and U streets NW, UIP paid all of the low-income households $60,000 each to leave, which allows for a much easier wholesale renovation and a building full of near-market rate units. (Of course, it also left dozens of low-income residents looking for a new home somewhere else.) Those who stick around get to live in a nicer building without paying more, but when they leave, the rents go up for new residents.
Arrangements like that are starting to eat away at the city’s supply of rent-controlled units (about 79,000 of them, according to an Urban Institute count last year). As many as a quarter or a third of units in most buildings that get bought this way are empty at the time of sale, so that leaves a lot of apartments eligible for big rent hikes.
For example: The average market rent in D.C. for Class B apartments—anything more than about 20 years old—is $1,886. UIP bought the 99-unit, 82-year-old New Quin apartments at Quincy Street and New Hampshire Avenue NW for $8.2 million in 2010, and put $4 million into upgrades. Twenty-four apartments were vacant and 30 tenants took the buyout, leaving more than half the building empty. Now, those apartments are leasing from between $1,400 (for a 338 square foot unit) and $1,875 (for 660 square feet). That’s far more than what tenants had been paying before. And the setup creates a near-market rate revenue stream for a building acquired at a rent-control price, which is a tidy return on investment (Schwat declined to disclose net revenues for the company overall).
There’s another problem, too, that can affect even the tenants who sign the deals and get their rent capped: Enforcing them isn’t always easy, and tenant associations often don’t keep their lawyers around long enough to make sure everything gets done. The mostly Hispanic, low-income tenants of two buildings on Ontario Road in Adams Morgan, which UIP recently bought, were lucky. When problems weren’t getting fixed as quickly as the tenants expected last January, pro bono attorney Blake Biles of Arnold & Porter LLP filed a tenant petition asking for a refund on all rents (UIP tried to settle, saying the upgrades just took a while to sort out, but tenants weren’t satisfied). The case is still pending.
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UIP ultimately owes its rapid rise to two main factors.
One: In 2010, the District ran out of money for the Housing Production Trust Fund, a pot filled by taxes on real estate sales that’s supposed to be loaned out to tenant groups buying their buildings, or to nonprofit developers who could run apartment buildings without raising rents. With the fund empty, tenants have few options besides selling their rights.
Two: Schwat has learned to play nice. As the apartment market heats up, UIP is usually only one of two or three developers bidding on a property that comes up for sale, and tenants vote for who they like best. He doesn’t always win: Last year, UIP had contracted to buy three buildings in Columbia Heights from the same owner, and tenants chose another developer instead. To burnish UIP’s reputation, Schwat keeps a binder full of letters from happy residents, paying his staff $20 per testimonial they bring in. Eric Rome, a lawyer who represents tenants associations, says he used to butt heads with Schwat, but hasn’t as much lately.
“UIP has evolved to the point where they realize that their business model is more compatible to respecting tenant rights than trying to get around tenant purchase laws,” Rome says. “And that’s what’s made them more aggressive.”
A number of tenant advocates think UIP is overextended—buying that many buildings that quickly, it’s hard to develop the management infrastructure to keep up (they’ve added ten property management staffers over the last year). And yet, the Ontario building aside, UIP usually gets decent reviews for being a company fundamentally interested in its bottom line.
“They are honest and decent in what they do, but we normally try to flip to the nonprofit developers who are committed to affordable housing,” says Michael Diamond, head of the Georgetown University Law Center’s Harrison Institute, which works with District tenant groups. “They have a sensitivity to affordable housing, but they are profit-making, and that’s a major motivation…They have a housing empire in the process.”
In other words: As the public commitment to affordable housing preservation has waned, Steve Schwat might be the best option the city has.
Here’s an expansion on the issue of voluntary agreements undermining rent control.
Photo by Darrow Montgomery
* CORRECTIONS: Due to a reporting error, this column originally incorrectly stated that the real estate firm’s principal, Steve Schwat, comes from Brooklyn; in fact, he comes from Great Neck, N.Y. The piece also stated that Schwat pays $20 for positive testimonials from tenants; it should have made clear that the payments go to the employees who procure the testimonials, not the tenants who write them.