As Veritas Faces Default on Loans, Eastdil Secured Places 95 of its San Francisco Properties on the Market for Sale
As Veritas Faces Default on Loans, Eastdil Secured Places 95 of its San Francisco Properties on the Market for Sale
May 12, 2023
Veritas Investments, the prominent residential landlord in San Francisco, led by its CEO Yat-Pang Au, is facing the potential loss of over a third of its apartment portfolio in the city as its lenders move forward with the sale of $1 billion in delinquent loans tied to Veritas properties.
Eastdil Secured has taken on the task of marketing these nonperforming mortgage loans, which are divided into two portfolios consisting of 95 multifamily buildings in San Francisco, according to a recent report by the San Francisco Business Times. These buildings house a total of 2,452 units and 45 commercial suites. Last year, Veritas affiliates owned approximately 6,500 units within the city of San Francisco.
Veritas affiliates began defaulting on the loans in November 2022, leading to the subsequent decision to sell them. In the meantime, ongoing discussions between the lenders, the special servicer responsible for managing the resolution process, and Veritas focused on options for selling either the properties or the loans themselves. Notes sent to bondholders in April revealed that Veritas was actively seeking a partner to inject fresh capital into the properties, aiming to revitalize their financial standing.
This recent development suggests that the lenders are inclined to sell the loans to another entity that will likely foreclose on the properties and assume ownership, according to published reports.
The first portfolio consists of 75 buildings described as “trophy” multifamily properties located in highly desirable neighborhoods. According to a marketing document referenced in the report, this group of properties is divided into two groups. The first one comprises of 61 buildings tied to a loan with an outstanding balance of $667.9 million. The second group includes 14 buildings tied to a loan balance of $134.2 million. The total number of units in this portfolio is 2,149. These loans matured in November of 2022, and Veritas has been in default since that time.
The second portfolio is made up of 20 buildings backed by a pool of seven loans, with six of them having fallen into default since January. According to the brochure detailing these assets, the loans were initially originated in August 2019, and their current outstanding balance stands at approximately $138.8 million. These buildings house 303 rent-controlled units and offer the possibility of accommodating an additional 30 accessory dwelling units (ADUs) in the future.
Reports indicate that Veritas affiliates previously managed around 265 buildings in San Francisco, valued at $3 billion, prior to the pandemic.
In a statement on Thursday, a Veritas spokesperson stated that the company is collaborating with its partners and lenders to reach a resolution regarding a portfolio owned by institutional investors.
“One of the parties in the lending and ownership structure has taken another step in the special-servicing process previously reported. The loan note may be sold to other parties or may continue to involve Veritas,” said a spokesperson for the firm, according to the report. “While we’ve all seen the stories about office usage going down in the wake of hybrid work, multifamily operators in San Francisco have to contend with even more challenges, including increased city regulation, increased taxes, more pandemic impacts and the rising cost of doing business here.”
In the early months of 2020, prior to the pandemic-induced disruptions that led to temporary closures and remote work arrangements for numerous San Francisco businesses, Veritas embarked on an endeavor to sell a portfolio comprising 76 buildings. The objective was to enhance its appeal as an investment partner by listing these buildings on the market. However, city officials intervened, urging Veritas to engage in negotiations with them before considering private investors. The intention was to explore the possibility of the city acquiring the buildings instead. Unfortunately, due to the sudden onset of the pandemic, these negotiations came to a halt and remained unresolved.
Despite the persistent challenges faced by building owners throughout the pandemic, Veritas continued to acquire real estate and pursue new construction projects. In 2021, an affiliate of Veritas acquired a notable property in Nob Hill for $43 million.
Additionally, Veritas presented a proposal for a new construction venture in San Francisco’s Tenderloin neighborhood towards the end of last year. The plan involved the construction of an 18-story tower, featuring 116 apartments, adjacent to an existing Veritas-owned multifamily building at 57 Taylor St. The proposed project aimed to replace a vacant one-story retail building at 105 Turk St. and a surface parking lot at 111 Turk St. However, records from the San Francisco Planning Department indicate that the project application was deemed incomplete and subsequently placed on hold in January.
Veritas has faced criticism and multiple lawsuits surrounding its business model, which some critics argue involves acquiring rent-controlled properties and undertaking extensive renovations while passing on the costs for repairs and debt service to tenants through bundled charges. In response to the 2019 legislation designed to discourage large corporate landlords from driving up rents via legal pass-through costs, Veritas made commitments to expedite a hardship waiver program and remove new fees for many tenants.
