Landlord licenses in limbo

City Council members will vote in the coming weeks on whether to revoke a major landlord’s rental license.

The vote follows an administrative hearing officer’s conclusion that the ownership structure behind Minneapolis apartment properties deceived city officials.

“I’m willing to go. I’m willing to get out of the business, and I’ve made steps to do that,” said landlord Stephen Frenz, who said he plans to appeal any revocation action.

“However, you can’t possibly say you care one iota about affordable housing and act the way you have acted,” he said, referring to the conduct of city officials.

As Frenz has sold his properties in recent months, city staff has raised questions about lingering ownership interests and declined to issue new rental licenses to at least eight landlords. At issue are some sales made under contract for deed, transactions where the city said Frenz and Spiros Zorbalas retain an ownership interest and good cause exists to deny rental licenses based upon past “fraudulent practices.”

The letters have angered Frenz, who alleges discrimination against new owners. The letters have also worried tenants living in buildings without valid rental licenses.

Eric Hauge, director of organizing and public policy at HOME Line, said he’s received calls from renters near 31st Street and 22nd Avenue South as well as 2201 Aldrich Ave. S.

“It’s good that the city is enforcing their codes, but this process of license revocation oftentimes puts residents in the worst-case position,” he said.

Tenants are taking action to seize control of one building at 3105 22nd Avenue South. They petitioned this month for relief under the Tenant Remedies Act, alleging that they are being asked to make illegal rent payments to a company without a valid rental license. The tenants are asking the court to return their rent payments and appoint an administrator to oversee the property.

“That’s by far the best way to protect yourself,” said Legal Aid Managing Attorney Luke Grundman.

He said the city could technically order the evacuation of such a property immediately. He’s seen it happen before, although he said residents typically have 30 days to leave and city inspectors tend to be willing to work with families.

“It’s harsh because they didn’t do anything wrong,” he said.

Frenz said he may have been one of the largest market-rate affordable housing providers in the city, charging rents around $745 for a one-bedroom unit. He said he’s sold some of his properties to about a half-dozen longtime employees who are performing maintenance work on properties themselves. Selling on contract for deed allows them to buy with fewer resources, he said, and contract for deed transactions allowed him to sell his buildings quickly.

One of the buyers is Rickey Misco, who described himself as a longtime friend of Frenz who has worked for Frenz in the past. Property records indicate that Misco Holdings LLC purchased five rental buildings near 31st Street and 22nd Avenue South for $7 million under contract for deed in August, with a down payment of $30,000. One of his properties is the focus of the aforementioned tenant remedies action.

Misco said he’s already purchased refrigerators and stoves and dealt with pest control.

“I’ve been given an awesome responsibility to be able to provide safe, comfortable housing,” he said. “…I’ve done this for years for other companies, and now I get a chance to do it for myself. I don’t want riches or castles, I just want to make a difference.”

He said Frenz has been treated unfairly by the city and the media. He said he’s watched Frenz boot drug dealers from his property, hire off-duty officers and personally handle repairs. Frenz should have been granted more time to clean up Zorbalas’ properties, Misco said, because he inherited a mess.

“If he hadn’t have ran out of time, he would have turned all these buildings around,” Misco said. “…He was the darling of Minneapolis.”

The city revoked rental licenses of three Zorbalas properties in 2011, alleging more than 2,000 violations at his properties in five years, and the revocation stood on appeal. Frenz said he purchased all of Zorbalas’ 38 properties in 2012, and the purchase was celebrated at the time because it allowed tenants to stay in their homes.

Recent findings by an administrative hearing officer said Zorbalas retained an ownership interest in the properties and recommended that the city revoke Frenz’s rental licenses.

“Through testimony it was disclosed that Zorbalas and his entities were majority owners in ERH [Equity Residential Holdings], holding an 80% interest in the company, with Frenz and Frenz’ entities accounting for 20% of the interest,” states findings by Administrative Hearing Officer Danielle Mercurio. “Frenz admitted that Zorbalas had a direct individual ownership stake in Equity Residential Holdings, LLC from 2012 through at least 2015.”

Frenz also gave Zorbalas a 50 percent ownership interest in The Apartment Shop, according to the court documents.

The findings said Frenz required Zorbalas’ approval to write checks larger than $1,000, and the buildings had net operating income goals.

“Over the years that followed, Zorbalas communicated with Frenz about a variety of operational matters, from when gas at the apartments would go on for the winter months, what vendors would be paid and when, and directing Frenz when and what renovations would be allowed,” states Mercurio’s findings.

Frenz said in an interview that Zorbalas has engaged in occasional conversations about buying, selling and financing, but has had nothing to do with employees and day-to-day management. He questioned the hearing officer’s qualifications to judge the matter.

Hauge voiced frustration with the length of the revocation process and appeals. He cited city license revocation actions for landlord Mahmood Khan that date back to 2015, where after years of appeals, the U.S. Supreme Court denied Khan a hearing over his rental license last week.*

“We’ve advocated for the city to do what’s called tenant remedies actions, instead of doing their rental license revocation process,” Hauge said. “We think that’s a much better tool that treats the tenants as partners, instead of a bargaining tool.”

The city could file actions on behalf of an entire building, he explained, and petition for an administrator to take over.

“We just think it’s a much better way than a two or three year long revocation process that has proven to result in really bad outcomes,” Hauge said. “The Zorbalas to Frenz sale happened because they were pushing on Zorbalas’s license. A different process at that time might have had a much better outcome.”

Council Member Lisa Goodman said city officials are spending more time trying to figure out how to handle rental license revocations while prioritizing tenants. Regarding Khan’s properties, where licenses have already been revoked, she said staff are taking a multidisciplinary approach to the issue.

“It’s the affordable housing team, the lawyers and the [regulatory] services people thinking about how we can ensure that these folks don’t get kicked out and become homeless. We’re concerned about that,” she said.

A Council committee is scheduled to vote on the rental licenses on Nov. 28. A full City Council vote follows on Dec. 8, with a 60-day option to appeal.

*Changed to reference U.S. Supreme Court