Thirteen years ago, Veritas Investments took advantage of the fallout from the Great Recession to start snapping up San Francisco homes by the thousands at a steep discount.
Fueled by a combination of private equity investment and lots of debt, Veritas continued its buying spree in the years that followed—eventually becoming the city’s largest residential landlord by 2016.
Now, amid a pandemic-induced real estate crash, a new outfit is poised to take Veritas’ place. Another opportunistic group—this time, a partnership between Ballast Investments and Brookfield Properties—has swooped in to buy up nearly $1 billion of mortgages that Veritas had defaulted on, public records show.
As a result, over 2,100 units across 76 apartment buildings in the city will have a new owner by the month’s end. While the foreclosed properties are technically on the market, industry observers say it’s most likely Ballast and Brookfield will just assume ownership of the buildings themselves, as they are now effectively Veritas’s lender.
It is not immediately clear how much Ballast and its capital partner Brookfield paid for this latest mortgage package, previously valued at a combined $915 million. The two transactions were recorded with the Assessor’s Office on Dec. 28.
Both firms did not respond to requests for comment. A spokesperson for Veritas declined to comment.
Veritas has continued to shed properties that it can no longer afford to pay for. In November, it opted to hand over 20 other residential buildings to SF-based Prado Group, which purchased a similarly distressed but smaller portfolio of mortgages.
Brookfield Properties might sound familiar to those following recent San Francisco real estate developments, ironically for giving up one of its iconic properties. Over the summer, the Canadian firm, along with its partner Westfield, stopped making payments on a $558 million loan and gave up the San Francisco Centre mall to its lenders.
Meanwhile, the company is also pursuing a massive mixed-use redevelopment of the area around the Stonestown Galleria mall, where it hopes to build up to 3,500 new homes, a 200-room hotel and six acres of open park space. One of Brookfield’s other major developments is 5M, a mixed-use development in SoMa which has an office tower that is currently more than 90% vacant.
In what could be a troubling sign for its future projects, Brookfield’s commercial real estate arm just had its credit rating downgraded to junk status by S&P Global Ratings—a warning to investors that the company is likely to default on its obligations. Some $2.3 billion of the company’s debt is scheduled to come due by 2025.
How does a company simultaneously play winning and losing hands without one impacting the other? Well, it’s not always one pot of money as it is in households, according to Gary Kaplan, a partner at Farella Braun + Martel LLP who specializes in restructuring and bankruptcy issues.
While the San Francisco law firm represents the receiver of the San Francisco Centre, it was not involved in the recent purchase of Veritas’ portfolio.
“All of these investments are done through special purpose entities (think: LLCs) and not the corporation itself,” Kaplan said. “Money gets pumped in and out of various initiatives depending on the case.”
The team at Veritas might have done an analysis and figured that this portfolio was no longer the best use of its money, whereas Brookfield might have seen it and thought otherwise, Kaplan explained.
He speculated that purchasing a new selection of apartment buildings rather than continuing to spend money on a struggling Downtown mall probably made more sense to Brookfield.
“I expect these companies have pools of folks whose job is to figure out when to get in and when to get out of things,” Kaplan said.
Despite its steady shedding of properties, Veritas remains in possession of thousands of apartments across the Bay Area and Los Angeles metro areas.
Ballast Investments, for its part, focuses primarily on homes. The San Francisco-based firm claims on its website that it specializes in repositioning “smaller, undermanaged properties.” More notably, its co-founder and managing principal, Ryan Brewer, helped lead the acquisition of multifamily properties at Veritas before co-founding Ballast in 2015.
Long before Veritas’ San Francisco empire began to crumble, it had increasingly become a target for tenant activists, some of whom have accused it and its affiliates of practices such as illegal evictions, union-busting and violating building codes.
Brad Hirn, an organizer with the Housing Rights Committee, has been helping residents at various Veritas properties organize and negotiate with the landlord for lower rents and better living conditions since 2016.
He called a potential Ballast and Brookfield takeover the “worst outcome” for San Francisco tenants currently fighting for recognition of their unions.
“This feels like a huge missed opportunity for the city to step in when yet another company’s bad business model is cracking,” Hirn said. “It doesn’t have to keep being this way. Thousands of residents are getting active and organized. We should chart a different course.”
Hirn said he would have preferred the city itself acquire the properties, rather than leave ownership up to the private market. Yet, a recent episode in the Mission District gives him hope that a change of ownership could push stalled negotiations along.
Just a few days before the Prado Group took control of over 20 Veritas-owned properties in November, the tenant association at one of these properties, located at 320-340 14th St., won key concessions from the landlord, including a 75% reduction in rent over 12 months, halting all pending evictions and the cancellation of previously scheduled rent increases.