San Francisco Apartment Association
August 2008

feature

In Conversation with Three Generations of the Lembi Family

by Allison Chapleau and Matthew Sheridan
photos by Jason Steinberg/Steinberg Imagery

Despite facing its fair share of adversity, the Lembi family has managed to persevere in the San Francisco apartment market for more than 60 years. Allison Chapleau, a senior associate in the San Francisco office of Marcus & Millichap Real Estate Investment Services, and Matthew Sheridan, editor of SF Apartment Magazine, had the opportunity to sit down recently with Frank Lembi, his son Walter, and Walter’s son Taylor to discuss how the family started in this industry back in 1946 with a small shop on Market Street known as Skyline Realty, and grew its empire into CitiApartments, one of San Francisco’s leading private multifamily investment firms.

Lembi FamilyQ: How did you get started in apartment buildings?

Walter Lembi: My father, Frank, started this business in 1946 and he’s still very, very active. He comes to work every single day around noon and he drives himself everyday. He’s 90 years old. We tried to get him a chauffeur, but he said no. Probably the best way he helps us is when we buy new buildings. He really knows his stuff, and we try to follow his example. Plus, he’s a very good negotiator.

So the business started in 1946 as Skyline Realty, and it was a big powerhouse in the city until about 1978. It was a well-known brokerage company.

Frank Lembi: We were in a little hole in the wall on 2261 Market St., with a 12-foot frontage. We had 12 good agents who burned up San Francisco. We did very well. We were heavy into probate estate sales. We controlled that market in San Francisco.

WL: I started working for Skyline in 1972 as a salesperson, which I did until 1980. And then we formed our own savings and loan called Continental Savings of America. That was the first nonminority savings and loan in San Francisco. I ran that from 1980 to 1990. We did many innovative things with that savings and loan, which we eventually merged into Cal Fed.

I ran another finance company and came back in 1998, did our first securitization on Wall Street—where we refinanced two hotels, one office building and twelve apartments—and from the excess money we took out $6 million to start buying apartment houses again. At that time we had about 1,200 units. Now we have about 8,200.

Q: Are they all in San Francisco?

WL: In Burlingame, there’s one 30-unit building on the corner of El Camino and Burlingame Avenue. Then we have the Ben Franklin Hotel, an extended-stay building with 99 units, on Third Avenue in San Mateo. We also have a building in Foster City and one in San Rafael. That’s all we have outside the city.

Q: How did you get the name “Skyline”?

FL: We went through the phone book; we went to the library. Then one day we said, “San Francisco skyline, so Skyline Realty.”

Q: What attracted you to apartment buildings in San Francisco?

WL: We owned several office buildings and I found them to be very expensive. The tenant improvements and the real-estate commissions are huge. Plus, if one tenant moves out it means the whole floor moves out. But if you have an apartment house with 36 units and three vacancies, it’s no big deal. Also, our business has always been apartments. We love apartments.

Q: What was it like in the real-estate market when you first started out?

WL: The first building I sold in 1972 was three flats on Church and 18th streets for $30,000. Now think about that. Those same flats are worth $2.1 million today. They were view flats on Church Street. So, the price of real estate has skyrocketed. Also, in 1973, we bought a building on the southeast corner of Taylor and Jackson streets. It had three-quarters of an acre of land and 35 large units, designed by Julia Morgan. The Dillingham Corporation owned it and was going to tear it down to build a high rise. We paid $900,000. It was a steal. Whenever a unit became vacant we would upgrade it. In those days, those units rented for $500. Now they rent for $5,000.

Lembi FamilyFL: When I bought five choice buildings from the Hill family estate in probate, I didn’t have a penny to my name. It was $125,000 for all five.

We went to court and made our deal in the hallway. I was going to buy it. The other brokers said, “How can you buy it?” and I said, “I’ll give you $10,000 a piece.” So it went to court for confirmation and the judge asked, “Does anyone in the court want to bid on this property?” Shhh, quiet. Everyone passed and then he came to me. In those days, you didn’t have to put a penny up. Just give them your name.

I got on the telephone and called various friends. I raised $150,000. When I closed, I paid off the brokers and then I sold off one building: two nice flats on Lake Street, 65-feet long with sunken living rooms. I sold that for around $63,000.
My favorite lender at the time was California Savings and Loan. Every Tuesday we’d go out with my good friend Bob Vickery and look at half a dozen, maybe up to 10 properties. He would mark down the information and say, “Okay, you got the loan.”

Then I’d go back to the office and tell the agents to send the loan applications to Bob Vickery at California Savings and Loan. You’d wait two days; you got your loan papers. We were the biggest borrowers for loans at California Savings and Loan.

Q: Any comments about the market today?

Frank LembiFL: Buy as much as you can and hold on to it. I learned that lesson. San Francisco real estate, and I’ve been through two or three cycles, is going to go up and up and up. So buy and hold.

Q: You are one of the leading apartment investors in the city, buying everything from six units to 117. What has your strategy been when purchasing buildings?
WL: My strategy is that I feel very strongly that apartments in San Francisco are cheap in comparison to other cities, like New York, London and Paris. In time, they are going to be a lot more expensive than they are today.
The rental demand in San Francisco is huge. Rents are going up every day. We finally reached $2,000 a month for a studio in the Marina with no parking. That’s a record. But we also offer the best apartment buildings in the city because we completely upgrade our apartments. We put in new electrical, new plumbing, new hardwood floors—because tenants love that—new kitchens, new baths, new light fixtures and new common areas. I think in 2007 we invested $75 million in upgrades.

Q: Do you have your own crew or do you use contractors?

WL: We have 17 outside small contractors that do the work for us.

Taylor Lembi: They really do single-family-home-level quality. We put in stainless steel appliances and granite. When you look in the home magazines, it’s not unlike what we put in the units.

WL: And everything we do now, down to changing a toilet, we do with a permit. That’s what the city and county wants.

Q: What is your highest rent?

WL: Our highest rent is in the Park Lane building on Sacramento Street and that’s $15,000.

When I used to drive by with my friends, I said, “I’m going to get it someday.” Then, all of a sudden, it became available. I really focused in. There were nine bidders and we had the highest bid and we won: $38 million for 33 units. It was one of the highest prices paid for an apartment building in America at that time. I think it’s worth $60 million today.

Right now, we’re going to keep it as rental property, but it would be perfect for TICs. There’s just no financing for a TIC of that size available today.

Q: What was your strategy to get to the top of nine bidders?

WL: Well, the strategy is that it’s a one-of-a-kind piece. It’s probably the best apartment building in the city with great views. There were two stages of bidding, and my father and I decided to make a very strong bid. We lucked out and we got it.

Q: There are some rumors that you’ve inflated the market by paying top dollar. Do you care to comment on those?

WL: Yes. I completely disagree. We just sold three buildings: 1221 Jones St. for $37.5 million that we paid $20 million for three years ago; 1850 Clay St. for $7.82 million that we paid $5.5 million for; and 1891 Jackson St. that we paid $3 million for two years ago and we sold for $4.22 million. All local buyers. So, I don’t think I paid too much.

We put a lot of money in the buildings. We’re not slumlords. Every building we own, whether it’s in the Tenderloin or Pacific Heights, we put the same type of quality of work into it.

FL: They always say, “You’re crazy, Lembi. You’re paying too much money.” But I paid $265,000 for 2101 Market St. years ago and it just got appraised for $14 million.

Q: Why have you put buildings on the market right now?

WL: The financial markets are unsettled, but our bankers are working very well with us. They would like to see some kind of pay down. I was able to refinance seven buildings and sell those three buildings, and so we’re looking forward to selling a few more buildings and refinancing a few others.
We’d like to try to refinance the whole portfolio, but that market is pretty much gone right now. This is the worst financial market I’ve been in the history of my career in real estate, and my father says the same thing and he’s been here a lot longer than me.

Q: Does that worry you?

WL: No. We have great lenders and they’re working with us. I don’t think there’s a lender in the United States who would want to come in here and manage 310 buildings. So, we’re protecting their assets with our management and renovation abilities.

Q: Do you think you are losing money by selling these buildings instead of holding on to them?

FL: By all means, yes. We’ll lose millions of dollars, millions.

Q: Is there some savings in having such a large portfolio?

WL: Having a large portfolio in the city is a double-edged sword because there aren’t a lot of big buildings. Our average-sized building has 20 units. So it takes a lot of management. Also, it takes a lot of accounting. We have about 13,000 tenants, so that means we get about 13,000 checks a month. So, the economies of scale come from our abilities to reduce expenses. We’re always on top of that.

Q: What are some of the differences between managing a building in the Tenderloin versus one in Pacific Heights?

WL: The city has to do more to clean up the Tenderloin. Because they don’t, we supply our own special patrols. There’s a lot of drug dealing on the streets. It’s embarrassing. You go to show a unit and there’s a guy dealing drugs right out front. One of our potential tenants at 1000 Leavenworth St. was waiting outside for the rental agent and was robbed.

TL: Our guys show up before the cops do. In fact, they’re off-duty cops who work at nighttime to patrol the buildings from 5 p.m. until 4 the next morning. They do about 40 buildings.

WL: It costs us about $10,000 a month. We’re the only landlord in the city to pay for such a thing. But they do a great job and they’re devoted. The tenants in those buildings feel very secure. We also have security cameras in most of our buildings.

Q: Have you been criticized for that special patrol?

WL: We’ve been criticized for the in-house security; that’s where the thoughts come that we were booting our tenants out. But that’s not true. We patrol our own buildings at night, but we felt that it was better after the lawsuit that we hire an outside company to do it, so we did.

Q: The lawsuit you are referring to was the one filed a few years ago by the San Francisco city attorney and some tenant groups asserting unfair business practices and intimidating tenants. Do you have any comment on that and what is the status of those lawsuits?

WL: The status of the lawsuit is that it’s in mediation, and I really can’t comment on it because it’s in mediation. I will just say one thing: we do not bully tenants, ever.

Q: Is there anything really exciting on the horizon for CitiApartments?

WL: We’re trying to be the best owner in the country. We’re working really hard to do that. Every time we get a vacant unit that has been untouched for 10 years, we completely remodel it. We don’t have to do that. We might get $100 to $200 less in rent if we just painted and cleaned it, but we want our units to stand above the rest, and they pretty much do.

We have our own in-house rental team of about 14 who work on a commission basis, and they can only rent our units. They work very hard. Then we also have a manager in every building over 15 units, and they have the ability to rent. We have our signs everywhere in the city and its amazing the number of calls we get off those signs.

We have very few vacancies. We have vacancies that are ready to rent and we have vacancies that are under construction. We have 250 units under construction right now and about 200 ready to rent, out of our 8,200 units.

Q: Do you think the San Francisco rental market will always be this tight?

WL: I’ve been doing this since 1972 and I’ve been through some very tough markets. In 1990, it was really a crusher. Even then, the rents went down a little bit but the vacancy level was never very high. The same thing happened after the dot-com era. By the way, our rents now are higher than during the dot-com era. But even then, the rents went down but the vacancy was still very good. San Francisco is a fantastic city; realistically you can’t build any more units, and if you do it’s going to cost you $500,000 a unit to do it, so therefore you have to get $5,000 a month to make it worth it. I shouldn’t be saying this, but there’s a lot of value in existing buildings.

Q: What’s your proudest accomplishment?

WL: My four children. One who doesn’t work for us right now is my daughter Sammy, who wants to be a pastry chef. Taylor works for us running CitiSuites, which supplies furnished apartments.

TL: It’s extended-stay living, with the majority in San Francisco. Our furnishings are high end, and you can’t beat the locations. We have managers who are like a concierge service. They’ll tell you the best restaurants in town. Actors stay with us, and major league ball players.

WL: My daughter Chelsea has a company called Charming Gardener that doesn’t garden! She’s a graphic artist who does wedding invitations and all the materials for CitiSuites.

My oldest child Damon runs Learn It, the computer training center that I founded. He’s doing a fantastic job. The best companies in California use it: Google, Microsoft, Stanford University and UCLA.

TL: What you guys have to understand is that my dad and my grandpa are both entrepreneurs to the max. So, they’ve started other businesses.

WL: It was a time when the mortgage market was really slow. I had just become interested in computers, so I went to a training class for the Mac and it was the most boring place I’ve ever been in my life. So, I said there’s a great opportunity here to create a highly designed school; if you go to Learn It, it looks like an architect’s office. It’s highly designed, with the best quality materials and teachers. We shortened the classes from four hours to 90 minutes. It was a big hit from day one.

FL: My father was also an entrepreneur. My mother came from Corsica and my father came from Lucca, Italy, to San Francisco. My father was very aggressive with all kinds of businesses, from bootlegging to everything else. We had restaurants and grocery stores. We had a market at 24th and Potrero streets. After school, I’d have to go in the back of the shed and clean up all the manure from the horses. We had horses and buggies then.

I was raised in Potrero Hill. I used to get up in the morning with my dad at four or five in the morning, go to the fruit and vegetable market, trim all the vegetables, put them in the stands and then go to school at St. Peter’s High School. Then I’d come back from school and go to work again. I’ve been working all my life.

Q: Any plans to retire?

FL: I’m never going to retire. Why? I enjoy what I’m doing here. I’ve got my son and daughter and my grandchildren here now. So, I’ll keep on going.

 


The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Allison Chapleau is a real-estate investment broker at Marcus & Millichap and specializes in the sale and purchase of San Francisco apartment buildings, NNN and multitenant retail properties. For additional information, please contact her at 415-625-2159 or achapleau@marcusmillichap.com. Matthew C. Sheridan is the editor of SF Apartment Magazine and the East Bay’s Rental Housing magazine. For more information on Steinberg Imagery, check out
www.steinbergimagery.com. Copyright © 2008 SF Apartment Magazine. All rights reserved.