ENCINITAS — A federal housing discrimination lawsuit alleging an illegal housing scheme in Encinitas has recently widened its scope to include 14 defendants, one of which is controlled by private equity megalith Blackstone Group, according to new court filings.
The lawsuit stems from the city-approved sales of two affordable homes — 1317 Portola Road and 1412 Mackinnon Avenue — to wealthy investors instead of dozens of qualified, very-low-income applicants, as first reported by The Coast News.
“Developers in Encinitas are putting on ‘dog and pony shows’ to honest applicants in order to meet basic requirements while pre-determining the sale of designated affordable homes in violation of the fair housing rules,” the lawsuit reads. “And the City of Encinitas is complicit in these housing violations and recklessly failing its duties to administer the programs properly to further the fair housing laws.”
A city spokesperson previously told The Coast News the legal action “cannot point to any allegation where the City has not complied with state law or affordable housing agreements with the developers.”
In addition to the City of Encinitas, developers and various shell companies, the lawsuit also names as defendants commercial real estate brokers David Santistevan and Ciara Layne-Trujillo, both of Colliers International, and Finance of America Mortgage lenders Kenneth Reed and Victor Spayde.
The second amended complaint, filed by Escondido-based attorney Anna Hysell on Jan. 14 in the U.S. District Court for the Southern District of California, further alleges real estate broker Mark Marquez, his company Marcor Ventures and its parent brokerage firm Real Estate of the Pacific, or Pacific Sotheby’s, acted unlawfully in the sale of the Mackinnon home.
Marquez, a broker associate at Pacific Sotheby’s, was responsible for marketing and sales of the Mackinnon property on behalf of defendant New Pointe 37, according to the complaint. Marquez confirmed to The Coast News he was the listing broker for the home but wholly denied the accusations outlined in the suit.
“Any accusations of malfeasance are baseless in my opinion because (the sales) have been all approved by the city,” Marquez told The Coast News. “And to see it any other way would be an assumption. The property is occupied by an arms-length tenant the city approved for the sale. Nobody knows the tenant, nobody has any relationship to the tenant.”
The legal filing, however, states Marquez had a “pre-existing relationship with the selected buyer (of 1412 Mackinnon) Kenneth Reed,” a mortgage loan officer at Finance of America Mortgage, in violation of state and federal anti-discrimination and fair housing laws. Reed ended up paying cash for the home.
Victor Spayde, Reed’s associate at Finance of America’s office in San Diego, was the preferred lender for the Mackinnon property. According to the complaint, Spayde discriminated against a low-income applicant during the qualification process to “enable his co-worker Kenneth Reed, a male investor to purchase the designated affordable home.”
Finance of America Mortgage, a publicly-traded company claiming to have originated over $65 billion in loans since 2017 from a variety of financial products, is owned by Finance of America Equity Capital and controlled by Blackstone Group.
According to a notice of financial interest filed by Bronwyn Pollock, attorney representing the defendant Finance of America Mortgage, “certain funds managed by publicly-traded Blackstone Group L.P. indirectly own more than 10% of Finance of America Equity Capital.”
The Coast News requested comments from Pollock and WPG Desert Rose attorney Louis “Dutch” Schotemeyer, of Newmeyer and Dillion, but did not receive a response in time for publication.
Blackstone and residential housing
Blackstone, one of the largest real estate investors in the world with nearly $619 billion of assets under management, is also among the biggest landlords in San Diego County. The firm holds $4.5 billion in real estate across the county, including Hotel del Coronado and Legoland, according to the San Diego Union-Tribune.
The New York-based asset management firm recently made headlines in San Diego after scooping up 66 residential complexes, or approximately 5,800 apartment units, in a $1 billion deal with the Conrad Prebys Foundation.
But the global juggernaut’s reach stretches far beyond Southern California. In the aftermath of the 2008 subprime mortgage crisis, Blackstone formed Invitation Homes, buying more than 30,000 homes out of foreclosure nationwide for $10 billion to become the “largest owner of single-family rentals in America,” according to HousingWire.
In response to the company’s growing presence in the residential housing market, the United Nations issued a report claiming Blackstone has contributed to the “financialization of housing” by investing huge sums of money in housing as “security for financial instruments” in worldwide trading, which has had a “grave impact on the enjoyment of the right to adequate housing for millions of people across the world.”
The report described Blackstone’s business model as first purchasing “undervalued” properties, fixing them up and then raising the rent, “driving existing tenants out and replacing them with higher income tenants.”
Both of the aforementioned affordable homes in Encinitas cited in the lawsuit were sold to investors associated with very large equity firms. But according to the city’s interpretation of state law, sales to non-qualified applicants (i.e. wealthy investors) are permissible with some conditions.
In a September interview with The Coast News, Roy Sapa’u, the city’s director of development services, said that under state law, the developer of a low-income property has three choices — the owner can keep it themselves and rent to a low-income family; sell the unit to a low-income household, or sell to a non-qualified investor who then must rent the unit to a low-income household for a period of at least 55 years.
But plaintiffs and others argue allowing developers to sell homes at rock-bottom prices to investors under the auspices of “affordable housing” completely undermines these types of programs and harms the individuals these laws were designed to help and protect.
Yorba Linda Mayor Peggy Huang, a former chair of the Southern California Association of Government’s RHNA subcommittee, said Blackstone’s presence in the residential housing market has only made things more difficult for prospective first-time and low-income homeowners.
“When you have Blackstone and Zillow, which created Ibuyer to buy up homes for rental purposes, we have a huge problem,” Huang told The Coast News. “(These large firms) buy up homes and make everybody a renter. And when your government policies award those things, it makes your constituents economic slaves, because the way to get out of poverty and to help the middle class has always been (owning) land.”
Huang, a state’s deputy attorney general, is also a founding member of the Brand-Huang-Mendoza Tripartisan Land Use Initiative, a proposed ballot initiative seeking to give individual cities more control over land-use and zoning decisions.
According to Huang, state and federal affordable housing policies haven’t effectively accounted for market manipulation by institutional investors with deep pockets.
“I don’t necessarily have a problem with investors…. I have a problem with manipulation of the market by big investors,” Huang said. “We do need to address the issue of having large financial companies playing in the residential market. It hurts us all.”
CORRECTION: A previous version incorrectly stated the lawsuit claimed Victor Spayde approved Kenneth Reed’s mortgage application for the 1412 Mackinnon home. However, Reed paid for the home in cash. The lawsuit alleges Spayde discriminated against a low-income applicant during the qualification process of the purchase application for the Mackinnon property to “enable his co-worker Kenneth Reed, a male investor to purchase the designated affordable home.” The Coast News regrets the error.