While many opportunity zone investors faced criticism for getting big tax breaks while putting their money in rapidly gentrifying, highly profitable neighborhoods, Muoto was winning fans for investing in truly poor ones. Forbes in 2020 picked SoLa’s fund as the nation’s best with an urban focus. And in a book castigating the abuse of opportunity zones, David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy, singled out Muoto as something of a true believer in the spirit of the law.
The speed and cost of SoLa’s building program contrasts with the plodding and costly progress under the city’s Proposition HHH homeless housing bond. More than halfway into the 10-year program to add more than 7,000 new units of subsidized housing, barely 1,200 have been completed, and the cost for those units has risen steadily to nearly $600,000 on average.
The 3,500 units on SoLa’s drawing boards are on a schedule to open over the next three years at an average cost of between $275,000 and $300,000, even taking into account the past two years of inflation.
With investor cash at hand, SoLa has quick access to conventional loans to get projects underway, compared with the two years or more it often takes developers to line up multiple government commitments. SoLa also avoids strings that come with that government money, most importantly requirements to pay prevailing wages and, in some cases, hire only union labor.
SoLa can choose which units to place under rent restrictions and whom to accept as tenants. Muoto has said he will keep about half the units affordable to low-income renters and most of the rest to those who earn less than 120% of the county’s median income.
Its first two new-build projects are dedicated to homeless people. HOPICS, the main homeless services agency based in South Los Angeles, has a five-year lease on the Avalon building. Another homeless services agency will occupy SoLa’s building at 92nd Street and Compton Avenue. Two other buildings scheduled to be completed in the next few weeks will be leased by an organization for homeless women and a group housing Afghan refugees.
Tenant advocates who have criticized SoLa say its private-investment strategy has inevitably led to skimping on labor and upkeep.
According to court records, in September 2020 SoLa agreed to a $520,000 settlement in a class-action lawsuit in which workers alleged that the company wilfully misclassified them as independent contractors, denied them overtime and minimum wage, failed to provide rest periods and did not produce itemized wage statements. The lawsuit estimated that as many as 600 workers were affected over a five-year period. SoLa did not admit to wrongdoing.
In an interview, Muoto and Lusk said the lawsuit had been a wake-up call and that they have since stopped working with independent contractors and instead work only with large, bonded general contractors.
They attributed maintenance issues to the age and decrepit condition of the buildings they purchases.
Of the 109 SoLa buildings for which Los Angeles County Assessor data list ages, more than half were built before World War II, the oldest dating to 1907.
A Los Angeles Times analysis of Los Angeles Housing Department records shows that, within a year before SoLa’s purchase, 64 of its buildings had tenant complaints and orders to correct code violations. Eighteen of those buildings were straddled with unresolved code violations when the property changed hands.
Those issues continued under SoLa. In the first year of SoLa ownership, orders to correct code violations were recorded at 60 buildings, and four of those cases were referred to hearings because of the slow response. Lusk attributed those delays to the city’s slow processing of building permits, especially during the pandemic.
Sharon Price, a neighbor of Rogers in the building on 60th Street, said she recently reported water seeping from under her sink and had to wait two weeks for a plumber to show up. He cleaned the drain and left, Price said, but the leaking continued. A maintenance worker then ripped up the baseboard to find a broken pipe covered in mushrooms.
Lusk provided a before photo of the repair showing a badly corroded pipe and a gaping hole in the exterior wall but no mushrooms. He said the repair was done in three days.
Disgruntled SoLa tenants, including Rogers, began showing up at community meetings organized by the tenants’ advocacy group Strategic Actions for a Just Economy.
Favian Gonzalez, the group’s assistant director of organizing, collected about 20 notice to repair complaints from several buildings and sent them to SoLa Rentals, the company’s property management arm.
“This company looks like a nonprofit, (like) they have a heart,” he said. “No, they ignored it.”
One building stood out. The 100-year-old, four-story, 29-unit apartment at 300 East Washington Blvd. had been purchased by SoLa in 2018. Three years later it was still a wreck. Layers of ancient lead-filled paint were peeling from the exterior walls, plumbing was leaking, flooring was dislodged, bed bugs were rampant, and whole sections of window casing were hanging loose.
Strategic Actions for a Just Economy turned to the Riley law firm. In May 2021, the firm filed a lawsuit on behalf of 23 tenants of the building. Two more lawsuits followed over conditions at other buildings. Among the plaintiffs was a mother of two who had video of rainwater gushing through a light fixture and a family of five in a small apartment whose ceiling collapsed on a bunk bed.
The law firm tipped off KCBS-TV Channel 2 investigative reporter David Goldstein, whose Oct. 16 report on the Washington Boulevard building featured tenants displaying baggies full of cockroaches and bed bugs interspersed with SoLa promotional videos showing Muoto touting his company’s social mission.
Three days later, the Inner City Law Center filed its lawsuit.
By late November, SoLa workers were hustling all over the building tearing out rotted framing and flooring, setting new drywall, installing plumbing and cabinets and painting inside and out.
Several tenants were moved to hotels while their units were refurbished.
Muoto has vigorously defended against the lawsuit. He characterized Strategic Actions for a Just Economy as an ideologically driven interest group. He denied that pressure to deliver promised investor returns caused the firm to short-change maintenance.
“In 2020 we did very little in terms of rehabbing,” he said. “Now, maintenance we did. But that was particularly challenging during COVID when tenants didn’t want us to come in and maintenance techs didn’t necessarily want to go inside. But we continued to do critical maintenance.”
Muoto said the public criticism has made it harder for him to raise development funds.
Investors grow leery “because of things that David Goldstein wants to sensationalize and what Grant Riley wants to profit from,” he said.
Muoto points to SoLa’s record of making housing available for poor people who hold Section 8 federal rental subsidies, resulting in a decrease in the average income of SoLa tenants. Resistance to subsidized tenants has been a chronic obstacle to finding suitable homes for poor and homeless people.
About half the 650 new leases SoLa has signed hold Section 8 vouchers, Lusk said.
SoLa’s critics contend that the company is selectively rehabbing units after pressuring tenants to leave so that it can raise rents beyond the 3% or 4% increases allowed under the rent stabilization ordinance. Section 8 rents, based on federal guidelines, can be much higher than long-term tenants in rent-controlled buildings pay.
Muoto denied that SoLa pressures, or pays, tenants to leave. The Los Angeles Housing Department, which requires landlords to file reports when they pay tenants to vacate, has no record that SoLa has used that practice.
But Housing Department records obtained by The Times through public records requests show a pattern of aggressive rent increases by SoLa. In 155 buildings subject to rent control, rents for about a third of units have been increased more than the annual limit — allowable only when a tenant vacates — and those increases in many cases were more than 50%.
SoLa said the Housing Department data were grossly inaccurate, but a check of one building confirmed that six of 16 units has been raised between 57% and 92% after tenants left. All those tenants left voluntarily with unpaid rent up to $10,000 that SoLa did not collect, Lusk said.
For all its controversy, support for SoLa has not wavered. In February, it announced a $50 million commitment from the California State Teachers’ Retirement System to its latest enterprise, the Black Impact Fund that has so far raised $270 million from investors including PayPal Holdings, Adirondack Capital and the Skoll Foundation. The money will fund another 3,500 units, Lusk said.
“SoLa’s model has demonstrated that a high-caliber operator with a disciplined investing approach, combined with intentional social impacts, can deliver returns that benefit investors and community members alike,” Julie Donegan, a portfolio manager for CalSTRS’ real estate team, said in announcing the decision.
The Black Impact fund will continue SoLa’s shift to new construction, Muoto said. About 90% of it will go into new affordable housing in South LA.
Muoto said the controversy has caused him to stop buying older buildings, but SoLa has no plan to divest its aging housing portfolio.
Muoto recoiled at a critic’s suggestion that the 100-year-old building on Washington Boulevard wasn’t worth saving.
“We’re not going to take away naturally occurring affordable housing regardless of what Grant Riley wants us to do,” he said.©2022 Los Angeles Times. Visit at latimes.com. Distributed by Tribune Content Agency, LLC.