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A Berkeley family’s $1.1 million city renovation nightmare

San Francisco Chronicle 2/27/2022 By Lauren Hepler

It didn’t take long for Leonard Powell to see how a home makeover can spiral out of control.

What started as a five-month construction job at the 79-year-old’s Berkeley home dragged on for more than a year. Budgets were blown on stainless steel appliances, granite countertops and a new front door painted a trendy shade of teal. Then came the permitting hassles to convert the home, where he and his wife, now deceased, raised six kids, back into a duplex.

Except Powell never wanted to gut his home of nearly five decades; he felt powerless as a confusing web of officials forced him to make the updates.

“It’s ludicrous,” Powell said. “They’re trying to steal my house.”

From San Francisco to San Jose, Sacramento to Riverside, lawyers who have fought similar cases say California has seen an increase in little-known “health and safety receiverships.” This legal process allows cities to petition courts to install “receivers,” who then take control of properties that local governments decide are problematic. The homeowner is not only billed for all improvement costs, but also has to pay receivers’ fees and legal costs that in Powell’s case total hundreds of thousands of dollars.

It all started for Powell when the city ordered him to fix code violations such as broken windows and unsafe wiring after police reported “substandard conditions” while serving a search warrant. Then a court appointed a receiver at $250-an-hour to manage the work that left Powell with $683,276 in loans and on the brink of losing his home.

As land values soar in fast-gentrifying neighborhoods like Powell’s corner of the Lorin district, near the Ashby BART Station, state lawmakers have quietly made the receivership process easier, allowing the small industry to sell cities a cheap way to address properties perceived as a nuisance. The Army vet and former postal worker is one of few Black homeowners left who paid off his house in the area once cordoned off by racist redlining maps — that is, until officials pushed him into perilous debt with the ever-expanding renovation.

“They’re basically flipping these houses and making money,” said Joshua House, a San Leandro native and attorney with libertarian public interest law firm the Institute for Justice, who has advised on Powell’s case. “Berkeley brags about being anti-gentrification, and yet this is sort of forced gentrification.”

Losing control

It was July 2014 when Berkeley police arrived at Powell’s house on Harmon Street to serve a search warrant and arrested “a guest” at the home, court records show. Police then searched the property and discovered “20 pieces of suspected crack cocaine,” a scale and “other indicia of an intent to distribute.”

Powell said his kids and grandkids frequently hosted guests, but he prohibited drugs in the house. His attorneys say no criminal charges appear to have been filed.

Still, the incident drew the city’s attention to the property, which Powell said he’d struggled to keep up after a family tragedy and his retirement in 2001.

“He didn’t actually live here, nor was he pushing drugs out of this house,” Powell said of the guest. “But that’s what set it off.”

Health and safety receiverships, which were added to California’s building codes in 1988, are often advertised for cases where tenants languish under slumlords, squatters set fire to foreclosed homes or other extreme situations. But then there are the unknown number of cases involving homeowners like Powell, who still live in their homes, have paid off mortgages and are accused of more subjective mental health issues, hoarding or petty drug charges.

“They just go ‘drug house!’” House said. “And the judge is like, ‘No one wants to live near a drug house,’ so they put it in receivership.”

Two months after the police were called to Powell’s home, court records show that then-Berkeley City Attorney Laura McKinney asked code enforcement officials about follow-up actions to label Powell’s property a nuisance: “This relates to a drug house,” she wrote. McKinney declined to answer questions about Powell’s case.

A formal city letter ordering Powell to fix 33 code violations arrived in October 2014. Inspectors cited minor offenses such as missing siding and a loose toilet, plus bigger issues including inadequate heating and venting.

It’s not that Powell didn’t care about the house. He and his wife, Myrtle, spent years turning the old two-story duplex on a roomy lot into a five-bedroom, two-bath home fit for six kids. They painted the exterior battleship gray and hired a high school friend of Powell’s to replace knob-and-tube wiring. Powell played Mozart to nurture the junipers out front.

Things went downhill at the 1,965-square-foot house, Powell said, when Myrtle died in 1997 after suffering a heart attack at home. Powell struggled to move on and settle into retirement on his $2,500-a-month pension — a common dilemma for “cash poor” longtime California homeowners, whose property values have soared even as their incomes stagnate.

After the notice from the city, Powell contacted the city about a senior loan programs and showed the property for repair estimates, but he had not obtained permits for the work. For the city, the process was moving too slowly. Powell had never heard of a receivership until another letter five months later informed him that he’d be participating in one.

“The violations are so extensive and of such a nature that the health and safety of residents or the public is substantially endangered,” city attorneys argued in a legal filing asking a judge to appoint a receiver “to take full and complete control of the property.”

So began the seven-year saga of Powell’s $100,000 home renovation. Which became a $225,000 renovation. Then $475,000, then $700,000. With a judge poised to rule this spring on who should pay hundreds of thousands in administrative and legal fees racked up contesting the process, it’s a quagmire that court records show has now cost more than $1.1 million. Appraisers have said the home is worth up to $1.3 million.

“I think they were using my house as kind of an ATM machine,” Powell said. “You know, the guy is Black, he’s old, we’re the adults in the room.”

The city of Berkeley did not respond to requests for comment. In one 2019 report to the City Council, City Manager Dee Williams-Ridley wrote that, “Unexpected costs during receivership created a challenging situation for all parties involved, and the city made good faith efforts to assist Mr. Powell with staying in his home.”

The receiver appointed in Powell’s case, Bay Area Receivership Group President Gerard F. Keena II, declined to answer specific questions about the ongoing case. He said that receivers are bound by strict city permitting requirements and must get court approval for spending.

“These are very difficult cases,” said Keena, who has also worked on receivership cases in San Francisco, San Jose and other nearby cities. “There are sometimes some unintended consequences.”

Whack-a-mole

Health and safety receiverships started to get more common in California after a 2005 court ruling that cities can pass related fees onto homeowners’ estates. The change offered a new incentive for cities to use the service offered by a handful of specialty consultants. It also added the potential for the final bill of homeowners, like Powell, to quickly multiply.

In recent years, state lawmakers have moved to expedite the process and give receivers more power, including demolishing buildings. That’s what happened to Sacramento homeowner Wanda Clark, who was cited for code violations related to an unfinished addition on her property and saw her home demolished in a compromise to get out of a court-ordered receivership.

“This is the most sad thing I’ve been through in my life,” Clark told the Sacramento Bee in January. “I’m 71 years old, and now I’m homeless.”

Those working in the field say no state agency tracks the number of health and safety receiverships happening in California, but that up to 100 such cases now start statewide each year. Public records show that dozens of cases have been filed in recent years in the hot spot of Sacramento, plus San Francisco, San Jose, Oakland, Richmond, Vallejo and other Bay Area cities.

Different types of receivers can be appointed to oversee failing businesses. In other areas, home receiverships have also been lauded as a cost-effective way to turn abandoned houses into entry-level homes in depressed areas. But critics say the same logic often doesn’t apply to the California housing market, where scarcity and unaffordability loom larger.

The problem, say advocates lobbying cities including Berkeley to limit the practice, is that impacted homeowners may be shut out of the market entirely if they lose their homes. Officials also have wide discretion on which properties to target in a state famous for construction red tape and DIY home renovations.

“As long as those incentives exist,” House said, “it’s going to be sort of like whack-a-mole.”

The red line

In Berkeley and beyond, today’s questions about uneven code enforcement follow a long history of housing segregation and ongoing concerns about discrimination in home lending, appraisals and displacement.

Powell’s house was built in 1910, six years before Berkeley became the first American city to enact single-family zoning. The move was designed to ward off perceived threats to quality of life and property values, but the Berkeley Historical Society notes that it also “reinforced segregation ... keeping virtually all Asian and Black residents” in South and West Berkeley.

By the time Powell was born in Atlanta in 1942, World War II was transforming the Bay Area. Thousands of Black workers, many from the South — including Powell’s uncles and father — moved here seeking stable jobs. Around 8,000 Black residents moved to Berkeley in the 1940s, East Bay for Everyone housing activist Darrell Owens found in an analysis of gentrification in Berkeley.

“Black newcomers faced endless hostilities,” Owens wrote, from deed restrictions barring non-white property ownership to higher-interest loans.

Powell graduated from Oakland Tech in 1959, then spent six years in the Army, mostly intercepting Soviet communications. By the time he got back to the East Bay, met Myrtle in college and got married in 1970, putting down roots proved hard to do: “Nobody wanted to rent to a family,” Powell said.

Stability seemed within reach when the couple heard about the house on Harmon Street from a firm focused on “distressed properties.” It was painted pastel pink inside and out — “hippie youngsters had made a deal with the landlord,” Powell recalled — but the family could finance it for $200 a month to start.

In February 1974, the Powells moved into the house that the bank said was worth around $55,000.

“We were comfortable,” Powell said. “It was a home.”

Many of the neighbors were other Black families, which wasn’t a coincidence.

On bank lending maps from the 1930s, the neighborhood was shaded yellow and red, denoting high-risk areas for home loans, due to “Infiltration of Orientals and some Negroes,” according to archives at the University of Richmond.

A long wait

By the time Powell’s case started winding through the courts — decades after civil rights laws barred some explicit forms of housing discrimination, but amid growing fears of displacement — his home was worth around $800,000. It was a windfall he planned to pass down to his 26-year-old granddaughter.

Before the receiver was officially appointed in his case in 2017, Powell asked the judge to halt the process. He’d signed for the $100,000 loan from the city, submitted pictures of repaired windows, and told the court he “simply cannot afford” a receiver.

The judge disagreed, saying a “reasonable time” had already passed, and appointed Keena, a Berkeley resident and former corporate restructuring executive. In May 2017, the new receiver filed an estimate projecting “the overall budget to range from $202,500 to $225,000.”

Then came the onslaught. By November, asbestos, lead and foundation issues were discovered, along with the unpermitted conversion from a duplex. Keena hired city-approved building contractor Habitat for Humanity to do the work and warned the court that “up to an additional $435,000 in bridge financing may be required.”

In June 2018, a construction estimate including “all of the city and state building department specifications” — Energy Star appliances, solid-wood cabinetry, high-end plumbing fixtures, $10,000 in new permits and so on — pushed the construction budget to around $675,000. That didn’t count $184,947 paid to Keena’s firm in 2019, or tens of thousands of dollars in interest and fees that would continue to balloon.

With the estate bleeding money, Keena recommended that Powell consider selling the property as is, or a high-interest option like a “jumbo reverse mortgage.” Powell took out a $583,276 mortgage, plus the city’s $100,000 loan.

“This is the conclusion of the conspiracy to rob me of my home; a conspiracy that has included forgery, months of attrition and a patina of legality,” Powell wrote in one of several letters objecting to the process. He called a letter from Keena “an invitation to me to stupidly collude in the robbery.”

Despite an initial budget to pay for Powell to stay in a hotel during the renovation, he said he ended up sleeping on his son’s West Oakland basement floor for several months. Watching the work from a distance was painful.

“I would come by and start crying,” he said. “They tore out my junipers. I mean, what the hey?”

Who pays?

As court appeals dragged on, Powell moved back into the house with his granddaughter and her mother, whose boxes of dialysis supplies line the new kitchen and entryway. The upstairs unit has been rented off and on, providing much-needed income to pay the new mortgage, but Powell still worries he’ll lose the house if he’s stuck with the full receivership bill. His sons have also taken out risky loans to try to keep the house.

This spring, seven years after the city first petitioned the court for a receiver, a judge will decide a question with big implications for the family and others in similar situations: Should Powell have to pay for everything, or should other parties like the receiver or the city also chip in?

In hundreds of pages of legal filings, the city has argued that state law shields it from any debt related to receivership cases. Keena contends that the city should pay him more than $291,000 in additional fees if Powell can’t, because the case has dragged on and the city’s own building requirements “went well beyond just the health and safety violations.”

Attorneys from global law firm Gibson Dunn took on Powell’s case pro bono last year after a partner heard about it from a neighborhood advocacy group. They argued in a December court filing that, “the Receiver mismanaged the estate and is personally liable for the consequences.” The city should also bear some responsibility, Powell’s attorneys wrote, after it “egregiously overstepped its enforcement role.”

All that leaves Powell in limbo a little bit longer, counting down to his 80th birthday in March while he watches “Deep Space Nine” reruns with his granddaughter. Some days he flips through old family photos of the house that he struggles to recognize as his own.

“This kind of thing,” Powell said, “is not supposed to happen in the 21st century.”

Lauren Hepler is a San Francisco Chronicle staff writer. Email: lauren.hepler@sfchronicle.com Twitter: @LAHepler

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