51-Building D.C. Affordable Housing Property Fails To Sell At Auction

More than 40 real estate investors, brokers, bankers and attorneys gathered Wednesday morning in the basement of the three-story community building of the Meadow Green Courts affordable housing complex in Southeast D.C. to witness the auction of the land on which they stood. 

While the room was full of people interested in seeing the outcome, none were willing to bid for the 435-unit property at a price above its $26M loan. After a tense, 35-minute session, the substitute trustee decided to call it off.

The path forward for the property is now unclear. The owner that defaulted on the loan, E&G Group principal Tom Gallagher, told Bisnow he plans to continue discussions with lender MainStreet Bank and the substitute trustees, Gordon Feinblatt LLC attorneys David Musgrave and Natalie Gibson. The bank and the trustees declined to comment. 

The auctioneer, Stephen Karbelk of Century 21 Commercial New Millennium, said he will no longer be involved with the process now that the property failed to sell at the auction, but he hopes it comes to a positive resolution for the community. 

“There needs to be another path forward to create a financially stable environment,” he said. 

Meadow Green Courts was built in 1941 and has been owned by E&G Group since 1997. The community’s 435 units are spread across 51 three-story buildings on nearly 12 acres near the intersection of Minnesota Avenue Southeast and East Capitol Street.

Its auction began around 11:10 a.m. After several minutes of reading legal disclosures and describing the rules for the auction, Karbelk opened the bidding at $30K per unit — or about $13M in total. Bidder 105, a man standing in the back of the room who declined to share his name, then offered a bid at $35K per unit — $15,225,000 total.

Karbelk then solicited bids at $15.5M, but the room was silent. 

He took a moment to pitch the audience on the property. He said rents have been increasing in D.C.’s apartment market and highlighted the property’s location across the Anacostia River from RFK Stadium, where the District is planning a major redevelopment that officials hope will be anchored by a new home for the NFL's Washington Commanders. 

“So please keep that in mind when you’re thinking about additional numbers, and let’s get this bid up,” he said, adding that the trustees have the right to cancel the auction if they don't like the price. 

Karbelk then announced a five-minute break, during which he spoke to bidders individually while the rest of the room whispered among themselves.

The auctioneer then came back and announced Bidder 105 had increased his bid to $55K per unit — $23.9M — which he said is “still not quite where we need to be, but within striking range.” 

He then solicited higher bids, but no one spoke up. After a brief discussion with Musgrave and Gibson, Karbelk announced the trustees had canceled the auction. 

As people were filing out, a disappointed Karbelk told Bisnow he thought the property would garner higher bids. 

“I perceived it as a really good opportunity,” he said, adding that he thought the property could fetch around $70K per unit. 

He said the lack of bids at that price reflects the uncertainty hanging over the D.C. apartment market, both from federal workforce cuts and D.C.’s tenant-friendly housing policies, which Mayor Muriel Bowser has proposed to partially roll back this year.

“Uncertainty is not good,” Karbelk said. 

Meadow Green Courts was one of many properties that saw soaring levels of unpaid rent from tenants who were allowed to remain in their units because of D.C.'s altered eviction policies during the pandemic. E&G's Gallagher told Bisnow last month that its tenants racked up more than $6M in rent delinquencies. 

Gallagher, who attended Wednesday’s auction along with two of the company’s other principals, said he was disappointed in the attendance. He attributed the lack of higher bids to the rent delinquency “crisis” and the local policy environment being unfriendly to landlords. 

“You’re seeing mostly bottom-feeders,” Gallagher said. “The people I would have hoped would be there today were not there. The substantial local developers know this is a bad time to be investing in the District.”

The firm filed plans in 2019 for a 900-unit redevelopment of the property, but it didn’t receive the public funding necessary to move forward.

The millions in lost income from rent delinquencies made it difficult for E&G to maintain the property and pay its debt costs, and Gallagher said the firm’s four principals paid $4M out of their own pockets to hold on to the property. But eventually, they ran out of money to plug the gaps, and MainStreet Bank filed a notice of foreclosure on Feb. 4. 

The balance on the loan as of that date was $26.3M, according to the filing. 

The lender appointed the substitute trustees on Feb. 7, and it tapped Karbelk and David Lowry of Century 21 Commercial New Millennium to market the property ahead of Wednesday’s auction. 

Karbelk told Bisnow last month he expected bidders would be attracted to the property because it presents an opportunity for improvement: If they come in at a relatively low basis and invest in upgrades and improve the rent collection problem, they could make a profit. 

The property’s rents start at $1,223 for a one-bedroom unit and reach $1,729 for a three-bedroom, according to a flyer handed out at the auction. The maximum income for a unit with a single occupant is $52,920, while the maximum income for a family of four is $75,600.

Karbelk said he spoke to a range of investors, some who wanted to preserve the property as affordable housing and some who wanted to redevelop it and increase rents. 

The units at Meadow Green Courts have remained affordable due to income-restriction covenants on the property, but the foreclosure process is expected to remove those. A new owner could bring in new subsidies and replace the income restrictions, but that isn’t guaranteed.