Embattled landlord Spiros Zorbalas had a secret operating agreement with a business partner that appeared to discourage renovations and repairs in his 60 low-income Minneapolis apartment buildings, despite a City Council ban that prohibited him from owning rental property anywhere in the city.
Newly revealed public records show the terms of an agreement between Zorbalas and Stephen Frenz, who purportedly bought the properties from Zorbalas in 2012 after the council instituted the five-year ban. The documents show that Zorbalas maintained tight control of the properties, even after the alleged sale.
Minneapolis’ regulatory division is accusing Frenz of concealing Zorbalas’ role in the apartment buildings, and the city is now seeking to ban Frenz from holding rental licenses for five years.
In arguments made at an administrative hearing that was completed on Monday, Frenz and Zorbalas have maintained that Frenz had full control of the apartment buildings through the Apartment Shop, a business that Frenz owned.
But documents released in the license revocation case suggest that Frenz reported to Zorbalas, who appears to have exerted ultimate authority. Frenz originally refused to disclose the operating agreement at the administrative hearing, but eventually turned it over.
The agreement was first divulged in a class-action suit brought against Zorbalas and Frenz by pro-bono attorneys from Faegre Baker Daniels, who have been representing tenants who claim the buildings have been poorly maintained.
The documents show that Alpha-Omega Companies, a Florida corporation, is owned 100 percent by Zorbalas. Alpha-Omega, in turn, owns 100 percent of four other entities, which own 80 percent interest of Equity Residential: the company that bought the 60 plus properties.
Zorbalas “shall be responsible for the custody of all funds and securities belonging to the company,” the agreement stated, including “supervising the operations of the management company,” “proposing annual budgets,” supervising the setting of all rents in conjunction with Frenz, and “supervising unlawful detainer actions” in which renters are evicted.
The document says that if Frenz did not generate a defined profit each year, based on the number of buildings being operated, he could earn as little as $120,000 annually.
If he made the defined profit, he could earn about $1.2 million or more.
In her court order authorizing the class-action suit, Hennepin District Judge Mary Vasaly, indicated that tenants’ attorneys had argued that the financial arrangement between Zorbalas and Frenz was an incentive for Frenz to spend as little as possible on repair and maintenance.
In an affidavit filed Friday, Zorbalas wrote, “I have not been an apartment manager or the person responsible for maintenance and management or involved in the direct management of the apartment buildings subject to this revocation appeal hearing.” He added, “Frenz is the license holder “and has complete 100 percent management control of the Apartment Shop LLC that includes day-to-day management of the properties subject to the revocation consistent with rental appliances in his name.”
But documents filed Monday by Minneapolis Assistant City Attorney Lindsey Middlecamp contradict those claims. They show Zorbalas’ irritation with Frenz when he believed Frenz exceeded his authority.
In a Jan. 21, 2015, e-mail, Zorbalas, who lives in Florida, wrote Frenz, “You are not to write any more checks. That will happen only in FL short of emergencies.”
Zorbalas told Frenz to stop renovations on two of the buildings. “It is too costly,” he wrote.
“You are my operating partner, but I am also the majority owner. Please do not ignore this ... You might not like some things but this is the deal you signed up.” In another e-mail, he wrote Frenz, “You continue to use our funds as if they were solely yours. I will not tolerate it any further.”
Even before Frenz made the announcement that he had bought out Zorbalas, an internal memo written by Zorbalas, on Sept. 11, 2012, suggested that Zorbalas would maintain some controls.
“As you are all aware, Contract Services Group and the Apartment Shop have merged together,” Zorbalas wrote. “Effective immediately, all operations staff and contractors currently working for me will now be directly supervised by Steve Frenz.”
“I will continue to maintain responsibility for all the accounting, financing and HR functions of CSG, including now the Apartment Shop.”
Closing arguments in the Frenz revocation hearing are to be submitted Wednesday. Hearing officer Danielle Mercurio has up to 30 days to issue a decision.
Her findings will be forwarded to the City Council which must vote on whether to bar Frenz from holding rental licenses in Minneapolis for five years.