In unprecedented move, Minneapolis seeks an administrator for 23 apartment buildings housing 1,200 tenants

The city of Minneapolis on Friday asked a court for authority to seize control of 23 apartment buildings in south Minneapolis that are illegally renting to tenants, in what could be its most aggressive intervention ever in the operation of residential rental property.

An estimated 1,200 tenants, many of them with low incomes, could be affected by the city's tenant remedies action, which seeks to have a Hennepin County housing court referee appoint an administrator to run the properties, recently sold under contracts for deed by embattled landlord Stephen Frenz.

"If it was not clear before, it should be clear now that the city will enforce its ordinances and look out for the rights of tenants," Minneapolis City Attorney Susan Segal said. Had the city not filed suit, its alternative would have been to shut down the buildings and evict the tenants.

Frenz bought the properties from Spiros Zorbalas in 2012 after Zorbalas was banned from renting in the city for five years. But in 2016, it was discovered that Zorbalas and Frenz shared a financial interest in the properties. The revelation led the City Council on Dec. 8 to revoke all 60 of Frenz's rental licenses for five years.

Seeing the revocation coming, Frenz sold off most of the properties in late summer on contracts for deed. The city refused to grant the new owners rental licenses because under such contracts, Frenz and Zorbalas would reassume ownership if the buyer defaulted on payments.

Nonetheless, many of the new owners were collecting rents anyway, putting tenants in a quandary about whether to face eviction or pay rents to landlords who lacked authority to collect them.

"What's historic here is the city is realizing that tenant remedies actions [are] a tool they ought to be using in addition to inspections, fines, license revocations and condemnations," said Larry McDonough, director of pro bono work at the Dorsey & Whitney law firm and an expert on housing law who is not involved this case.

"It's a big deal" that the city is back doing tenant remedies actions, he said, and "it's a big deal because of the scale on which they are doing it."

Segal said she expected that a court hearing on the city's suit will be scheduled for early January, when the city attorney's office will make its case for the appointment of an administrator.

The city's request has two recent precedents. On Monday, in response to tenants represented by pro bono attorneys from Faegre Baker Daniels, referee Mark Labine appointed an administrator for 42 properties owned by Mahmood Khan, whose rental licenses were revoked in 2015. Khan recently exhausted all his appeals.

On Tuesday, at the request of Faegre attorneys, housing referee JaPaul Harris appointed an administrator for five properties owned by Misco Holdings, which purchased them from Frenz and Zorbalas on contracts for deed. The city had refused to grant Misco a rental license. Harris ordered rents returned to tenants for September through November.

If the housing referee grants the city's request, most of Frenz and Zorbalas' 60 apartment buildings will be under an administrator. Besides the five Misco buildings, a mortgage lender foreclosed on 17 other Frenz properties and had an administrator appointed after discovering Frenz and Zorbalas were partners, in violation of mortgage papers Frenz signed.

Frenz has about 15 other properties; their status is not clear, but the city believes most were properly sold.

Segal said the city has been in discussions with Faegre attorney Michael Cockson, who has been in continuous litigation against Frenz since January 2016. Cockson said Friday he anticipated filing suit on behalf of tenants in the 23 buildings to get recent rents rebated. He's also overseeing a class-action lawsuit against Frenz and Zorbalas.

"I am very happy the city has joined the fray in vindicating the rights of tenants," Cockson said. "I can only bring a lawsuit on behalf of individual tenants whereas the city can sue in its own name."

Segal indicated that it would recommend to a housing referee the appointment of Lighthouse Management Group, the same administrator named by both Labine and Harris. It will have authority to collect rents, provide services and make repairs as needed.

The administrator would remain until the properties have a qualified owner, Segal said. That would occur if the buildings were sold, but not on contracts for deed.

Neither Frenz or Zorbalas returned phone calls Friday.

The city has been under pressure for some time to file a tenant remedies action against the Frenz and Zorbalas properties. Segal said that because the City Council serves "in a quasi-judicial capacity" regarding its power to revoke rental licenses, her office did not file suit earlier. "So we are only initiating this action now," she said.

Roberto de la Riva, an organizer with Renters United, which has been mobilizing tenants at Frenz properties to press for repairs, said Friday that "it's about time."

"We need the city to defend tenants and stand with tenants," he said. "There is imbalance of power between landlords and tenants in the city and this is one way that moves toward a more just city for everyone."

Randy Furst • 612-673-4224