Minneapolis landlords unload apartments amid multiple lawsuits

At one point, Stephen Frenz and Spiros Zorbalas owned more than 1,200 apartments in Minneapolis. Now they're trying to sell every single one.

The flurry of sales in recent weeks — as many as 45 buildings worth tens of millions of dollars — comes amid multiple lawsuits against the business partners who own The Apartment Shop.

Frenz and Zorbalas are being sued by all their tenants in one of the largest class-action lawsuits in the United States against a private landlord. Mortgage lenders are going after Frenz and seized control of 17 of his properties.

On Tuesday, the city of Minneapolis goes back to court in an attempt to revoke all of Frenz's rental licenses and ban him from renting property.

The legal actions center on two major claims. The first is that Frenz and Zorbalas didn't properly maintain their buildings. Tenants report persistent pest infestations, little or no heat in the winter, pervasive mold, broken water heaters and appliances and more. Those complaints are echoed in numerous code violations from city inspectors.

The second claim is that Frenz's rental licenses are fraudulent because he hid his financial partnership with Zorbalas, who was banned from owning rental property in Minneapolis in 2010, from city regulators.

Zorbalas is scheduled to testify Tuesday remotely from his home in Florida in what's expected to be the final day of hearings to revoke Frenz's licenses. After that, the administrative hearing officer has 30 days to submit a recommendation to the City Council for final review.

In her opening remarks, Minneapolis assistant city attorney Lindsey Middlecamp called Frenz and Zorbalas' business partnership an "unprecedented and elaborate fraud" and argued they are unfit to be landlords in Minneapolis.

The relationship between Frenz and Zorbalas began in 2012, after Zorbalas had exhausted all of his legal options in appealing the revocation of his licenses.

He had two licenses revoked for unpermitted work; in Minneapolis, when a landlord has two licenses revoked, they become ineligible to hold a rental license for five years.

Zorbalas appealed the revocations all the way to the U.S. Supreme Court, which declined to hear his case.

With the revocations upheld, the city of Minneapolis was faced with a new big problem: what to do with the hundreds of tenants who lived in Zorbalas' now-unlicensed apartments.

Enter Stephen Frenz. Frenz said he was looking to expand his portfolio and could buy all of Zorbalas' buildings with funds from a secret investor.

Frenz had a good track record as a landlord at that point, so his announcement that he could take over Zorbalas' properties was hailed as a best-case scenario. Zorbalas would be out of the picture, and the city wouldn't have to vacate his properties and displace hundreds of tenants.

The deal, however, didn't happen that way.

Instead, Frenz and Zorbalas got together and merged their real estate portfolios under two main shell corporations based in Delaware. Zorbalas and his wife were given the lion's share — 80 percent — while Frenz and his wife got the remaining 20 percent.

Frenz's management company, The Apartment Shop, was then hired to manage the properties.

The city argues Zorbalas never really relinquished control over their 60-plus properties.

Frenz said in court he had day-to-day management control. He also said he wasn't able to write business checks for more than $1,000 without Zorbalas' approval. Frenz also testified that Zorbalas could be a difficult person to work with, and that, "he doesn't understand why you want to spend money on things ... but they eventually get done."

In the years after Frenz and Zorbalas became business partners, their properties racked up dozens of code violations. Frenz was sued by the tenants of one building and then another, which led to the current class-action suit.

That suit includes everyone who lives or has lived in one of their 63 buildings from November 2012 to today. The tenants' lawyers, led by Michael Cockson at Faegre Baker Daniels, are asking that Frenz and Zorbalas return all the rent money they collected in that time. That would reach into the tens of millions of dollars, according to Frenz.

Minneapolis didn't know about Zorbalas' continued financial interest because it's notoriously difficult to find out who's behind a corporation. For the city's part, they asked Frenz explicitly if Zorbalas had a financial stake in any of these buildings. Frenz said no.

And this is one of the larger problems the case raises: Minneapolis, or any city really, can't always know who controls the rental buildings it's supposed to regulate.

During revocation hearings last week, Middlecamp said Minneapolis depends on honesty from its license holders because it doesn't have the resources to pick apart every rental property.

Frenz's lawyer, Doug Turner, said that Zorbalas would testify that he has a financial stake in even more buildings throughout the city. His point is that the city is inconsistently enforcing the law in coming after Frenz. But the fact that Zorbalas' reach may go further than his business partnership with Frenz further underscores how hard it is for a city to rid itself of a problem landlord.

In the meantime, Frenz is selling his properties as quickly as he can. He testified in court that he had sold all of his buildings that weren't in foreclosure proceedings, which could be as many as 45 buildings. Tax filings show Frenz has sold at least 19 buildings for more than $48 million. The details of those transactions are still coming out.

While Frenz's lawyer said in court that he won't seek new rental licenses, the tenants' lawyers worry Frenz might not be getting out of the rental game. They filed a new lawsuit last week to reverse the recent sales claiming they're fraudulent.

Tax filings show the buyers of these new buildings are corporations that were founded days before the sales. Moreover, all of these buildings were sold through a "contract for deed," which means Frenz is financing the sale himself and will collect monthly payments directly from the new owners.

Frenz testified in court that he sold some of these properties to family members and employees.

Cockson, the tenants lawyer, says that raises the concern that Frenz is trying to maintain a financial interest in these properties, while also unloading his legal responsibility for them.

Frenz's rental licenses expired on Aug. 31, and new licenses have not been issued for his buildings. Eventually, someone will have to get the buildings up to code and get a valid rental license.

The city does not want to vacate dozens of properties and make hundreds of tenants move, especially in a tight rental market. At the same time, the question of safety remains. A brick facade fell off one of Frenz's buildings recently, sending one person to the hospital.

As Frenz, Zorbalas, the city, and the courts work it out, tenants continue paying the rent and asking for repairs.