.West Oakland Councilmember Involved in House-Flipping Scheme

Public records show that city Councilmember Lynette Gibson McElhaney, who represents a district impacted by gentrification, used her social justice nonprofit to finance for-profit house-flipping deals in Oakland.

During the 2012 campaign for Oakland’s District Three council seat, Lynette Gibson McElhaney said affordable housing was one of her top priorities, and that if elected, she would work to prevent gentrification and displacement of low-income residents. Since 1996, she has run a nonprofit housing assistance organization based in Richmond, and during the 2012 campaign, she said her job made her well-qualified to be a city councilmember.

At a candidate forum in July 2012, Gibson McElhaney even issued a warning about for-profit speculators who seek to profit from Oakland’s volatile housing market. In response to a question about how to maintain affordable housing, she said it was important to make sure “we don’t allow carpetbaggers to come into the community. We have lots of affordable inventory right now created by an economic crisis that we didn’t have anything to do with. We’ve got 30 percent of our units vacant and we’ve got investors who are coming in here and swallowing these up.”

And since taking office, Gibson McElhaney has been outspoken about Oakland’s affordable housing needs. “I firmly believe that the city needs to commit funding to affordable housing, to infrastructure development, and to other strategies to address the serious displacement problem,” Gibson McElhaney said during a July 15 city council meeting, referring to the displacement of longtime residents who can no longer afford to live in the city. At the same meeting, Gibson McElhaney, who represents downtown and West Oakland on the council, complained again about the impacts that speculators have had on Oakland’s housing situation: “Many of the things that have us in pain about displacement, about rising rents, those things are happening now because there’s uncertainty in the marketplace, and because there’s wildcat speculation.”

Yet despite Gibson McElhaney’s rhetoric on gentrification and displacement, our months-long investigation reveals that she used her nonprofit housing assistance corporation to take part in some of the same “wildcat speculation” that she has condemned.

Records show that beginning in March 2013, just two months after she was sworn in as an Oakland councilmember, Gibson McElhaney used her nonprofit, Richmond Neighborhood Housing Services, to lend at least $225,000 to an investor engaged in house-flipping transactions in Oakland.

Records and interviews also show that the loans, which earned Richmond Neighborhood Housing Services considerable interest and fees, had nothing to do with creating affordable housing for Oakland residents. Rather, the flipped properties ended up in the hands of landlords and homeowners who bought them at market rates. Furthermore, in at least one of the deals, Gibson McElhaney’s sister, Andrea Gibson Nobles, invested alongside Richmond Neighborhood Housing Services and made money off the transaction.

Gibson McElhaney’s dealings raise numerous legal and ethical questions, including whether Richmond Neighborhood Housing Services has violated its tax-exempt status by engaging in for-profit activities, and whether deals that included her sister violated the organization’s conflict-of-interest rules.

Gibson McElhaney’s house-flipping deals also contradict her claims that she’s concerned about low-income Oakland residents being squeezed out of the housing market. The deals occurred at a time when soaring housing prices and rents have caused a crisis of affordability for many residents — a crisis made worse by shadowy investors, including those that Gibson McElhaney has done business with.

In a letter responding to our findings, Gibson McElhaney didn’t dispute any of the facts presented in this report, although she maintains that she has done nothing wrong. In a separate letter, the president of Richmond Neighborhood Housing Services’ board of directors, Maxine Reynolds, said the board “has no knowledge of any activities or behavior on the part of the Executive Director Lynette Gibson McElhaney that would be considered improper or illegal.”

Lynette Gibson McElhaney’s involvement in house-flipping deals appears to have started in March 2013 when, through her nonprofit, she lent $75,000 to a secretive company named Nakatoma Acquisitions, LLC. Nakatoma Acquisitions then used the money to purchase a duplex with dual addresses: 5800 Ayala Avenue and 592 Martin Street (the house sits on the corner of Ayala and Martin, and for the purposes of this report, we will refer to it as the Ayala house). The Ayala house is just a few blocks from the Rockridge BART Station in Oakland. According to public records, Nakatoma Acquisitions bought the Ayala house for $478,000 from its previous owners, and then turned around and listed the house for sale at $849,000 in October 2013.

The Ayala house sold in January 2014 for $888,000 to a Berkeley couple. We could find no evidence that the Berkeley couple plans to rent out the two-unit house as an affordable dwelling. The couple didn’t respond to repeated phone calls seeking comment for this report. During a recent visit, both units in the Ayala house appeared to be uninhabited.

Richmond Neighborhood Housing Services, which recently changed its name to East Bay Neighborhood Housing Services, made a lot of money by helping Nakatoma Acquisitions flip the Ayala house. According to escrow documents we obtained, and records on file at the Alameda County Recorder’s Office, Gibson McElhaney’s nonprofit was paid a $35,000 “exit fee” along with $6,550 in interest when the property sold.

Gibson McElhaney told us in an email that her organization has earned a total of $49,000 on all of the loans it has made to Nakatoma Acquisitions to date, but she didn’t break down earnings for each different loan.

Gibson McElhaney’s sister, Andrea Gibson Nobles, also profited from the deal. According to escrow documents and public records, Gibson Nobles made a separate loan of $37,500 to Nakatoma Acquisitions as part of the financial package that allowed the company to purchase or renovate the Ayala house. When the duplex sold, Gibson Nobles got back the $37,5000 she had loaned to Nakatoma plus $7,191 in interest. Andrea Gibson Nobles did not respond to multiple phone calls and emails seeking comment for this report.

In April 2013, Richmond Neighborhood Housing Services made another $75,000 loan to Nakatoma Acquisitions to finance the purchase of a residential property on Carberry Avenue in the Idora Park neighborhood of North Oakland, not far from the Ayala house. The Carberry house — a small storybook structure built in the 1930s — had been owned by an elderly couple. When the couple died in 2013, their children quickly sold it to Nakatoma Acquisitions for $565,000 — a significant discount in a hot Oakland location, in which the average home price has hit $700,000. Nakatoma Acquisitions replaced the sewer lateral, added new coats of paint, put a new roof on, and then quickly put the house up for sale, asking $699,000. It sold to a young couple in August for $720,000, allowing Nakatoma Acquisitions to earn $155,000 on the flip.

We spoke with the new owners of the house — two lawyers with a newborn baby. The couple, whom the Express has agreed to not identify, said the property wasn’t marketed as an affordable home under any kind of government or nonprofit program. They had never heard of Richmond Neighborhood Housing Services and dealt only with Nakatoma Acquisitions through a real estate agent.

“You could see they were asking a lot more for it than they had done in terms of work,” said one of the new owners about Nakatoma Acquisitions.

The most recent deal we found between Richmond Neighborhood Housing Services and Nakatoma Acquisitions was a September 2013 loan for $75,000 secured by a mortgage on a large house located at 2559 Oliver Avenue, a few blocks from the Oakland Zoo, just below Interstate 580. According to Alameda County records, Sun West Mortgage Company foreclosed on the house in 2012. Nakatoma Acquisitions then bought it from Sun West for $261,0000 in July 2013. The house is still owned by Nakatoma Acquisitions, and today it sits vacant. On a recent visit, one of the glass panes next to the handle on the front door had been punched out, indicating that someone may have recently broken in. Trash crowded the entranceway.

Public records show that Nakatoma Acquisitions, LLC was incorporated in 2011. Its principal owners and managers are Richard Reese and Ruben Gressett. Reese is a long-time real estate investor in the East Bay with a checkered past. Gressett owns a termite extermination company, and it appears that his involvement in Nakatoma Acquisitions was mostly to provide money through his family’s trust to finance property purchases. Gressett’s company also appears to have done pest inspection work on properties owned by Nakatoma Acquisitions.

Seeking answers, we attempted to contact Reese, but were met with silence. For years he has operated out of a Castro Valley P.O. Box in the UPS Store on Redwood Road. From public records, including court documents, we obtained multiple email addresses and telephone numbers used by Reese over the years, and attempted to contact him, but got no response. We then called the attorney listed as the agent of service for Nakatoma Acquisitions, Steven Miyake.

Miyake told us he is Reese’s attorney. We asked about Nakatoma Acquisitions, but Miyake said he couldn’t provide us with any information about the company. We asked Miyake what sort of business Nakatoma Acquisitions is, and whether it was formed to develop affordable housing. “I’m only familiar with the for-profit aspect of it,” he said.

We asked if he knew anything about the company’s dealings with Richmond Neighborhood Housing Services or if he knew Gibson McElhaney. “No, nothing,” he answered. We asked him where Reese was, and if he would pass on our contact information along with a request that Reese call us.

“I’ll ask him and get back to you Friday,” Miyake told us weeks ago, “but if you don’t hear from me, it’s because my client doesn’t want to talk to you.”

We heard nothing after that.

Public records and interviews paint a picture of Richard Reese as a hard-driving real estate investor who has burned bridges with former clients and colleagues while seeking a fortune in Oakland property. Over the years, he has been sued multiple times and had a restraining order lodged against him, court records show. He also has brought numerous civil actions against others.

In 2002, Reese and his then-business partner David Shepard incorporated a limited liability company called Banana Bug that they used to buy and sell real estate in the Bay Area. But Banana Bug, LLC apparently didn’t make out well during the real estate boom of the 2000s, and the company ceased operations when the market blew up six years ago. The California Franchise Tax Board suspended Banana Bug’s license to do business after it failed to file a 2008 tax return.

Reese and Shepard’s relationship had already disintegrated by then. As their real estate business was collapsing, Shepard sought a restraining order in Contra Costa County against Reese, alleging that Reese had become “unstable” and had made threats of violence.

“Mr. Reese and I have done real estate dealings together and now that monies have ran out he has gone crazy,” Shepard wrote in one court filing in 2006. “Mr. Reese has left several messages that he intends to do bodily harm to myself and my family.”

In at least one deal, Reese and Shepard were accused of defrauding a homeowner and stealing her house. “They were pretty nasty,” said Matthew Webb, a Castro Valley attorney who spoke with us about Richard Reese.

Sometime in 2003, Reese and Shepard were on the lookout for distressed homeowners who had recently been hit with notices of default on their mortgages, according to court documents. That’s how they found Julie Hess. Hess had inherited her father’s house at 833 Santa Ray Avenue in the Crocker Highlands neighborhood of Oakland in 1993. In 1994, Hess took out a home equity loan secured against the house. Things were going okay until 2002, but then Hess ran low on cash and one of her lenders recorded a notice of default, threatening to possibly foreclose unless she caught up on her mortgage payments. According to court documents, Reese and Shepard approached Hess with an offer to help her save her family home by refinancing her mortgage in order to secure lower monthly payments.

“In the course of the refi[nance], they put her in a loan that was guaranteed to fail,” Webb told us. “The loan they procured for her had a sixty-day balloon period. When the loan came due they pounced and initiated foreclosure proceedings.”

At that point, Hess hired Webb, and a long, messy legal battle ensued. Hess filed a lawsuit in Alameda County Superior Court alleging that Reese had promised to save her home with a 5.5-percent refinance loan, but instead Reese placed her in multiple loans, one of which was owed to a relative of David Shepard. Reese allegedly told Hess the loan was for $30,000, when, in fact, the principal was $100,000, and instead of a 5.5 percent-interest rate, it had a 12-percent rate and the entire balance was due in two months.

In court, Webb secured an injunction preventing a foreclosure sale, but Hess ultimately lost her house to Reese and Shepard. Afterward, Webb was able to win a legal judgment against Reese and Shepard for $449,660, but Webb said that Reese never paid the money.

“It was cruel,” said Webb. “I have no love for these characters.”

In 2007, Reese was sued by a contractor who did heating and air conditioning work on one of Reese’s properties in East Oakland. The contractor alleged that Reese withheld $5,000 in payments. “He ripped me off,” said Daryle Price. “He basically burns people.”

Reese also owned and managed a rental building in West Oakland in the mid-2000s. Several of his tenants sued him, alleging wrongful evictions and harassment. In court documents, Reese called one of his tenants a “specimen,” and said that the renter was a “ringleader” in an “uprising where all the tenants refuse to pay rent.”

On Reese’s Facebook profile, which he hasn’t updated since 2012, he claims to live in Bangkok, Thailand.

Gibson McElhaney told us she met Reese sometime in 2013, and her nonprofit subsequently signed a partnership agreement with his company, Nakatoma Acquisitions, to buy and sell Oakland real estate. “We sought partnerships with private developers to identify foreclosed properties for the purpose of purchase and resale or rent to low-moderate income families,” she said.

However, Gibson McElhaney did not provide us with any evidence that her nonprofit’s deals with Reese’s company resulted in homes or rentals for low-income families in Oakland.

Gibson McElhaney said another goal of the deal was to replace money that Richmond Neighborhood Housing Services was no longer receiving from the federal and state governments. “In response to the loss of both HUD [Housing and Urban Development] and Redevelopment agency funding, nonprofit housing organizations began looking to form partnerships with private developers who had greater access to bank-owned foreclosed property … inventories and access to flexible capital,” wrote Gibson McElhaney.

In a separate letter, Maxine Reynolds, president of Richmond Neighborhood Housing Services’ board of directors, described the house-flipping deals with Richard Reese’s Nakatoma Acquisitions company as a means of creating “earned income” that will be used to launch a veterans housing initiative. “The Board approved a strategic partnership with Nakatoma Investments to identify and acquire abandoned, vacant, or bank-owned foreclosed … properties with the goal of using earned income to fund the launch of our veteran’s initiative and to help us acquire multi-family structures to expand our ability to provide low-income rental housing to families throughout the East Bay,” wrote Reynolds. “Nakatoma is a small scale developer with access to flexible capital that allows them to be competitive in a field dominated by large-scale cash buyers.”

Reynolds continued: “Any profit earned from loans made to Nakatoma is being used to build up the agency’s financial resources so that we could pursue our new objective of building our portfolio of affordable rental housing for veterans.”

In other words, Gibson McElhaney and Reynolds contend that the ends — building affordable housing for veterans — justify the means: flipping houses for profit in gentrifying Oakland.

Richmond Neighborhood Housing Services used to be part of a national network of nonprofits, called NeighborWorks America, chartered to promote affordable housing. Through this network, Gibson McElhaney and her staff obtained state and federal funds to conduct their work. As a NeighborWorks America affiliated organization using taxpayer money, Richmond Neighborhood Housing Services also had to undergo audits and annual reviews. But about two years ago, the affiliation between Richmond Neighborhood Housing Services and NeighborWorks ended.

According to Richard Castro, the Senior Relationship Manager at NeighborWorks America who oversaw Richmond Neighborhood Housing Services, Gibson McElhaney voluntarily ended her organization’s affiliation with NeighborWorks America network. Castro said he had no knowledge of Richmond Neighborhood Housing Services’ recent problems, and declined to comment on details.

“These organizations, by the way, are standalone entities,” said Castro about Richmond Neighborhood Housing Services’ relationship with NeighborWorks. “We provide training and resources to organizations, as well as funding for certain types of capital development, but that’s the extent of our relationship.”

Castro said NeighborWorks conducts audits of member organizations, providing a score of one to four, with one being “vulnerable” and poorly run and four being exemplary. For its last audit under NeighborWorks’ supervision, Richmond Neighborhood Housing Services scored a two: “stable.” NeighborWorks America’s media relations office did not respond to repeated requests for more information about Richmond Neighborhood Housing Services.

But even though Richmond Neighborhood Housing Services left the NeighborWorks America network two years ago, Gibson McElhaney’s organization was using the network’s name and logo on its website until last month. NeighborWorks America recently sent Gibson McElhaney a letter requesting that her organization remove the NeighborWorks America logo. In other words, Richmond Neighborhood Housing Services had stated on its website for approximately two years that it was part of the federally funded NeighborWorks American network, and implied that it was overseen by the network’s strict financial and managerial controls, when it was not.

Regarding the use of the NeighborWorks America logo and name, Reynolds stated that it was an oversight related to the overhaul of Richmond Neighborhood Housing Services’ website. “The overhaul of the NHS East Bay website did not happen as quickly as we expected. However, there was no intent to mislead anyone and no funding requests have been made under the premise of being affiliated with NeighborWorks.”

Public records and information about Gibson McElhaney’s personal finances, and the dealings of her nonprofit housing assistance corporation, are limited. But the facts that are available paint a picture of personal financial stress for Gibson McElhaney, and serious financial problems for Richmond Neighborhood Housing Services since the late 2000s, followed by multiple unusual business deals.

When Gibson McElhaney was elected to the Oakland city council in late 2012, the San Francisco Chronicle reported that she had substantial federal and state tax liens, including a 2006 IRS lien of $17,184 for unpaid back taxes recorded against her in Alameda County. “We experienced a lot of economic stress in our marriage,” Gibson McElhaney told the Chronicle at the time. She added that she believed she could pay back the taxes and extinguish the liens before taking office in 2013.

However, our research found that as of late November, Gibson McElhaney appeared to still have not paid her old income taxes from 2006, because the IRS had not lifted her $17,000 federal tax lien. In addition, records show that Gibson McElhaney’s husband, Clarence McElhaney, has also been hit with thousands of dollars of state tax liens, including a $14,252 lien recorded in 2009, a $5,438 lien recorded in 2011, and a $1,653 lien recorded in 2012, according to Alameda County records. In 2010, in Contra Costa County, the federal government recorded a lien against Gibson McElhaney for $133,823 for unpaid income taxes in 2008 and 2009. We found no record that these back taxes have been repaid either. Finally, in January of 2014, the City of Oakland put a $262 lien on Clarence McElhaney and Lynette Gibson McElhaney’s Oakland home for an unpaid trash bill.

According to Gibson McElhaney, her tax situation is close to being resolved. “As I continue my efforts to serve and support my community I’ve made it a priority to get my own house in order,” she said. “One of my key 2014 personal goals was to complete my delinquent tax filings. In October I turned over all of my documentation to my CPA who has initiated negotiations and is expected to file all of the returns with the state and the IRS by the end of the month. I am happy to put this painful and expensive chapter behind me.”

Gibson McElhaney said she has made approximately $40,000 in payments to the IRS via payroll deductions so far to clear up the unpaid taxes.

Records show that Gibson McElhaney’s nonprofit also has experienced financial turmoil. In 2005 and 2006, Richmond Neighborhood Housing Services was flush with cash, running annual surpluses of approximately a half-million dollars. But the financial crisis and recession took a toll. The organization’s revenues — which come from mortgage payments its borrowers make, along with state and federal grants — dropped, and the organization ran deficits, losing $98,000 in 2008, and another $65,000 in 2009.

But even though her organization was losing money, Gibson McElhaney and her board members more than doubled her executive salary in 2008, raising it from $80,000 to $193,000. In 2009, Gibson McElhaney was paid $134,000. All told, Richmond Neighborhood Housing Services lost $313,000 between 2008 and 2012, the most recent year for which tax records for the organization are available. Over the same period, McElhaney was paid $587,000.

Reynolds said that since 2012, Gibson McElhaney has only worked part time as executive director, and “her salary has been reduced commensurate with this reduced status.”

Beginning in June 2014, we sought records from Richmond Neighborhood Housing Services, including the organization’s articles of incorporation, conflict-of-interest policies, and most recent IRS Form 990 tax returns. Three months later, in September, Richmond Neighborhood Housing Services representatives finally provided us with a copy of their organization’s 2012 tax return. They did not provide us with their articles of incorporation or conflict of interest policies.

In response to our questions about a potential conflict of interest concerning Andrea Gibson Nobles’ co-investment in deals with Richmond Neighborhood Housing Services, the organization’s board president said that the board had recently considered the matter, and found no violations. “Your inquiry alerted Lynette [Gibson McElhaney] about the potential conflict of interest with the loan made to Nakatoma Investment by her sister Andrea [Gibson] Nobles,” wrote Richmond Neighborhood Housing Services president Maxine Reynolds. “After learning this information, Lynette immediately informed the Board Chair and Treasurer of this conflict and the matter was discussed before the full Board within a week of the revelation. We engaged in a lengthy discussion with Lynette and Mr. [Richard] Reese. We were assured, and believe her statement, that Lynette also did not know that her sister had made such an investment. Mr. Reese apologized for any misunderstanding, stating that it is his policy to maintain investor confidentiality within his funds. He further stated that Andrea is no longer an investor with Nakatoma and that he was not aware of any other potential conflicts. He further added that Ms. [Gibson] Nobles only participated in one transaction.”

In her letter to us, Gibson McElhaney claimed that she had no knowledge of her sister’s co-investment alongside Richmond Neighborhood Housing Services. “I learned that Andrea [Gibson] Nobles had invested in one of the projects on or about November 30 after Mr. Reese confirmed information provided by Darwin [BondGraham] in his email inquiry. Prior to getting the press inquiry, I had neither knowledge of nor any cause to believe that Andrea [Gibson] Nobles was engaged in any financial transactions with Nakatoma.”

Yet despite her assertion that she didn’t know about her sister’s investment in Nakatoma, Gibson McElhaney admitted to us that it was Gibson Nobles who introduced her to Reese in 2013. “I believe she met Mr. Reese through a realtor that was helping her shop to purchase her own home,” Gibson McElhaney said about her sister.


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