Operator of $700-per-month sleeping pods in downtown S.F. faces eviction

San Francisco Chronicle​

a day ago

In San Francisco, where the average apartment rent is about $3,000 per month and millions of square feet of commercial space sit unused after the pandemic, James Stallworth saw an opportunity.
Through his startup, Brownstone Shared Housing, Stallworth leased a small former bank building at 12 Mint Plaza in 2023 and converted it into dormitory-like sleeping pods, which he leased out for just $700 per month. The work to remove the bank's abandoned furniture and install the pods, each large enough to fit a twin mattress, was done without city permits.
Like any eager market disruptor, the bright-eyed entrepreneur figured it paid to ask for forgiveness rather than permission. He was right — sort of.
Despite emerging victorious from a nearly year-long standoff with city officials over the legality of the conversion and managing to skirt hundreds of thousands of dollars in fees once associated with the project, Brownstone is now on the verge of closing its sleeping pods at Mint Plaza for good, seemingly after failing to reach profitability.
Last week, Brownstone's landlord — the Prime Company, a Kansas-based real estate developer— filed an eviction lawsuit accusing the startup of owing more than $150,000 in rent payments. The alleged debt is equal to about a year's worth of unpaid rent, according to court records, which show that Brownstone signed a year-long lease with its landlord in May 2023 and operated on a month-to-month agreement for some time following the contract's expiration.
Prime Company could not be reached for comment. Stallworth, on the other hand, said he was blindsided by the news of the lawsuit.
'I wasn't aware of the unlawful detainer lawsuit until I was notified by the Chronicle. Brownstone will respond to the lawsuit, but what is clear is that the landlord wants to move on with the building empty going forward,' he said in an email on Monday.
Stallworth confirmed that Brownstone currently offers 26 sleeping pods at 12 Mint Plaza, of which he said a majority are occupied. He declined to comment on whether all of Brownstone's current tenants are actively paying rent.
The eviction lawsuit comes months after Stallworth and his landlord switched to a new lease contract that pivoted away from requiring the startup to make monthly rental payments, switching instead to a 'revenue sharing' model.
Per the contract, which was viewed by the Chronicle, the landlord would receive 80% of all profits generated from the sleeping pods. It also stated that Brownstone was required to provide a financial report and future revenue projections on April 1 — and that the landlord retained the right to terminate the agreement if 'unsatisfied' with Brownstone's performance.
The new lease was signed 'with the understanding that the landlord and Brownstone could mutually decide to end the agreement in the event the city indefinitely impaired our ability to operate again,' Stallworth said.
The plan was always to house 30 people at 12 Mint Plaza. But, the city began investigating Brownstone's operations after a tenant of the building made the unconventional sleeping arrangement public on social media. The tenant's post went viral before the company could apply for a formal change of use of the commercial building with the city's Planning Department, Stallworth revealed in a blog post last year.
Despite launching what Stallworth described as 'costly code enforcement cases' against his startup, the city never shut down the sleeping pods' operations. But, it did limit Brownstone's ability to rent the pods to 'new people' for some time, capping the building's occupancy at 13 tenants.
The Planning Department greenlighted the building's residential conversion in October, only to rescind the approval a month later, after ruling that the project didn't meet the city's affordable housing requirements and accusing Stallworth of misrepresenting certain details of the project.
At that point, Stallworth faced over $300,000 affordable housing fees, payment of which the city required from all housing developers with projects of 10 or more units.
Stallworth was offered a lifeline when legislation by former Mayor London Breed exempted downtown residential conversion projects like 12 Mint Plaza from paying the onerous fees. Brownstone's sleeping pods were approved to operate again, pending final permits from the Department of Building Inspection.
But those permits were never pulled, public records show. Dan Sider, the Planning Department's Chief of Staff, said the lack of permits has caused Brownstone to accrue $69,000 in penalty charges with the department to date.
'They've finally gotten the approval from our office to do the thing that they want to do. But they need evidence that this is safe,' Sider said, referring to the building permit process, which he referred to as 'straightforward and objective.'
'Our priority right now is just to help Mr. Stallworth finish this process. We'd like him to take 'yes' for an answer,' Sider said, adding that Stallworth has the option to petition for a decrease in the fines, should he stop operating at 12 Mint Plaza or address the violation.
Stallworth did not comment on the outstanding permit issue, but blamed the situation with the city for putting the company in financial arrear.
'We had a lot to recover from, due to incurred costs and deferred maintenance, during the months where we were barely pulling in enough to keep the place somewhat operational,' he told the Chronicle. 'We were optimistic that we could stabilize the place given a few more months, and communicated that with the landlord, so I was surprised to learn the landlord decided to file an unlawful detainer case.'
Brownstone may be preparing to decamp from Mint Plaza, but Stallworth said that he is not done with downtown San Francisco. In fact, Stallworth said that he is currently in the 'final stages' of negotiating a lease for a new, larger location nearby, which could house 100 tenants.
If the new lease is signed, Stallworth said the hope is to keep the Mint Plaza pods open long enough to transfer existing residents to the new location.
And this time, Stallworth said he plans to work with the city, not against it.
'We learned a lot from doing things the wrong way at Mint Plaza,' he said. 'We are glad we stayed open though, because we have seen the benefits of rapidly creating housing from empty buildings downtown … to stop now just because we may have accrued some rental debt in the process would be a disservice to our residents and the city.'