Losses Strain CRA. Bad Deals Cost $50 Million
Janurary 27, 1996
By CHIP JACOBS
Daily News Staff Writer
In betting its financial clout can rejuvenate Los Angeles’ seediest areas, the city’s urban renewal agency has lost nearly $50 million in written-off loans, foreclosures and bankruptcies during a five-year period, records show.
The 66 soured deals – blamed on the treacherous economy, developer money woes and risky government loans – have saddled the Community Redevelopment Agency with costly baggage in a time of financial strain.
Property taxes, which drive most agency projects, remain flat because of the sluggish economy and reassessments by landowners. On top of that, a Los Angeles Superior Court judge has barred the CRA from exceeding the $750 million spending cap in the downtown Central Business District.
Meanwhile, urban renewal officials must grapple with loans that have forced them to swallow losses on dozens of projects. They include a landmark theater, the defunct Los Angeles Stock Exchange nightclub downtown and housing projects stretching from Hollywood and Chinatown to Watts.
“Is it a serious problem? The answer is yes,” said former CRA commissioner Cynthia McClean-Hill. “Any loss represents redevelopment that could have taken place somewhere else. One of the problems is the view of the CRA as a cash cow” by developers and others seeking agency money.
At least 15 of the losses were over $100,000, according to records obtained by the Daily News. The largest write-off of CRA funds in recent years, $718,000, involved a San Pedro tourist hotel built by one of the city’s most prolific developers.
In an interview, Mayor Richard Riordan said the unraveled deals illustrate the dangers of a loan-approval process that wouldn’t meet private-sector muster, and they are catching up with the city treasury.
“The practices of the past have encouraged confusion, lack of accountability and fragmented spending,” Riordan said. “When you look at projects that benefit the community, you have to weigh whether the risk is worth the reward.”
Word of the loan losses also dovetail with other questions about the condition – and management – of the agency’s $450 million loan portfolio.
Some CRA and city officials, however, say loans that go awry are simply occupational hazards for redevelopment agencies across the country. Investing public dollars in blighted areas that other investors won’t touch is the CRA’s intrinsic mission, they add, though improvements can be made in reducing losses.
“Without the CRA interceding for communities across L.A., the urban blight would mirror the devastation of European and Asian cities as a result of warfare,” said Councilman Rudy Svornich, chairman of the council’s redevelopment and housing committee.
CRA board chairwoman Christine Essel said officials are “careful” in screening loan applicants, but working in dicey communities means taking gambles.
“It’s worth the investment,” she said.
After being shown loan records provided to this newspaper, City Controller Rick Tuttle said his department would launch a review to determine if lending guidelines were met and how the CRA stacked up with other redevelopment agencies.
“It’s been a rough economy out there. Having said that, it’s important that the agency be more selective in the future than it might otherwise have been,” Tuttle said. “We’ve had concerns in the past about the way they’ve tracked and managed their portfolio.”
Among foreclosed properties, the CRA took one of the heaviest hits at the low-income Huntington Hotel in downtown Los Angeles, records show.
When the property’s main lender, Wells Fargo Bank, foreclosed in 1994, redevelopment executives were faced with Hobson’s choice. According to one agency analysis, they could foreclose themselves, negotiate with the bank to buy the nearly vacant hotel and pay mounting operating and repair costs – or walk away.
After crunching the numbers, they chose not to fight the bank’s foreclosure. In doing so, the CRA surrendered repayment of its $1.8 million rehabilitation loan.
But like dozens of other CRA-subsidized projects, the Huntington’s cost doesn’t include $1.2 million in unpaid interest also sacrificed, officials acknowledge. Information on lost interest on all the failed loans was not available.
Public records do, however, detail the agency’s financial involvement with the Montecito Apartments in Hollywood.
In late 1994, a state housing finance agency foreclosed on the complex – once a hangout for show-business luminary Montgomery Clift and others decades ago – when its investors fell into debt. They had borrowed from the state, the federal government and the CRA to rehabilitate the apartment complex for elderly and handicapped tenants.
The foreclosure, though, triggered CRA losses that amount to $8.2 million. That amount is $3 million more than the agency has committed to a controversial 100-unit senior housing project planned for Hollywood Boulevard.
Though they were blows to CRA coffers, upgrades to the Montecito and Huntington Hotel before the foreclosures did increase the housing stock for poor Los Angeles residents, an agency priority. Officials said in most cases, tenants are unaffected by the financial turmoil caused by foreclosure.
Moreover, they say, because commercial investors and others generally have priority to recover their money before the CRA does, the agency isn’t stunned by big-ticket losses. It’s the agency’s role to fill the gap between what banks loan and project revenues produce.
“There are no (CRA) loans we make where the purpose is to earn interest,” said agency housing director John McCoy. “We’re trying to make the projects happen.”
Montecito representatives did not return phone calls. The Huntington’s owner could not be reached.
Few agency losses compare with those racked up on the Los Angeles Theater Center.
As a linchpin in the city’s drive to transform downtown’s Spring Street from rotting urban strip to cultural haven, the vintage property ultimately received $27 million in CRA money, records show. Despite that investment, debt problems for the theater’s producing company triggered bankruptcy five years ago.
Under a City Hall-brokered arrangement, the center was turned over to the Los Angeles Department of Cultural Affairs, which runs it today as a rental facility, said Lee Sweet, the complex’s manager.
Although the theater is operating, some are chagrined over what they see as a waste of $27 million that could have been used for other projects.
“Think what you could do with that money,” said one top City Hall official.
To the south, the agency wrote off a $718,000 loss after the San Pedro Sheraton Hotel was sold. Opened five years ago in a bid to jump-start the harbor tourism base, the hotel’s developer, Goldrich and Kest Industries, was never able to turn a profit, records show.
CRA officials say the hotel lost more than $3 million a year, spurring Goldrich & Kest – considered one of the Southland’s top commercial builders – to hunt for new owners. In donated land and loans, the agency’s investment came to $2.5 million, and the developer, after CRA negotiations, settled its obligations at about $1.8 million, records show.
The hotel, meanwhile, was sold to investors for an undisclosed price. Goldrich and Kest officials did not return phone calls.
Svornich, whose district includes San Pedro, said the hotel is doing much better and that the agency’s involvement was well worth it. He acknowledged that the volume of failed deals and the status of the CRA’s portfolio was a concern, and said he plans to question CRA Administrator John Molloy on it before the council soon.
Riordan said he believes reform could start with calling CRA loans grants as a way to clear up taxpayer confusion when repayment falters.
Molloy said he is considering bringing in a banking consultant and making other moves to reduce losses. The CRA’s dry coffers and the tilt toward private sector-style management makes that more important than ever, he said.
“The whole loan portfolio has been wrongfully attended,” he said in a recent interview. “I’m not saying people inside the agency always make the right decision.” INSIDE THE CRA
In recent months, the Daily News has disclosed details of the Los Angeles Community Redevelopment Agency’s troubled $450 million loan portfolio, originally intended to tackle urban blight in communities stretching from North Hollywood to San Pedro.
Among the findings:
The loan portfolio is valued at seven cents on the dollar because of so many high-risk loans.
Roughly 70 percent of all loans are tied up in low-interest deals that won’t have to be repaid for up to 30 years – if ever.
An estimated $42 million in loans are in default.
The agency has made $13 million in “forgivable loans” – including a handful to wealthy corporations. Repayment is waived if the borrower’s project stays open.
A Hollywood Boulevard housing-shopping project could end up consuming $18 million in city funds, triple the original estimate, while producing about half the senior housing units. Each could cost about $134,000.