City Manager and Community Services Director Explain Why DACHA is Failing

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citycatIn today’s Davis Enterprise, City Manager Bill Emlen and Community Services Director Elvia Garcia-Ayala offer their explanation as to why DACHA, the Davis Area Cooperative Housing Association is facing financial trouble.

In the past week, we have learned that the city has indeed foreclosed on DACHA and it has put the entire property up for auction. Neighborhood Partners/ Twin Pines on Tuesday indicated that they were still willing to negotiate with the city and DACHA.  However, DACHA is supportive of the foreclosure procedure as is the council.

Now we get an explanation from the city’s perspective as to what went wrong.

First Mr. Emlen and Ms. Garcia-Ayala explain what DACHA is and what makes it unique.

“The DACHA cooperative was proposed, designed and developed by Neighborhood Partners, which is a for-profit affordable housing corporation whose principals are Davis residents David Thompson and Luke Watkins. The idea behind DACHA was to provide a form of home ownership for low- and moderate-income families that would stay affordable over time. Like all cooperatives, residents would not own their homes outright but would purchase shares and make monthly payments in exchange for the right to occupy one of the homes.

DACHA has a number of characteristic features which, in its totality, have made it a somewhat atypical limited-equity housing cooperative. Rather than consisting of a single building or cluster of buildings, it consists of a number of geographically scattered single- family homes, duplexes and a triplex.”

According to Mr. Emlen the financial problems began with contractual obligations to “expand regardless of future conditions.”

“DACHA was contractually obligated to pay all direct costs of acquiring these future properties and to pay Neighborhood Partners a fee of at least $8,000 to $12,000 for each of these new units, plus any additional but unspecified ‘extraordinary’ associated costs.”

This according to Mr. Emlen would lead Neighborhood Partners to sue DACHA for $500,000 in unpaid fees, mainly for fees for units that had not been built or acquired.

They then explain how DACHA was created and financed.  They write, that Neighborhood Partners created a non-resident DACHA board prior to the point at which DACHA members were recruited.  This board formalized the administrative and legal structure of the organization.

“One of its first actions was to sign the contract with Neighborhood Partners for continued consulting services for what was to become 60 additional units; this is the contract that gave rise to the lawsuit.”

The city would get involved at this point, through the Redevelopment Agency, which provided $1.24 million to help purchase the first seven homes, of which, $100,000 was paid to Neighborhood Partners “for costs and compensation for the creation and development of DACHA.”

What is noteworthy is they suggest that they cannot point to a single factor with certainty that is “responsible for the deterioration of DACHA.”  However, they argue, as the residents did in 2005, that from the start, they struggled to find buyers to pay the full share price of $20,000.  They suggested that this was either due to lack of interest in this model or more likely because the

“carrying costs had become equal to or greater than market-rate rents. The carrying costs were a function of such factors as the underlying cost of the home, the loan arrangements, the management fees, the consulting and development fees that Neighborhood Partners charged, and costs involved in the continuing required expansion of the cooperative.”

They solved this problem by having DACHA receive “loans from David Thompson and Twin Pines Cooperative Foundation (whose president is also David Thompson) to help finance membership fees. These loans had adjustable rates and prepayment penalties.”

Moreover they write that shares were sold to people who could not afford the carrying charges or to repay the loans.

“Other members were required to pay only a portion of the share price without any loan requirement. There was no uniform share price for DACHA.  Hence, while members could buy in, DACHA lacked an adequate financial plan to cover its loan obligations for balloon payments, prepayment penalties and adjustable rates. All of these decisions were made during the time Neighborhood Partners was the primary consultant to DACHA.”

Based on these problems, in May of 2005, DACHA residents wrote in to the city concerns about the carrying charges and other problems.  The Redevelopment Agency commission a financial audit in 2006.  This revealed a number of problems with “missing records, inadequate accounting practices, problems with the business model and problems with project financing. To protect affordability and viability of DACHA and its investment, the agency completed a comprehensive refinance of DACHA, including repayment of loans from banks, Twin Pines and David Thompson.”

They continue:

“These re-payments included pre-payment penalties that Thompson and Twin Pines refused to waive. As part of this refinance, the agency established reserves for DACHA, and DACHA used a portion of the loan proceeds to equalize residents’ share investment at one common and affordable amount by repaying those residents who had overpaid for their membership.”

The lawsuit, at least according to Mr. Emlen and Ms. Garcia-Ayala arose due to the fact that the DACHA board “decided it was not financially feasible to expand the cooperative by pursuing additional units, nor to continue to pay Neighborhood Partners for consulting work on an expansion it hoped to avoid.”

“In December 2006, Neighborhood Partners filed a lawsuit against DACHA, asserting that DACHA owed it more than $500,000, partly for consulting work it said had been performed but for which it had not previously submitted invoices. The remaining fees were for services not performed but that Neighborhood Partners would have earned in connection with the purchase of new housing units that Neighborhood Partners believed DACHA was required by contract to acquire.

In 2009, Neighborhood Partners and DACHA submitted their dispute to a private binding arbitration, which resulted in a decision awarding Neighborhood Partners $331,872. This award included $282,000 for development fees on housing units that have never been built or acquired by DACHA, such as unbuilt units in proposed projects that were never approved by the city.

The arbitrator emphasized that ‘it is not the task of the arbitrator – to determine the viability of the business model or the financial health of DACHA …'”

They writes claim that the city had hoped to facilitate a settlement between the two parties, but that Neighborhood Partners has to date rejected this option.

When Neighborhood Partners received its arbitration award, they put a levy on all DACHA’s bank accounts since DACHA did not have the funds to pay Neighborhood Partners.  This action collected more than $57,000 and left DACHA with no funds by which they could pay for operating expenses or loan payments.

As the city manager explains:

“As a lender, the agency initiated the foreclosure against DACHA to maintain the affordable housing units and protect its investment, since DACHA is unable to bring its loan out of default and cannot afford to file bankruptcy or secure legal representation due to Neighborhood Partners’ levy on its funds.”

As we learned on Tuesday, the DACHA board is not opposed to the foreclosure as they believe it is the best way for them to remain in their homes. 

“Although the outcome for DACHA as an organization is uncertain, DACHA’s board supports the foreclosure decision and the agency continues to take actions to protect the 20 affordable homes and the community’s affordable housing program.”

Luke Watkins Letter to the Editor

Mr. Watkins alleges the city’s actions amount to retaliation against a whistle blower.

He writes:

“In Sunday’s Enterprise, a city staffer said ‘the DACHA co-op model was simply failing.’ That’s untrue. The only problem with DACHA is that the city lent $4 million to an organization with an illegally seated board, whose president, treasurer and secretary were collectively more than $20,000 behind in rent, and allowed them to illegally distribute $200,000 of the loan proceeds to its members. Why?

In 2000, the city ‘forgot’ to put its usual resale controls on 52 affordable homes in Wildhorse, allowing each buyer to reap an approximately $200,000 windfall profit. At least one city planning staffer got a home.

David Thompson blew the whistle on this misconduct in 2001. The council then directed David to create a limited-equity housing cooperative as a mechanism to avoid future embarrassments.

Since then, city staff has been busy exacting reprisals. They found a couple of greedy DACHA residents, who with their eyes on reaping their own windfall profit, accused David of being ‘corrupt.’ An ‘audit’ was then manipulated to convince the council to act to dissolve DACHA.

Sadly, the city allowed DACHA to halt loan payments on its public loans so that DACHA could spend approximately $125,000 on legal fees fighting with David (and myself as his business partner). And the city has paid more than $125,000 to its own attorney to assist DACHA in this fight.

In 2008 we offered to settle for $120,000 (to cover legal costs to that point). In their zeal to deny us our claim, city staff persuaded DACHA to counter with a bad-faith offer of $38,000.

A court-approved arbitrator in June 2009 awarded a $332,000 judgment against DACHA. Now, in order to play its next card, the city has decided to go for the nuclear option by foreclosing on DACHA.

A whistle-blower must be courageous and tenacious. David Thompson is both. When will the council stop this vendetta and gross waste of public funds?

DACHA’s households each will lose about $8,000. And the city’s reputation will be further spoiled by a few bad apples who probably should be held liable for retaliating against a whistle-blower.”

Commentary

The bulk of this article lays out the city’s version of events.  There is little doubt that Neighborhood Partners along with David Thompson and Luke Watkins will dispute some aspects.  However, we have little means by which to independently assess whose version is the truth.

It is interesting to note that from Mr. Emlen’s version of events, they fail to mention questions raised about the re-finance or specify that the city loaned $4.15 million in it to reduce the share cost and the monthly carrying charges.  They also failed to mention that a number of actions, at least according to Mr. Thompson and Mr. Watkins may have been initiated by board members who did not have standing to serve on the board.

Moreover they fail to mention that the loan payments were owed to the Redevelopment Agency and the Redevelopment Agency could have waived the payment requirements until DACHA had paid back the arbitration award to Neighborhood Partners.  Instead, the Agency declared DACHA in default and moved foreclosure as a way to remove Neighborhood Partners from the equation.

The city council declined to have an independent investigator investigate what happened, what went wrong, and whether city-directed actions in the refinance were legal.  The result is that the public is hearing a version of events from an interested party in this dispute, not an impartial bystander as the op-ed implies.  It may be that the city is absolutely correct here.

From my perspective I certainly do not have a lot of confidence in the city and city staff to simply take their word for versions of events.  We have all seen occasions that would question the judgments, ethics, and efficacy of city staff and their actions.

I cannot stress enough however, the public does not really know what happened other than the fact that the city at one point put $1.24 million and $4.15 million into a project that has gone terribly awry and there has been little independent public accounting for what happened and what went wrong.

The people who have suffered in this process are low to middle income affordable housing residents, who appear to have been kicked around like a football between the feud between Neighborhood Partners and the City.  They have taken the advise of the city and hope for the best.

—David M. Greenwald reporting

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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10 thoughts on “City Manager and Community Services Director Explain Why DACHA is Failing”

  1. E Roberts Musser

    Emlen and Garcia-Ayala: “The DACHA cooperative was proposed, designed and developed by Neighborhood Partners, which is a for-profit affordable housing corporation whose principals are Davis residents David Thompson and Luke Watkins. The idea behind DACHA was to provide a form of home ownership for low- and moderate-income families that would stay affordable over time. Like all cooperatives, residents would not own their homes outright but would purchase shares and make monthly payments in exchange for the right to occupy one of the homes.”

    1) Who “arranged” for NP to do this project in the first place? The city?

    2) Was DACHA to be part of the city’s affordable housing program from its inception?

    3) If YES, then did the city really do its HOMEWORK in allowing the following contractual setup to happen? – “DACHA was contractually obligated to pay all direct costs of acquiring these future properties and to pay Neighborhood Partners a fee of at least $8,000 to $12,000 for each of these new units, plus any additional but unspecified ‘extraordinary’ associated costs…Moreover they write that shares were sold to people who could not afford the carrying charges or to repay the loans… Other members were required to pay only a portion of the share price without any loan requirement… There was no uniform share price for DACHA. Hence, while members could buy in, DACHA lacked an adequate financial plan to cover its loan obligations for balloon payments, prepayment penalties and adjustable rates. All of these decisions were made during the time Neighborhood Partners was the primary consultant to DACHA.”

    Luke Watkins: “David Thompson blew the whistle on this misconduct in 2001. The council then directed David to create a limited-equity housing cooperative as a mechanism to avoid future embarrassments.”

    If the CC/City Staff was truly angry with Thompson for “blowing the whistle”, why would the CC/City Staff then turn around and direct Thompson to create anything for the City? I’m missing the logic here…

    Or is the situation more one of the City not being more careful in looking into the business model proposed by NP, that put all the risk on DACHA homeowners – including the risk there would not be a housing market for cooperative housing, but nevertheless saddling DACHA homeowners with consultant fees of houses not yet built? (Sounds a lot like Rancho Yolo issue…) Or am I missing something here?

  2. davisite2

    “It is interesting to note that from Mr. Emlen’s version of events, they fail to mention questions raised about the re-finance or specify that the city loaned $4.15 million in it to reduce the share cost and the monthly carrying charges.”

    I’m afraid that this is another example of DPD staking out a position and then going further and further afield in an attempt to defend it. The City’s explanation is focused upon how and why the city was under threat of losing its loan investment to DACHA. The “board standing” issue and whether the city was legally correct in loaning DACHA money in an attempt to bring the shareholder’s fiscal burden to a manageable level are not really relevant to the city’s narrative and would, in all liklihood, offer little except a vindication of the importance of the issue chosen by the Vanguard(and NP’s David Thompson)to emphasize.

  3. David Thompson

    An interesting Op-Ed today by the City Mgr.
    Why no explanation of the ineligible board members which a majority of the City Council members have been shown proof of?
    Why no mention of an unduly constituted board being provided with over $4 million in public funds?
    The City of Davis staff approved every budget, and approved every applicant according to income and a third party did the qualifying according to the city guidelines.
    City staff have not qualified any of the present occupants (they should but they have not) so how do they know anything?
    Why no mention of the City approving over $200,000 of public funds distributed to the members in contravention of a legal opinion provided to the City of Davis by Twin Pines Cooperative Foundation?

    Then in today’s OpEd we see this mention of NP getting $100,000.

    “The city would get involved at this point, through the Redevelopment Agency, which provided $1.24 million to help purchase the first seven homes, of which, $100,000 was paid to Neighborhood Partners “for costs and compensation for the creation and development of DACHA.”

    The closing statement for the seven Tufts units shows NP receiving $38,220 and that was what we received, we ate numerous other costs. In fact we created 7 units for Tufts for the same developer fee as the City approved ($38,000 each) for one unit in the CHOC project on 5th Street. Why is it okay to give CHOC over one million dollars to do 29 units?

    Wondering about how your public dollars are being spent? You should be?

    There is more so later today I will post again.
    David Thompson, Neighborhood Partners.

  4. davisite2

    …. something to consider: “moral outrage” can often be substituted for
    “patriotism” in the truism, “patriotism is often the refuge of scoundrels”.

  5. Sue Greenwald

    [quote]They [the city] solved this problem by having DACHA receive “loans from David Thompson and Twin Pines Cooperative Foundation (whose president is also David Thompson) to help finance membership fees. These loans had adjustable rates and prepayment penalties — David Greenwald quoting op-ed
    [/quote]David presents this paragraph as a paraphrase followed by a quote from the article, implying that the city got David Thompson to make the loans with prepayment penalties to new members to cover the membership share costs.

    In fact, the op-ed that David is describing did not say that the city “solved this problem”, and it is not true. The city was not involved in these secondary loans. My understaning is that David Thompson himself created this “solution” to the fact that there were a shortage of prospective members who could afford membership share price, which ran, if I recall, as high as $20,000 or more. And it was David Thompson and Luke Watkins who proposed, structure and vigorously lobbied for the entire DACHA model.

    I remember at the time DACHA was proposed that I questioned quite vigorously whether the model would work. I had trouble seeing how members would benefit. David Thompson and Luke Watkins lobbied me very hard, arguing that they were the experts in cooperative housing. The project had very strong advocates on the council at the time.

  6. concernedcitizen

    I for one am interested in hearing more from David Thompson. He is an expert in cooperative housing, and I look forward to hearing more about this issue. Great article David Greenwald!

  7. Sue Greenwald

    I share E. Roberts Musser’s perplexity over Luke Watkin’s contention that staff had been busy “exacting reprisals” from Neighborhood Partners because David Thompson acted as a “whistle-blower” in 2001. As Musser pointed out, staff approved Thompson’s project subsequent to the alleged whistle-blowing event in 2001.

    I am the only current councilmember who was on the council when the project was proposed. As I have mentioned, I had serious reservations about the business model that David Thompson and Luke Watkins had proposed. I discussed these reservations with specificity and at great length with staff. Staff told me that they shared my concerns, but ultimately decided to give David Thompson and Luke Watkins a chance to demonstrate that their model could work. Staff recommended in favor of the project despite their reservations.

    This hardly sounds to me like a staff that was out to get David Thompson.

  8. Sue Greenwald

    Finally, concerning Luke Watkins letter, I found the following accusation to be particularly puzzling[quote]Since then, city staff has been busy exacting reprisals. They found a couple of greedy DACHA residents, who with their eyes on reaping their own windfall profit, accused David of being ‘corrupt.’ — Luke Watkins[/quote]Does Luke really believe that staff would construct an elaborate plot to first approve Thompson’s and Watkins’ project, and then purposely set out to locate unusually greedy low income people to join the DACHA in order to sabotage it?

    How did staff go about determining if an applicant was sufficiently greedy? How did they go about recruiting greedy people? Did they use psychological profiling? Did they hire a consulting firm who specialized in locating greedy people?

  9. David Thompson

    Today’s Enterprise OpEd.

    •We had hoped that the taxpayers of Davis would learn answers to the many questions that have been raised publicly about the use of 10 million in public funds, We are disappointed that the City Manager did not take the opportunity to do so.

    •DACHA is not unique. There are numerous limited equity housing cooperatives that are scattered site. In fact there are more units in scattered site housing co-ops in California than single site. There are huge scattered site limited equity housing cooperatives in NYC and back east.

    •If Mr. Emlen and Ms. Garcia look at the original documents, the city staff asked NP how we could grow the co-op and our answer to the City was to get it to 40 units ASAP would be the most economically effective. Our plans to add additional units were all approved by the board and all were supported by city staff. Dos Pinos works great at 60 units and DACHA can be just as effective as Dos Pinos given time.

    •Our developer fee per home was never more than $8,000 a unit. City Council approved CHOC getting $38,000 developer fee per home at Mace Park.

    •There is no uniform price in any co-op or community land trust which is acquiring homes over time.

    •NP proposed at least four funding plans to the City to provide share assistance. The first time we were told you won’t get any money. The second time, we proposed a share loan pool that was turned down by staff. The third time we asked city staff to apply for CalHOME funds because limited equity housing cooperatives are eligible to use them. Luke Watkins helped staff write the grant application, it included future DACHA sites in the request. The city was awarded $500,000. City staff would not make any of those funds available to DACHA. The City in fact returned $169,000 to the state in September of 2007 because they did not use them in time. At $10,000 each, we could have really helped all DACHA members. The funds once obtained would have been revolved for the next 30 years. DACHA would have never needed another penny for share loans.

    •DACHA qualifies for the WISH program set up by the Federal Home Loan Bank. WISH provides a $15,000 match to co-op members that is completely forgiven over 5 years. Why has the city never tried to use it?

    •Mr. Emlen and Ms Garcia state that NP received $100,000 to do Tufts. That is completely untrue. NP reviewed the escrow (December 20, 2010) today to show what we said earlier. NP received $38,220 and not one dollar more. I don’t mind having a dialogue but let’s use correct facts.

    •The budget for each DACHA home had to be approved by the staff of the City of Davis. A budget was shown for each cluster of homes showing how each of the homes met the affordable housing guidelines of the City of Davis. Each applicant was reviewed by the management company as to their ability to meet the city guidelines. The management forwarded each successful applicant to city staff for their final approval. Everyone living at DACHA while NP played a role was approved by city staff as having met the income guidelines and every DACHA home budget was approved by city staff.

    •In both mediation and arbitration NP stated quite clearly that if DACHA would honor the remainder of the contract we would go back to work.

    •For more information http://sites.google.com/site/itsthelawdacha/home

    •The loans that were made to members were meant to be complete mirrors of the DACHA share. The members living at DACHA earn a different rate on their shares each year because the rate traces a number established by the Wall Street Journal every January.

    •The refinance was meant to equalise costs at DACHA but even now there are 8 different forms of payments on 20 homes.

    •What is most interesting is that the staff set new rents for each unit. Seemingly when this was all done none of the members were allowed to see what the other members were paying.

    •The staffs seemingly set the Treasurer’s rent at the lowest of all the DACHA homes. Even though, that home is the most valuable home of all 20 homes and on the largest lot. Even though at the time the Treasurer was about $6,000 behind in their rent and has been behind from about October of 2005 to this very day. Five years of being behind in the rent and therefore ineligible to be a board member and corporate officer for all that time. City staff knew she was ineligible to serve and did nothing. Even though the report to the Yolo County Superior Court said the Treasurer was ineligible to serve, city staff allowed her to stay on the board and continued to do business with her. When the average of the 20 homes is $1,112.40 why did city staff assign the DACHA Treasurer a cost of $953 for her home? $159 less than the average?

    •It is time to find solutions and history is a help. Sue you can call me at 757-2233 to talk about solving this.

  10. Sue Greenwald

    I have a general issue that I would like to raise, and that involves the power that Neighborhood Partners gave to the first, non-member board which was appointed by Neighborhood Partners. According to the following quote from a paper on cooperatives written by a group from the University of Illinois, Chicago, [quote]Cooperatives are self-governing organizations that depend on participation of members for success. All cooperatives have shared ownership, a democratically managed organization, and a board of directors made up of the residents themselves. A board of directors is elected by the membership, generally on a one share one vote basis. The board of directors is responsible for developing policies and procedures for management, budget, membership, and occupancy. This basic organizational and governance structure is shared by all housing cooperatives. http://www.uic.edu/cuppa/voorheesctr/Publications/Affordable Cooperative Housing 04.pdf
    [/quote]Yet the board that set up all of the rules and wrote the binding contracts concerning expansion and payments to Neighborhood Partners were made by an appointed, non-member board. Is this really consistent with the democratic principles of cooperatives?

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