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.
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.”
“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
“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.”
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