City Addresses Public Criticism Toward DACHA and the City’s Affordable Housing Program

The Redevelopment Agency in August of 2008 had performed a comprehensive refinance of DACHA’s secured debt in August 2008 in an effort to stabilize the organization and protect the affordable housing units it held.  This reduced the initial share investment and lowered the monthly carrying charges. However, by paying back money to members of the co-op, they took assets from the cooperative.

The council, by a 3-2 vote in 2009, declined to do so and they have since moved to foreclose on the property.

As a result of this and other issues, a lawsuit was filed against DACHA and DACHA had a legal judgment against them filed by Neighborhood Partners and Twin Pines, which resulted in a debt of roughly $300,000.  In order to collect that debt, they levied DACHA’s accounts. 

In October 2009, DACHA was unable to continue making payments on the Agency loan and subsequently went into default. Beginning in November 2009 and in accordance with its loan terms, the Agency began collecting and releasing funds on DACHA’s behalf for the purposes of protecting the security assets of the Agency’s loan against deterioration and liens.

In addition to laying out a discussion of the current status of DACHA, the staff goes much further in attempting to address criticism leveled at them publicly, specifically by David Thompson and Luke Watkins of Neighborhood Partners and also Twin Pines.

The most interesting response is to the question of whether the City made a mistake and sold the 52 affordable homes in Wildhorse without deed restrictions on the homes’ resale prices, and whether city employees unfairly benefited from this arrangement.

According to the staff, “The sale of the 52 affordable homes in Wildhorse without deed restrictions was not a mistake; the City’s affordable housing policy at that time did not include requirements for resale controls or deed restrictions. Many programs throughout the state do not include resale controls. This is seen as a mechanism for providing low and moderate income families a source for increasing their wealth and moving up to their next house. Since that time the City has adopted a policy of resale restrictions on all new units, in order to maintain unit affordability over time.”

They continue, “Affordable housing units in the City are aimed at serving the local workforce, including city staff. There are or have been a dozen or so employees that have participated in the program since the 90’s, including one past City Councilmember. None of the city-affiliated buyers have had special treatment or preference. As a large local employer, this is a relatively low number of program participants from the city. The City continues to work towards providing affordable housing for the local workforce for the benefit of local employers, employees, and the overall community.”

Based on my limited knowledge of this history, I question the staff’s response here, as I believe in the there were city staff who benefited personally from this arrangement.  Including some who were ineligible to purchase the properties outright, and so they purchased them in the names of friends or family members who were eligible.  This was one of the reasons why future affordable housing had equity restrictions and limited equity arrangements.

Late last night, both Luke Watkins and David Thompson, who were the principles involved in the original DACHA project, responded to what they called errors in the staff report.

Luke Wakins wrote, “It is absolutely a fact, according to Harriet Steiner’s 2002 memo to the city council, that the meeting minutes from 1995 reflect council direction to establish recapture provisions, preventing a windfall profit. Harriet admits that this city council direction was not followed by staff for the Wildhorse 52 units in 2000.”

In a memo from October 2002 provided by David Thompson, City Attorney Harriet Steiner wrote, “In May 1995, the City Council considered recommendations on the community equity mortgage.  Two staff memos, copies of which are attached, made numerous recommendations to implement task force recommendations on the community equity mortgage.”

She continued, “The Council considered two options: (1) an equity sharing note; and (2) a subsidy recapture note.   Based on the minutes of the City Council meeting, the council directed staff and the city attorney to implement a “recapture system” in which the first loan would be the developer contribution and the development impact fees and the second loan would be the initial subsidy amount. The initial subsidy would be the difference between the affordable sales price and the initial market value of the unit. The second note would be at no interest.  In addition, the Council direction called for an amendment to the owner occupancy requirements to require that buyers occupy the homes for as long as they own the home.”

The bottom line, however, is that “The owner occupancy requirements have been implemented.  With respect to the recapture note, we can find no record in either the City files or in our files that this note was drafted or implemented.”

This would suggest that the council’s interpretation was wrong and that Mr. Watkins is correct.

Wrote David Thompson in a January 5, 2011 letter to City Council, “The stark truth is that a Community Equity Mortgage should have been applied to each of the 52 affordable homes in Wildhorse and it is abundantly evident that it was not. Due to not performing the intent of existing City policy, city staff blew the opportunity for the City to collect part of approximately $11 million dollars.”

Moreover and more importantly, there are city staffers who clearly benefited from this error by the city, in that they were able to purchase a home at an affordable rate, wait two years, and with the lack of a recapture provision implemented, sell the unit at market rate and make a fortune. 

Not only that, but the policy defeated the purpose of an affordable housing program by taking an affordable unit out of circulation.

Staff also responds to the question as to whether the city directed Neighborhood Partners to create a limited-equity cooperative.

The city responds, “Based on a proposal from Neighborhood Partners, DACHA was the first try of the limited-equity cooperative model in the City’s Affordable Housing Program. Early on the City had a number of questions regarding the model and its financing. The goal was to provide housing with long-term affordability.”

They continue, “The City now utilizes a number of different models for affordable ownership housing. All of these models rely primarily on resale restrictions that cap the amount that units can appreciate, thereby maintaining their affordability over time. Regardless of its concerns, the City did work to support DACHA and provide it an optimal beginning through more favorable initial financing and regular approval of new affordable units to the organization over several years. As the organization faced more challenges with affordability and marketability, staff became concerned with the organization’s finances and long-term viability. With the results of the organization’s financial audit, the City determined that it could not risk adding new units to DACHA.”

Luke Watkins responds, “Dos Pinos was initially financed with a commercial loan, just like DACHA’s units. That is how income producing property is financed. I feel that the claims made by city staff have consistently been that DACHA’s commercial loans were somehow unstable and risky, some sort of scam like the no-doc loans so infamous in the foreclosure mess. And that is just not true. And every one of the commercial loans put in place to finance the purchase of DACHA’s units was approved by city staff.”

David Thompson adds, “I know that the staff and city attorney were quite irritated by my public action pointing out their poor quality follow through on this important City Council direction. In reaction to the scandal, the Council subsequently approved the creation of DACHA as a 60-unit limited equity housing cooperative, as one method of avoiding future similar windfall profits. I continue to believe that city staff and Harriet Steiner have gone to extraordinary lengths to damage DACHA’s successful development and Neighborhood Partners, LLC, in order to exact bureaucratic revenge against a whistleblower.”

The city also responds to concerns about the audit and the charge of misusing public funds.

They ask, “Did City staff sway the audit and trick Council into determining that the DACHA had fatal flaws?”

They respond, “The audit looked at the finances of DACHA, not its consultants, management companies, or Board. The audit concluded that DACHA could not sustain itself financially given the existing loans and liabilities. The audit did not result in the dissolution of DACHA, but instead in its comprehensive refinance by the Agency.”

The city continues, “Unfortunately, with the legal expenses and the judgment levy of DACHA’s funds by Neighborhood Partners, the organization was not able to stabilize financially, even after the refinance. The ongoing financial instability of DACHA, without available solutions, left the Agency with no other option but to foreclose. Foreclosing on DACHA was the only way to protect the Agency’s financial investment in DACHA and it was the only remaining option for DACHA. DACHA’s Board publicly stated support for the foreclosure, as they too saw no other way for the organization to continue and be able to pay its regular bills and attorney bills to defend a second lawsuit brought by Twin Pines Cooperative Foundation.”

However, Luke Watkins and David Thompson disagree.

Mr. Watkins argues, “If you really want to find out the answer to this question, then you need to authorize a third party investigation, because they are obviously not going to admit any wrongdoing.”

Mr. Watkins then cites Ken Malovos, the arbitrator in the legal case between DACHA and Neighborhood Partners.

Mr. Malovos wrote, “The bulk of the criticisms of the audit report are aimed at the accounting systems and procedures, which are not the responsibility of NP. As to the criticisms of the lack of adequate reserves, the use of interest-only loans, the lack of minutes and information to complete an audit and the non-viability of this type of cooperative housing model, the arbitrator finds that many of the conclusions in the audit report and the City of Davis summary are not established by the record. “

Mr. Watkins continues, “How could an auditor look at two years of financial information and not point out that month after month the residents were delinquent? In a lengthy 84 page report to the Council, neither city staff nor the auditor point out the continued member delinquencies.”

He adds, “More importantly it should have been pointed out that the board members were a major portion of the delinquencies.”

He also stated, “When Neighborhood Partners levied DACHA’s bank account, we collected about $58,000. The city staff and attorney have repeatedly stated that this left DACHA without resources to pay its city loan payment, and caused such instability that foreclosure resulted. However when the $58,000 levy occurred, the city was holding more than $230,000 in DACHA reserves, a portion of which could have been applied to pay the past due city loan payment. So the levy did not cause the default.”

Finally, the city addresses the issue of the misuse of public funds.

This is their response in its entirety:

No, there has been no misuse of public funds, and the City and Agency have not spent $10 million on DACHA. Initially the City and Agency assisted DACHA with a $1,240,000 loan to start the organization and purchase its first seven homes. Later the Agency did a comprehensive refinance of all DACHA debt, stabilized the resident share to a common amount, and established funds on which DACHA could draw for maintenance and repairs and other types of large expenses (these funds served like “reserves”) in order to make DACHA more viable. DACHA’s refinance was funded with Agency affordable housing funds and represented a new public investment of $2,980,251.

In addition to the assistance noted above, the Agency paid for a third of the cost of a mediation session and completion of the audit. The Agency has also devoted staff time and attorney time to compose staff reports for Council meetings, monitor DACHA, facilitate meetings of DACHA members and its original Board, prepare documents for many public records requests, prepare staff for lawsuit depositions, prepare loan documents for the refinance, and carry out the legal steps of the foreclosure process. The Agency’s legal bills are not for services provided to DACHA; they are for Agency legal expenses. The Agency does not advise DACHA.

The City and Agency have not spent $10 million on DACHA. Approximately $4,153,428 has been provided by the City and Agency to DACHA as loans, during its creation and existence. At the time of foreclosure, the amount still due to the Agency was $4,081,844 (the City had been fully repaid). Since January 2007, just after the filing of the lawsuit by Neighborhood Partners against DACHA, it is estimated that the City and Agency have spent $269,149 on DACHA for the completion of the audit, participation in a mediation session with DACHA and Neighborhood Partners, foreclosure expenses and legal costs, in addition to already budgeted staff time that has been used on this project.

Luke Watkins responds, “David Thompson has asserted that approximately $10 million in public funds have been misused in this fiasco. Staff responds that $4,081,844 is the loan amount that was in place at the time of foreclosure, plus an additional $269,149 has been spent for legal fees and the audit.”

Why the difference between the city’s version and theirs?

According to Mr. Wakins, “What the staff report does not count is the amount of loan payments that the city deferred by providing the city loan with a 55 year term. The city provided this loan term without ever re-qualifying any of the DACHA residents’ income. Based on the incomes of the DACHA residents when they were initially qualified for moving in to their units, the repayment term of the city’s loan should have been much shorter. That extra $5.6 million in David’s $10 million estimate represents the net present value of the unnecessarily deferred loan payments, plus the value of city staff time wasted on this mess.”

Mr. Watkins and Mr. Thompson maintain the city has continued to cover up missteps by the city by refusing to allow for an independent third party to investigate.

Mr. Watkins writes, “The objections to spending the estimated $10,000 cost of an independent investigation, in order to save the city funds for a better use, is made hollow by the admission that so far $269,149 have been spent by the city on legal fees. Unless the truth can be established by an independent third party investigation in the near future, it will eventually be decided by the existing very expensive lawsuit between Twin Pines Cooperative Foundation and the city, plus two more lawsuits to follow based on the two claims recently presented to the city.”

The city now needs direction from the council as to what to do long term.

According to the staff report, “During the existing interim period of ownership by the Agency, the Agency has been leasing the occupied units to the existing tenants at the time of the foreclosure sale. Originally sixteen of the units were filled, but three members have since left and now thirteen units are occupied.”

These units will remain unutilized until provisions are made for their use.

The staff reports, “Consistent with the Agency’s interim plan, these units have not been refilled since transitional/emergency housing in the units could not be staffed, the future of the units remains unknown, and there is an associated cost with preparing a unit for turnover. Without knowing the long-term plan for use of the units, refilling them could result in multiple turnovers in a unit and more cost to the Agency.”

Staff suggests that this arrangement has reduced costs, “While it has not been ideal for Agency staff to management these units and balance other job duties, it has resulted in notable cost savings and benefits to having this occur.”

The savings is factored in because there is no management company, no direct costs for insurance, and it has the ability to utilize expertise of other city departments and provide additional work to offset city positions with recent budget reductions and utilize existing landscaping contracts, reducing the cost of landscaping.

According to the staff report these costs have come from the rental revenue from the twenty units. 

They report, “While there is much deferred maintenance, staff has primarily focused on immediate habitability issues and related work that contributes to the long-term life of the units. Staff estimates, in accordance with the previous budget adjustments, that expense of these units and revenue from rent will likely break even if projections come to fruition.”

However, the ultimate goal is to figure out long-term use.  The city staff provides four options: affordable rental housing, limited-equity cooperative housing, affordable ownership land trust housing units with capped appreciation, and affordable ownership housing units also with capped appreciation.

I think the city’s response on Wildhorse clearly paints, at the very least, an overly-rosy view of the affordable housing scandal from the 1990s – if not outright whitewashing public corruption.  Their response here may prompt further investigation.

What I do not know, and what the public does not know, is whether their other statements are equally sanitized.  That is a concern.

We are in a situation where we have a series of claims by interested parties – one side claiming they acted appropriately and the other side did not, and the other side making similar claims.

Should we take city staff at their word here?  While I do not know all of the facts at issue, I have seen the way the city operates in other venues, and I question whether we can soundly draw this conclusion.

What I do know is that we are unlikely to get any further with this now than we had before.  The two people who called for the independent investigation on the council are now off the council, and the two remaining holdovers were steadfastly against such an inquiry.  Where the new councilmembers come down is anyone’s guess.

I remain concerned about what the city has done here and will not simply take them at their word that they acted appropriately.

—David M. Greenwald reporting