The Yolo County Grand Jury issued a scathing report on Davis’ handling of the DACHA (Davis Area Cooperative Housing Authority) issue. While in general it praised the City of Davis’ affordable housing program, it reported that the city was “far less successful” with DACHA.They added, “The Grand Jury found that greater care should have been taken initially by the City and the Redevelopment Agency when performing legal analysis of documents such as DACHA’s articles of incorporation and bylaws and that better initial oversight of DACHA by the City could have prevented this situation.”
The Vanguard in the fall of 2009 advocated for a third party review of DACHA, and the city by a 3-2 vote declined that review. However, the Grand Jury has stepped up in the city’s place.
One of the issues that was of concern was the city’s loan to DACHA being used to reimburse the initial investment by members.
However, the Grand Jury found that “no inappropriate gift or use of public money was made at any time, for any purpose by the City in connection with DACHA.”
Nevertheless, they conclude, “The City has incurred losses that may not be recovered and may increase in the future. Better initial oversight of DACHA could have prevented this.”
History and Demise of Affordable Housing Program
The 17-page report released today includes a lengthy history of the project and the increasing involvement of the city.
As the Vanguard and other local media entities have reported, the city became aware of problems with DACHA as early as 2005. Residents complained that their monthly payments were too high and some complained that they had been misled into purchasing into a cooperative, believing it to be a route toward private ownership.
In January of 2008, the city decided to refinance DACHA, using money from redevelopment.
According to the Grand Jury report, this would have helped DACHA deal with cash flow problems as well as the affordability problems for its membership. At the same time, it was hoped the refinance would allow DACHA housing units to remain in the affordable housing program.
However, in June of 2009, the lawsuit filed by the developers/ consultants against DACHA went to binding arbitration and after the resulting $300,000-plus judgment, they filed a lien on DACHA’s assets.
In October of 2009, DACHA’s bank accounts were seized for a total of $57,000 to pay the arbitration award.
“To date, this is all that is known by the Grand Jury to have been paid by DACHA,” the Grand Jury reports. “However, the Grand Jury was informed that an attempt is being made to make some low income tenants pay the remaining arbitration award.”
This action led to a cascade of events, beginning with DACHA faulting on mortgage payments to the City, foreclosure procedures by the city, and ultimately, ownership by the city.
The City believed that “the staff time, expenses and expertise necessary to continue to manage these units as affordable housing make it impractical to continue as the landlord.”
The city has also incurred “significant legal fees in conjunction with DACHA.”
“In October of 2010 the Yolo County Superior Court ordered that the City be added as a defendant to an ongoing lawsuit against DACHA,” the Grand Jury reports. “Although the Court dismissed the claim for monetary damages against the City, it allowed the issue of whether the original consultant or the City is the proper beneficiary of the 20 units in the event of the dissolution of DACHA to proceed to trial.”
The ownership of the units is at stake and the matter is set for trial in October of this year.
There are other pending claims against the city as well.
Critical Findings by the Grand Jury
The Grand Jury report issued 18 findings on the matter, including a number criticizing the City of Davis for failing to anticipate problems and failure to do proper oversight.
Critically they found, “Greater care should have been taken initially by the City and the DRA [Davis Redevelopment Agency] when performing legal analysis of documents such as DACHA’s articles of incorporation and bylaws. Had the City been made DACHA’s beneficiary at the outset, it is probable that many of the current problems, including the ongoing lawsuit by the original developers/consultants seeking to take possession of the DACHA properties and their rents/proceeds from the City and its citizens, with resulting large attorney fees and staff costs, could have been avoided.”
Furthermore, the City has maintained that DACHA is a private organization, and therefore “the City had no greater responsibility to take a more active role than any other lien holder when DACHA was first formed.”
As a technical matter this is accurate, however, the Grand Jury argues, “Beginning in 2005 the amount of staff time and energy, constant oversight and investment of large amounts of public funds proves this initial attitude was unrealistic. If the City was going to assume the degree of responsibility observed by the Grand Jury, it should have done more from the outset.”
Undoubtedly, the city failed to anticipate the degree of problems and thus their involvement in this project.
The Grand Jury believes “more should have been done to assist the shareholders to fulfill their obligation to create a total of 67 affordable housing units. The DACHA shareholders were inexperienced first time home buyers who were required to build and market 67 homes, manage the properties, assure capital improvement reserves were sufficient, and refinance sophisticated commercial loans.”
This is particularly important given both the claims of DACHA members as well as the claims of David Thompson and Luke Watkins.
The Grand Jury argues, “The City’s awareness of financing issues that led it to make the first loan to DACHA, combined with the City’s concern that initial carrying charges were at the maximum level allowed under its affordable housing rules mandated that the City monitor DACHA’s progress carefully.”
The Grand Jury found that the lack of buyers able to make the down payment for shares with DACHA led to personal loans with balloon payments and prepayment penalties that were made to DACHA in order to attract share purchasers.
However, they find that there was “insufficient discussion between the City and the developers/consultants regarding this problem. The City should have exercised its right to appoint a DACHA board member long before it did so in June 2005, when concerns by residents came to light.”
Thus, the Grand Jury finds, “The failure to take proper cognizance of the developing problems and the failure to appoint a board member earlier was failure of oversight by the City.”
However, the Grand Jury also argues that, while multiple factors could be cited in the demise of DACHA, there is no one factor that they find likely to be primary cause of DACHA’s failure.
Indeed, “The City acted responsibly by making many attempts to preserve DACHA as part of its affordable housing program. These attempts include changing the maximum carrying charges, reducing the cost of the homes, reducing the initial share price to $6,250 and refinancing the outstanding loans.”
Indeed, the Grand Jury finds, “The City’s actions were made in good faith and with transparency. The Grand Jury found no evidence of a cover up.”
The issue of an inappropriate loan has been posed, particularly in that the city’s money was used to reimburse the residents.
The Grand Jury finds, “The loan of $202,000 to DACHA for share stabilization was not an inappropriate gift of public money. A loan that must be repaid is not a gift.”
They continue, “DACHA’s insolvency due to a lawsuit means the loan will not be repaid. However, the filing of a suit and its aftermath does not transform the loan into a gift.”
They conclude, “Most importantly, even assuming the loan had not been made, the City and the DRA would have faced a significant moral dilemma at the time of foreclosure regarding whether to permit DACHA shareholders to receive a refund of some or all of their share investments, that is for the citizens and their elected representatives to decide.”
Nor was an improper gift of public money made to pay DACHA’s legal fees.
The Grand Jury writes, “The only money transferred from the City to DACHA to pay attorney fees was $30,000 from a trust account created to protect the City’s right to collect its mortgage.”
They continue, “The money in the account was from the carrying charges received directly from DACHA and therefore was not public money. The City also forbore to collect $116,510 in mortgage payments to permit DACHA to pay its attorneys. However, this money was “wrapped” into the refinance loan by extending its term and therefore was a loan rather than a gift.”
The Grand Jury also finds, “During the period of time DACHA’s carrying charges were paid into the City’s trust account, approximately $13,000 in arrearages occurred. This did not result in any loss to the City or any gift of public money, as simple arithmetic shows that even after deduction of the $30,000 in attorney fees to defend against the involuntary bankruptcy, the funds in the trust account were more than adequate to make the mortgage payments of $12,877 per month.”
While there were indeed serious delinquencies in payments of carrying charges by some members to DACHA, “there was no failure by DACHA to make mortgage payments to the City. The City was not damaged by any such delinquencies and no public money was lost as a consequence of any such delinquencies.”
While none of these seem to directly address the charges made by David Thompson and Luke Watkins about the propriety of public money going to reimburse share members, it does hit on a number of other crucial questions about the use of public money and the propriety of it.
The Grand Jury also found that since the city has seized DACHA, they have successfully managed the properties and collected all money due.
They report, “There has therefore been no further loss to the city or gift of public money subsequent to the foreclosure.”
The major problem from the outset was the high share costs that were initially implemented. “Unsustainable share costs with expensive financing were major factors in the DACHA debacle from the outset and are to be avoided if at all possible.”
Their report therefore concludes, “No inappropriate gift or use of public money was made at any time for any purpose by the City in connection with DACHA. However, the City has incurred losses that may not be recovered and may increase in the future. Better initial oversight of DACHA could have prevented this.”
Recommendations and Response
The Davis City Council, Redevelopment Agency and Davis City Attorney Harriet Steiner are required to respond to this report.
They have made four recommendations listed below:
R1. The City and RDA need to be sure their oversight and expenditure of taxpayer dollar responsibilities are taken into account when affordable housing projects meet challenging implementation and sustainability problems.
R2. The City and RDA should do a more thorough job of analyzing the risks and benefits of any novel project before deciding to invest significant taxpayer funds in it. This should include public policy, legal and financial reviews of any documents that form the basis of such a project.
R3. The City and RDA should do a more careful job of deciding at the outset of any privately developed project involving the investment of significant public funds what the degree of public involvement will be, and ensure the plan has a clear means of implementation.
R4. If the City sells DACHA at market value, it should ensure that all funds received are reinvested in affordable housing.
We will have much more on this issue later. However, from the start the Vanguard’s goal was to have the public know the truth about what went wrong, and why, with DACHA. We would have preferred the city appoint an independent investigator. They did not.
The Grand Jury has stepped in. Hopefully, there are enough lessons for all involved to do things better should the opportunity arise in the future.
—David M. Greenwald reporting
David, I did not interpret the Grand Jury report as you have represented it.
The Grand Jury exonerated the city of wrong-doing, and praised the city’s motives and the affordable housing program in general. Since the purpose of the report was to explore possible wrong-doing on the part of the city, that is the main conclusion of the report.
The program was not supposed to need active city oversight, and I don’t believe that staff would have recommended nor council approved the project if the city had to micro-manage it. To actively manage the project would have cost far too much city staff time.
Again, the Grand Jury exonerated the city of wrong-doing, and praised the city’s motives and the affordable housing program in general.
I particularly agree with the follwoing Grand Jury recommendation:
[quote]The City and RDA should do a more thorough job of analyzing the risks and benefits of any novel project before deciding to invest significant taxpayer funds in it.[/quote]As I have said many times on the dais, I had concerns about the risks and benefits of this particular model from the very beginning. A much more critical examination of the model would indeed have saved everyone including the low-income residents of DACHA a lot of money, time and turmoil.
Sue: I think there were real problems in the way the city failed to anticipate problems and the way in which the program was overseen. I’m not sure there is any other way of interpreting it. The Grand Jury exonerated the use of public funds and defended the overall affordable housing program. In what way did I misinterpret it?
[quote]Sue: I think there were real problems in the way the city failed to anticipate problems and the way in which the program was overseen. I’m not sure there is any other way of interpreting it. —David Greenwald[/quote]
David, I think this quote illustrates your bias. You have written many columns insinuating malfeasance on the part of the city. You repeatedly called for a third party review when one had already been done. You called for a Grand Jury investigation. Well, now we have had the Grand Jury investigation.
The first sentence of the Grand Jury report states its purpose: “The Grand Jury investigated allegations of unfairness and misuse of public funds in the administration of the affordable housing program in the City of Davis”
And the Grand Jury finding regarding this is: “No inappropriate gift or use of public money was made at any time for any purpose by the City in connection with DACHA”.
The Grand Jury also find that “The City acted responsibly by making many attempts to preserve DACHA as part of its affordable housing program.”
In light of the stated purpose of the investigation, these are the key findings. An unbiased headline would have read “Grand Jury Exonerates City of Unfairness and Misuse of Public Funds” and an unbiased first sentence would certainly [b]NOT[/b] state: “The Yolo County Grand Jury issued a scathing report on Davis’ handling of the DACHA”.
It seemed pretty scathing to me. Nevertheless, i got what i wanted and i am satisfied with the findings.
[quote]”Unsustainable share costs with expensive financing were major factors in the DACHA debacle from the outset…”[/quote]
IMO, this statement by the Grand Jury is key…
Sue Greenwald,
1)When was the city served by the grand jury?
2)Was this report signed by the judge?
Thanks
[quote]As I have said many times on the dais, I had concerns about the risks and benefits of this particular model from the very beginning. A much more critical examination of the model would indeed have saved everyone including the low-income residents of DACHA a lot of money, time and turmoil. [/quote]
Too often it seems “the city” (which would include city staff/city attorney and CC members) does not do proper due diligence when it comes to investigating/analyzing proposed contracts. The Zipcar contract comes to mind. It is not the puffery and promises made prior to a contract that count, it is the terms that appear in the four corners of the document that are controlling, period. This is well settled contract law. It would behoove the city to make sure they know exactly what they as well as citizens are getting into BEFORE signing on the dotted line.
Let me make a slight change in that last sentence: It would behoove the city to make sure they know exactly WHO THEY ARE DEALING WITH AND what they as well as citizens are getting into BEFORE signing on the bottom line.
I noticed at the bottom of the GJ report they stated that another GJ report would be forthcoming at the end of the month. Grand Juries are not in the habit of informing the public that a report is forthcoming. This is NOT something that Grand Juries do. I am very curious if the judge reviewed and signed this report before it was issued.
I have served on four Grand Juries and this is something I have never seen.
Correction
The above should say
I noticed at the bottom of the GJ cover letter attached to the GJ report
Substitute DACHA for the national subprime mortgage debacle, substitute David Thompson for Moody and the other Wall St. infallible experts , and substitute Twin Pines and the Neighborhood Partners consultants for the incestuous relationship between Wall St. investment institutions, banking and rating agencies and we once again see the national scene played on the local level.
[quote]”If the City sells DACHA at market value, it should ensure that all funds received are reinvested in affordable housing.”[/quote] What’s the rationale for this? I’d think the first thing should be to repay the city for all of the “loans not gifts” that the GJ found won’t be recovered.
I’m still awaiting any response about what “affordable housing” ownership programs ever undertaken in Davis have not resulted in waste, fraud or corruption (or bankruptcy) of some kind.
The city has proved over two decades that we cannot or will not manage such a program in a fair, business-like manner. Participants (picked in fair and insider manners) walk away with windfall profits or with nothing to show for their time, effort and money.
Name a couple of our ownership programs for which you’d stand up in public and announce, “I’m proud of the way we’ve managed this program!” Since David Thompson already has expressed satisfaction with his current enterprise, he may have a point. Of course, he’s in court.
[quote]”Again, the Grand Jury exonerated the city of wrong-doing, and praised the city’s motives and the affordable housing program in general….An unbiased headline would have read ‘Grand Jury Exonerates City of Unfairness and Misuse of Public Funds’.”[/quote]If even Councilor Greenwald reads this as praise and an endorsement of the way the City has managed this particular program, we’re all lost. It’s the end of the world.