It is perhaps an oversimplified statement that those who have nothing to hide, hide nothing. But as the Vanguard closes in on five years examining public documents and scrutinizing the actions of local government, I think even from a political perspective it is best to lay all of the cards on the table and let the chips fall where they may.
DACHA (Davis Area Cooperative Housing Association) was a vexing problem for a watch dog, with competing claims made by the developer/consultants, the DACHA membership and the city. Complex laws and documents made it more difficult. That is why from the start, we asked for the city to conduct a third-party investigation into what happened.
Did the Grand Jury answer all of our questions? No. As the consultant and representative from Twin Pines Cooperative, David Thompson noted, “Due to the issues in the pending law suits the Grand Jury appears to have focused on a few very narrow components of the DACHA situation.”
This was by design. The Grand Jury does not have the authority of a court of law, they are an investigative body that issues finding and makes recommendations. The recommendations do not carry the weight of an order by a Judge.
What the Grand Jury report does do, however, is answer questions that were beyond the scope of the pending civil litigation.
Many of these findings have tremendous policy implications for the city, going forward, and they laid out the mistakes that the city did make and those that they did not make.
In essence, as we noted on Friday, what we have is a third-party investigation. But instead of being performed on the city taxpayer’s dime, it is performed on the county taxpayer’s dime.
There are two fundamental findings in the Grand Jury report. First, the fact that “no inappropriate gift or use of public money was made at any time, for any purpose by the City in connection with DACHA.”
This was the most serious of charges that were laid upon the city. They stem from the use of the Redevelopment Agency’s money to refinance the project, which led to two key questions. First, whether that refinance which ended up lowering the carrying charges and reimbursing residents for their monetary investment, thus improperly transferring assets from the cooperative into private hands.
And second, whether the city itself was helping to finance the legal defense of the cooperative.
The answer was a resounding no. That is a relief. It is what the city has been saying all along.
Mayor Joe Krovoza told the Vanguard, “The City appreciates and certainly concurs with the conclusion that there was no inappropriate gift of public funds within the DACHA-related transactions. That was the main allegation and the city has been exonerated in this area.”
The City had claimed this all along, but again, the problem is two-fold. First, the laws are very complicated to evaluate. And second, it was the same person making the claim that the city acted lawfully who approved the policy to begin with.
That is an inherent conflict of interest that needed to have a third party review it. The Grand Jury has no such conflict and their finding allows us to move on.
The second area of question was the handling of DACHA by the city. Here again I think it is helpful to separate the functions that the city played in DACHA.
In essence, the city had two jobs here, first as the regulator of affordable housing, and second as a lien holder.
The initial role of the city was as a regulator and provider of affordable housing. Here, the Grand Jury admonishes the city for failure to do proper oversight and foresee the problems that later arose. As such, the project ultimately failed.
This, despite the fact that the city had to step in, starting in 2005, continuing with a greater role until the city was forced to loan, foreclose on and now sell the project.
The Grand Jury found that the city did all right as the lien holder. There was not a misuse of public funds – as accused by some. But they failed as a regulator of affordable housing, which ultimately lost the city money that it will not recover and led to DACHA’s downfall.
As Sue Greenwald put it, there were indeed risks with this model from the start, and, unfortunately, the project was not self-executing but rather needed much more oversight.
The original terms were too burdensome on what were supposed to be low or middle income residents. The purchase price was too high, the carrying charges too steep. This led to risky loans and it led to the city’s attempt to stabilize the finances.
The Grand Jury found that a proper assessment and oversight at the start might have prevented this.
That said, the city made a good faith effort to save the project, first through a loan and share stabilization, and then through foreclosure.
The most serious charges, those of the misuse of public funds, proved to be untrue. However, the city needs to reassess how it will act in the future to ensure the success of affordable housing projects, as that is one of its chief charges and failures in this case.
We can thus look at it this way, the city erred in its handling of the situation prior to 2005. The city did everything it reasonably could after 2005 to save DACHA. If it failed – and it appears the answer to that is that it has failed – it is because it failed to anticipate these problems pre-2005.
There are critical lessons that the city can take from this. First is that there is no such thing a self-executing affordable housing plan. The city ought to, as the regulator of affordable housing, monitor and audit its projects.
Second, the city needs to take seriously the costs to residents. From the start this project appeared doomed because no one in that income class could afford the cost of the initial shares and the carrying charges – akin to rent – were way too high.
That should have been a signal to the city that they needed to reassess that. But it took until 2008 to do that. By that point it was too late, and certainly it was after legal issues resulted in the cooperative having to pay consultants for their judgment.
Now we can move on, as we await the court judgments on the civil litigation to play out. The city’s role in this is largely understood, and in the end, while the city bears a good deal of responsibility, they avoid legal culpability.
—David M. Greenwald reporting
It is appreciated that the Vanguard has covered many of the topics related to DACHA and provided a mechanism for the citizens to have dialogue around those issues.
However, allow me to share some quick responses to today’s column.
•Dos Pinos Housing Cooperative was started about 25 years ago and has become the most successful moderate income ownership program in California. Numerous efforts have been made to dismiss housing cooperatives as being too novel and untried to be worth it. Calling DACHA a novel idea when there are almost 100,000 housing cooperative units in California does a dishonor to cooperatives. Over the past five years, Dos Pinos is hardly mentioned by either the Vanguard or the Enterprise Limited Equity Housing as a model of a law abiding, legally elected board, without delinquencies conducting business fully in accordance with California law. I am concerned about the implicit attack on cooperatives by not looking at the conduct of the board of DACHA.
•DACHA is the only limited equity housing cooperative in the US in a situation were the members wanted to own their own homes and dissolve the co-op. There was up to $4 million to be gained over time if that could be accomplished.
•Nowhere in today’s blog not the Grand Jury Report nor the Enterprise is there a mention of the fact that since about 2006 almost every DACHA board member was required by the by laws to be automatically removed from the board as they were delinquent to the organization more than 30 days. Some of the board members were doubly ineligible as they were sitting in sponsor seats. At the point that DACHA borrowed $4 million in public funds the board and members were delinquent to the amount of $64,000. At the meeting at which the membership removed Twin Pines Cooperative Foundation as the recipient, there were no enough eligible votes to meet the state law requirement for a change of the articles of incorporation. However City staff prepared the documents for the Secretary of State which were then signed under penalty of perjury by the President and Secretary (both ineligible to serve on the board) that they had been duly passed by the membership. The City staff knows this, they have had the information for a long time, they have been provided with the information on numerous occasions and they have never denied that those facts are true.
•Like other organizations, Limited Equity Housing Cooperatives will not be able to work when the board and membership do not follow their own bylaws, do not follow the Davis Stirling Act when it comes to the noticing of meetings where there is a self-dealing transaction with a board member, AB 1246, Corporations Law, Mutual Benefit Corporation Law, etc. The evidence we have is the background for the allegations in the law suit. The actions of the DACHA board are harmful to all cooperatives and throw a shadow over all cooperatives in California. The fact that a cooperative in Davis was allowed by city staff to conduct business this way should be of concern to all. The evidence that city staff approved the board’s forbearance of public funds so that their unduly elected board could defend themselves against the allegations of breaking the law seems to invite abuse.
David Thompson, Twin Pines Cooperative Foundation
What did the City’s Appointee do at DACHA board meetings?
At a DACHA board meeting on August 24, 2006, Sally (not her real name) was chairing the meeting, in her role as president. The meeting was held at the City of Davis Hunt Boyer conference room. The meeting was an “executive session” which means that only board members could be present. The City’s appointee participated in the board meetings and actually made a number of the following motions. The following actions were taken:
1. The board voted to direct the management agent to enter into an agreement with one of the residents, whom we shall call “Alice” to pay an additional $90 per month toward her delinquent carrying charges in the amount of $4,703.07. Alice, who was the board treasurer at that time, was more than three months behind in her carrying charge payments.
2. The board voted to direct the management agent to enter into an agreement with another one of the residents, whom we shall call “Mary” to pay an additional $250 per month toward her delinquent carrying charges, plus an immediate payment of $6,000. Mary was not a member of the board.
3. The board voted to direct the management agent to initiate a court eviction action against another resident, whom we shall call Karen. But Karen was going to also be offered an alternative option to voluntarily turn over possession of her share (which essentially means vacating her residence) and enter into a court stipulated payment plan. Karen was also not a member of the board.
4. The board voted to excuse Sally (the board president described above) from making any further payments on the approx. $13,000 share loan, and refund to her the amount of interest already paid.
5. The board voted to have DACHA refund a portion of the share amount to three of its DACHA members. One of these members was a board member.
Decisions 1, 4 and 5 above involved voting on matters that would financially benefit a specific member of the DACHA board. The Attorney General and state law considers these actions to be “self dealing transactions”. The law requires that if a board of directors is engaging in a self dealing transaction, then it must notify each member of that organization that it is considering taking a vote on that self dealing transaction, with a thorough description of the proposed transaction, and that the entire membership be allowed to attend that board meeting. This law is intended to prevent the board of a homeowners association from secretly voting to charge themselves lower assessments than the rest of the association’s members. The mechanism for self-dealing transactions is described fully in the DACHA bylaws which were approved by the City of Davis.
Instead of notifying the DACHA membership of these potential self dealing transactions, the DACHA board held the 8/24/06 meeting in executive session, where none of the other members could attend or subsequently receive copies of the board meeting minutes.
Furthermore you can see that the terms offered in Decision 1 above to Alice, the board treasurer, were far more generous than the terms offered to Mary and Karen, the two non-board members in Decisions 2 and 3. This disparity appears to me to be a serious violation of federal fair housing law.
Conclude what you wish from this snap shot look at DACHA’s board of directors.
In 2008, the City of Davis made a $4,153,428.62 loan to DACHA, despite the fact that its staff had a copy of the above meeting minutes in its possession. City staff also had a copy of the DACHA bylaws, which require that any board member who is delinquent more than 30 days in their carrying charges must be immediately removed from the board of directors. Sally signed the city loan documents on behalf of DACHA, asserting that she was lawfully entitled to do so. Under penalty of perjury, Sally also signed other documents with the Secretary of State which she confirmed as 3 and 4. (see below).
” 3. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the board of directors.
4. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of the members.”
The suit against DACHA alleges among other issues that the document signed under penalty of perjury with the Secretary of State had not been duly approved as required by law.
David Thompson, Twin Pines Cooperative Foundation
The discussion of the costs of DACHA being too high, expensive etc, have no factual meaning by themselves and serve no use for dialogue.
The charges for the affordable homes in Davis were proposed by city staff, and approved by the Social Services Commission (as they are every year) and approved I believe by the City Council.
The budgets Neighborhood Partners proposed for DACHA met the standing requirements. The charges, the budgets, the share levels, and the financing plans for DACHA were each and every one approved by city staff as meeting the standards of the City of Davis for those income groups. So under those measures they were not too high or too expensive. The City arrived at those through a laborious process. To make it sound as though NP had set charges above what is allowed for these income groups is an incorrect charge.
NP did immediately protest to City staff that no one complained about the charges when two years after owning the home the occupant earned a $200,000 windfall. NP suggested that the formula used by city staff needed to be redone as it did not take into account various additional costs such as HOA Mello Roos fees, inflation, etc. We have copies of numerous memos sent to city staff on these issues. Our memos showed that the city had allowed a formula which over-charged DACHA about $450,000 for the 20 units. It was only after DACHA had bought the 20 homes that city staff adopted our recommendations and lowered the cost of the homes. Too late, regretfully, to be of use to the DACHA residents. No matter the over charging by city staff the DACHA charges were still within the required levels.
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As to the cost of the shares which were originally set at $18,000 to $20,000. From almost the beginning we told city staff that more people would be able to apply if we created a share loan pool or a down payment program. We submitted at least four different programs to the city staff, none of them were adopted.
During this time, we suggested to the city to use the Cal Home program as that could be used by a co-op. The City did apply, Luke Watkins helped staff do the application and the city won $500,000. None of it was ever used for a co-op, three loans were made and the rest was returned to HCD as it had not been used. What a waste.
So the next six homes after DACHA were in Parque Santiago. The developers there had exactly the same problem as DHACA had. Too few people had the more than $20,000 to put a down payment on the homes. At least NP and TPCF allowed people to get into the DACHA homes and they received the same interest rate on the funds they borrowed as TPCF gained as lenders. DACHA paid its members $78,000 in interest in September of 2008. Whatever any writes about the high interest rates they paid is not true. Wouldn’t you like to get & $7,318 dollars on a $20,000 investment. Well that was the kind of interest DACHA members got.
So the only people who got the Parque Santiago homes were the ones who had $20,000 in cash and everyone else had to walk away. So NP pointed out the problem in 2003 and suggested solutions in 2004 and 2005 and it is now 2011 and city staff and the City have still not solved it. Shame on city staff for turning down all our suggestions.
Fortunately, TPCF is able to work with other cooperative development organizations to carry out our ideas in most other states except California. As the largest co-op provider of capital to development organizations in the USA we’re proud to help people in co-ops anywhere else. But in Davis rather than work with us to obtain solutions we get called names.
David Thompson, Twin Pines Cooperative Foundation
All in all, I think the Grand Jury did a good job. But I also see one issue that I would have liked to have seen the Grand Jury delve into more deeply, and that includes the issue of the “67 additional housing units” which were never added to DACHA, but the fees for which Neighborhood Partners sued DACHA.
David Thompson and Luke Watkins signed contracts with the DACHA Board obligating the organization to purchase these additional units and to pay Thompson and Watkins a fee for each of these units. They did this even though they knew that the city had not agreed to provide these units to DACHA.
These contracts were signed with DACHA boards that at first included NO members of DACHA, and later included Boards of which minority of members were not members of DACHA, and hence would not have to live with the economic and legal consequences of these contracts.
David Thompson and Luke Watkins had set up the DACHA board structure such that it did not include a majority of DACHA members during this period.
It was for their fees from these hypothetical future additional units that David Thompson and Luke Watkins sued DACHA, and won the judgment that financially encumbered to organization.
Proof that the city had never agreed to provide these additional units and that Thompson and Watkins should have known this when they signed the contract obligating the DACHA board to purchase these units can be found in a July 19, 2002 letter submitted to the city by Luke Watkins on behalf of Neighborhood Partners. This letter is on record.
Luke Watkins answered a series of questions posed by staff about Neighborhood Partners’ DACHA proposal. One question was particularly pertinent. Staff asked:
[quote]By approving this proposal, is the city committing to allocate some or all future affordable housing projects to this mode?—question posed by city staff[/quote] Luke Watkins answered: [quote]…The project individualized plan option in the ordinance allows a developer to propose including affordable units from their market-rate project within our LEHC, if they so choose. [b]Clearly there is no such commitment from the city to mandate this[/b][/i]… – Luke Watkins[/quote]To repeat for emphasis: [quote][b]Clearly there is no such commitment from the city to mandate this[/b]– Luke Watkins[/quote]
[b]”Third Party Review” issue[/b]
Concerning David Greenwald’s opinion that we should have had a second “third party review”:
We already had one third party review. It concluded that the project was on an unsustainable course. Neighborhood Partners didn’t like the results of the third party review, so they asked for a second “third party review.”
I saw no reason to spend time and money on a second third party review. I had gone over all of the voluminous documents in the case, and was confident in my judgment. There are many other decisions made by the council that I feel would be far better candidates for third party reviews if we had the time and money.
David Greenwald could have asked me to sit down with him and discuss this case. We could have gone over all of the documents together, and he could have then made a more informed judgment regarding my position on the lack of need for another third party review, but he never did.
The only third party review done that met Yolo County Court requirements awarded Neighborhood Partners, LLC (NP) $330,000. We offered on numerous occasions to just do the work. If that had happened we would never have had this miasma of corporate irresponsibility.
In effect, the DACHA situation has received only one third party review conducted according to legal requirements and in conformance with Yolo County court requirements. That third party review again was the arbitration award won by Neighborhood Partners. It was required as part of the contract and the judge agreed to by both parties is highly esteemed in California. The arbitrator awarded NP $330,000.
Both parties went through a lengthy process providing materials. Both parties were represented by their own lawyer. There were depositions of NP, DACHA board members and city staff. We paid for our lawyer. Unbeknownst to us, DACHA’s lawyer was being paid from DACHA being allowed not to pay their mortgage to the city for 18 months. Anybody else in Davis want this deal? The over $116,000 of public funds un-repaid was folded into another loan which in the end was not paid by DACHA.
The Yolo County Court affirmed the award and DACHA was given the opportunity to challenge the award but chose not to challenge the findings of the Court.
The law firm for DACHA resigned just after that as DACHA owed them they claimed about $90,000. So if the City allowed DACHA not to pay about $116,000 in mortgage payments so that they could pay their lawyer how come their lawyer is owed $90,000? What we do know from the records is that DACHA got $116,000 in cash flow from the City through August of 2008 and DACHA members had increased their delinquencies to $64,000 by August, 2008.
Quotes by Kenneth M. Malovos, the attorney jointly chosen by DACHA and Neighborhood Partners and approved by the Yolo County Court.
“What is curious is that representatives of the City of Davis were present throughout the entire time when the new Board took these untoward actions and they did little to discourage the Board”. (Page 5 of Arbitration Award)
“The testimony by three members from DACHA who appeared at the arbitration can only be described as cavalier. For the most part their testimony was characterized by failures of memory, contradictions and a certain inability to admit even their own written words. Two of theses members appear to have been in serious arrears in their fees during times that they were members of the Board, in direct contravention of the bylaws”. (Page 7 of the Arbitration Award)
David Thompson, Twin Pines Cooperative Foundation
Four “third party reviews” have now been done.
The first was a study done by Gilbert and Associates. There was also a decision by the Yolo County Superior court and a Grand Jury report as well as the arbitration decision referred to by Mr. Thompson above.
The city of Davis and its RDA retained Gilbert and Associates to do a third party review of the project and its finances. The auditor found that the project was not sustainable at the time.
The Tentative Ruling Case No. CV PO 08-3424 which Twin Pines (David Thompson president) brought against the Davis and its Redevelopment Agency and DACHA found that the facts did not support the allegations of liability by the City of Davis and/or its redevelopment agency.
The Grand Jury report also found the city not guilty of any wrongdoing.
Neighborhood Partners won an award by a private arbitrator against DACHA (not the city) that David Thompson referred to above. The arbitrator wrote: [quote] “It is not the task of this arbitrator to wade through years of history between the City of Davis, DACHA and all other interested parties to determine who is right and who is wrong…..” Private Contractual Arbitration, Kenneth Malovos[/quote]
He based his decision narrowly on the contract that I discussed above: The contract between Neighborhood Partners (Mr. Thompson and Mr. Watkins) and the DACHA board to pay David Thompson and Luke Watkins fees for 67 new units. The DACHA board was composed of a majority of non-members of DACHA who did not have to personally experience the financial or legal consequences of the contract. David Thompson and Luke Watkins entered into this contract even though they had acknowledged that the city had not agreed to provide the units.
[quote]”The city of Davis and its RDA retained Gilbert and Associates to do a third party review of the project and its finances. The auditor found that the project was not sustainable at the time.”[/quote]Councilor Greenwald, thanks for the background. When did the city get the G&S report? Where can we find it to read? Link?
The grand jury process is a very interesting one. As everyone knows, they carry out their proceedings in secret, and choose who they wish to gather information from. In this investigation, the current Grand Jury never conducted an interview with me. I still find this surprising, given that they made a series of conclusions about the financing of DACHA, but did not deem it necessary to hear the perspective of the individual that was most responsible for arranging the details of that financing. As a result, I feel that they possibly failed to learn some facts, and thus came to some difficult to prove conclusions.
Particularly surprising to me is the headline grabbing grand jury conclusion that there was no gift of public funds. It appears that they failed to address the fact that the city made a below market interest rate loan to DACHA to pay its legal fees for third party civil litigation. Is a below market rate loan a gift of public funds? Of course it is, if the use to which the funds were put is not allowed by state law. Is it legal to utilize redevelopment agency funds reserved for the development of affordable housing (by legislative statute) to pay legal fees defending the affordable housing owner in a private civil suit? I don’t think so. Because the grand jury proceedings are carried out in secret, we don’t even know whether they received any legal advice on these two issues. They seemed to conclude that the use of city funds in this manner was legal, simply because it was loaned, instead of granted, without commenting at all on the terms of the loan.
Fortunately, the court system allows both parties the right to call their witnesses, and there is no mystery about what information was presented to the jury. I look forward to having the opportunity to tell my story in that forum.
[b]Luke Watkins[/b], it sounds as though you have some background that the Grand Jury missed and needs, particularly on the issue of a loan vs. inappropriate use of city funds. Initially, I accepted the city/GJ rationale that “a loan isn’t a gift if one assumes it’ll be paid back,” but I didn’t see anything about the “loan” interest rate.
IRS considers a below-market interest (or a “loan” one doesn’t expect to be returned–like one to a no-account kid”–as a gift. But, the city’s redevelopment agency agrees to all kinds of strange, sweetheart deals. Is it possible that these kinds of “gifts” are just fine?
Have you offered your information to the Grand Jury? It’s my impression the report isn’t final yet. Did the GJ question David Thompson? The report certainly referred to you, without naming the two of you.
I don’t think you should put to much on the GJ for the “headline grabbing conclusion.” I read several of more significance, in my opinion, in the report. The mayor and Councilor Sue Greenwald obviously found that one positive point very quickly, and the [u]Vanguard[/u] and the [u]Enterprise[/u] highlighted their reactions (which didn’t include much of the GJ criticism).
DG concludes that we now know the “truth” about DACHA. I’m not so sure the DACHA secrets are all out, given the competing, conflicting interests involved in this enterprise.
Final question: Do you know where one can read the Gilbert and Associates report to which Sue refers? (I asked her for a link, but sometimes she doesn’t come back to respond to questions.)