Jones’ 100% Property Loan Called Proper but Unusual

San Diego City Councilman William Jones obtained a rare real estate loan from Great American First Savings Bank that enabled him to buy a small apartment building in Southeast San Diego as an investment without putting any money down, interviews and public documents show.

Both Jones and Great American, which has a development subsidiary active in the city, said he received no special treatment in obtaining financing for the apartments, which, by the institution’s own calculations, give him rents that “far exceed” his monthly payments for the loan. The apartments had been entangled in bankruptcy proceedings.

Jones, who makes $40,000 a year as a council member and has no other source of income, said he was given specific assurances from Great American officials that the conditions of the loan had nothing to do with his position, which requires him to vote on development projects.

“They’re the experts in financing, but they tell me that the loan that they provided to me . . . is within the federal regulations and it is something they would do for anyone to rid themselves of distressed property,” Jones said. “The reason I knew that is because I specifically asked.”

Great American spokesman Ken Ulrich said: “The facts show that we have done nothing improper. Councilman Jones received no preferential treatment.”

But executives at Home Federal and Imperial savings and loans characterized the 100% loan as extremely rare, and said they wouldn’t consider granting one. Ulrich acknowledged that Great American gives only “two or three” 100% loans a year.

“It is totally unusual,” said Clinton Elmore, vice president for the Southern California lending division of Imperial Savings.

Jones purchased the four-unit apartment complex at 3055 L St. on July 31 for $150,000. Its previous owner, Nathaniel B. Williams, had filed for bankruptcy seven months earlier. Records in federal bankruptcy court show that Great American held an $89,000 first trust deed and a $35,000 second trust deed on the property.

When Jones approached Great American for financing, it offered to lend him $150,000--the full purchase price--without any down payment.

The terms of his loan call for interest-only payments at 10% for five years--about $1,250 a month, not including insurance and taxes--at which time the $150,000 principal will be due.

“The challenge that I received, not the one that I wanted when I walked in there, was to make this project successful because somewhere between now and five years, I have to pay off that note,” Jones said. “That’s a challenge.”

Jones said he has been interested in acquiring income-producing property for some time.

“I have worked ever since I have been 15, 16 years old, and I think I’ve done OK,” Jones said.

“I work very hard and I don’t have a lot of money, and I believe that it’s OK in America for someone to use their hard-earned money and take advantage of business opportunities to invest in the future.

“The line that I have to draw is if there is a situation in which I should not participate in a vote as a member of the City Council. Every time there is a potential conflict, I make darned sure that I raise the question. That’s the duty that I have as a public official.”

Great American Development Corp., a subsidiary of the savings and loan, has at least two large projects under way in San Diego. One is the Otay International Center, a 36-lot industrial subdivision in Otay Mesa, and the other is Miramar Ranch North, a residential development east of Scripps Ranch.

Both have required action by the City Council. Miramar Ranch North, for which Great American Development is seeking a change in zoning to permit more intense development, is pending and will be before the council again, said Ron A. Smith, a city planner.

Jones said he does not believe his loan with Great American creates a conflict because he was not given special treatment. A spokesman for the state’s Fair Political Practices Commission said there should be no problem for Jones if the same 100% deal were available to the general public under the same circumstances.

The deal for Jones to acquire the L Street apartments took shape late last year, when a real estate agent alerted the councilman to Williams’ desire to sell the property.

The complex was one of several properties that Williams had accumulated, primarily through his company called N. Bernard Realty Inc. Williams had failed to make payments on the L Street property, and Great American filed notices of default in July and September, 1985. In addition, bankruptcy records show, Williams owed $1,750 in property taxes on the apartments.

Eventually, Jones said, he decided to buy the L Street property. The men agreed to a purchase price of $150,000.

“The property has been valued much higher than $150,000,” Jones said. “There have been a couple of appraisals done. I’m told by some real estate people that replacement cost is $200,000. The highest appraisal that was done was $175,000, and that was done a couple of years ago.”

An escrow agreement dated Dec. 11, 1985, and filed in bankruptcy court shows that Jones originally intended to put $30,000 down on the L Street property, with the $120,000 balance to be financed through a conventional loan. The deal was to be consummated in early January, 1986, the escrow agreement says.

The sale was interrupted--albeit temporarily--when Williams filed for bankruptcy Dec. 31.

Ulrich said Great American didn’t find out about the bankruptcy proceedings until mid-January, when it sent a notice to a title company to prepare a foreclosure sale for L Street; the title company reported back that the property was tied up in bankruptcy proceedings.

Despite the new legal wrinkle, the agreement between Jones and Williams survived, and the councilman said he decided to pursue the purchase because he had invested “considerable time” in the acquisition. The bankruptcy judge approved the sale April 8.

“I talked to him pretty hard just to keep him interested,” Williams said about the councilman. “He was a first-time buyer of investment property, and he wasn’t that familiar with the intricacies, and he was a nervous person, first time starting his investment program.”

In March, Jones approached Great American for a loan. “I went to Great American because Great American had the loan on the property, and it seemed to me that, because this was a problem piece of property, they had an interest in the property,” he said.

At first, Jones said he intended to put $30,000 down and to ask the institution for a $120,000, 15-year fixed-rate loan for the balance of the purchase price. He also wanted a loan of “several thousand dollars” to improve the four units.

“The answer to the improvement loan was ‘no,’ and the answer for the 15-year loan was ‘no’ because this had been a distress piece of property,” Jones said.

Instead, he said, Great American countered with the 100% loan offer. Of the four to seven Great American-backed properties that wind up in bankruptcy proceedings a year, two or three of them are sold with loans that are 100% of the purchase price, Ulrich said.

In the case of Jones, the 100% loan was suggested so he could avoid a down payment and free the $30,000 of his own money to improve the property.

Jones said he was willing to come up with the $30,000, even if it meant taking a second mortgage on his home. He added that Great American didn’t propose putting the $30,000 in a special impound account or require him to commit a schedule of improvements to paper, he added.

“I felt good about their concern about it being successful,” Jones said about the loan. “I felt good about their wanting to make sure that I didn’t get into something deeper than I should. So I did not get a feeling at all that they were careless or reckless, nor did I get the feeling at all that they were doing me any favors.

“I would not ask them to do me any favors, and I would not expect them to do any favors for me or anyone else.”

Ulrich offered a different account of the circumstances surrounding the 100% loan, saying it was one of several options offered by Great American to Jones.

“We offered what he initially wanted,” Ulrich said. “He was the one who said ‘I want the 100%,’ after comparing what it would do for his own financial condition.

“It was not a question of a counter offer. It was us laying out for him at least three, maybe four different alternatives that he could consider because when he realized what he may have to do to come up with the $30,000, he didn’t want to do it. We did not put a gun to his head and say, ‘You have to take this.’ He chose it.”

Ulrich said the 100% loan was justified and acceptable.

“The piece of property that he bought was in bad condition,” Ulrich said. “He bought it out of bankruptcy court and it was the bankruptcy court judge who approved the purchase price of $150,000. So this type of loan was a ‘loan to facilitate,’ and it is a perfectly acceptable loan, and it is a way for lenders to deal with property that you’re having trouble with, you’re experiencing difficulty in selling.

“The general policy is to do whatever we can, whatever we have to do, to get a property out of bankruptcy,” Ulrich said. “When a property is in bankruptcy, we’re not making any money on it. It’s a loser. We don’t like loans like that. We like to get paid. So we offer incentives.”

Ulrich said Great American’s calculations showed that the property was actually worth $160,000, making the loan 94% of the property’s appraised value. In addition, the rents collected from the tenants would “far exceed” the payments Jones would have to make on the mortgage, taxes and insurance.

“Why in the world wouldn’t you make a loan like that? There’s absolutely nothing wrong with it,” Ulrich said.

“To us, it’s an economic matter. It was a non-performing asset on our books, and we wanted to turn it into a performing loan. Obviously, it’s got to carry itself, and when we looked at the financial statements, we determined that it would.”

Ulrich said none of Great American’s senior management knew about the loan or approved it, a task left to a “junior committee” that examines loans of $500,000 or less. In addition, Jones’ loan was scrutinized and passed by a special “oversight committee,” which monitors loans to prominent officials to make sure there is no favoritism.

Jones said he, too, was careful to warn Great American that he didn’t want a special deal because of his position as a council member.

“I asked the question, I said, ‘I don’t want you to do anything for me that you wouldn’t do for anyone else, given the circumstances of this property,’ ” Jones said.

“Great American’s response was, ‘Don’t worry. We won’t, and to make sure we won’t, we’re going to give it to this committee.’ There was pro-active discussion on this matter.”

A spokesman for the Federal Home Loan Bank in San Francisco said Wednesday that 100% loans are permitted by federal regulations.

Peter Q. Davis, president of the Bank of Commerce, said the 100% loan to Jones is a “pretty logical business decision from Great American’s standpoint.”

“Great American has a problem,” he said about the property. “They are willing to bend a few rules to have a smaller problem” by making the loan.

Yet other savings and loans executives said they had never heard of giving 100% loans, and they wouldn’t approve such a transaction, even for distressed properties.

Chuck Taylor, chief lending officer for Home Federal Savings & Loan, said he didn’t know of any 100% loans given by his institution.

“I can’t think of any, to tell you the truth,” he said. “We wouldn’t do that. That’s just not policy at all. We wouldn’t do it.

“It doesn’t sound normal at all,” he said, when told the general details, but not the name, of the Jones loan. “I’m just trying to rationalize how someone did that. We wouldn’t do it that way.”

Elmore, of Imperial Savings, said 100% loans are “totally unusual.”

“I don’t know what institution is doing it, but the only 100% loan you see is a VA loan, for a veteran. The only thing a veteran pays is closing costs. But other than that, you look long and hard to see institutions making 100% loans . . . and be around to tell you about it,” he said.

Elmore said 100% loans are impossible to sell on the secondary market, where banks and savings and loans turn around and sell the mortgages to other investors. “It doesn’t make good business sense to do it,” he said. “We want to sell our loan so we can generate more capital.”

He also said any requests for a 100% loan would have to be examined by top management at Imperial Savings. “It would have to go to the top, and I doubt it would be approved there,” he said.

A tenant in the L Street apartments said improvements began last month on one of the four units. Eldora Dawsey, who said she pays $445 a month for her two-bedroom apartment, said workmen put tile in the kitchen, laid new carpet in the living room and painted the walls of another apartment in the complex.

Rent for the remaining three units, all three-bedroom apartments, she said, is more than $500 a month.