Insiders : The Money Behind the L.A. Slums

For more than a decade, many of Los Angeles’ worst old slum apartment buildings have been commodities on an insider’s trading block.

While immigrant tenants live in squalor in the aging structures, behind-the-scenes investors have developed sophisticated financial devices that drain the buildings of thousands of dollars in cash rents and virtually condemn them to further decay.

Those who stand to make the greatest profits do not need to step inside the door. Often, they do not own the properties, at least not in their own names. They own the mortgages on them.

Exceed Property Value

In a two-month examination of Los Angeles slum real estate, The Times found that some lenders have heaped old buildings with high-interest mortgages that often exceed the value of the properties. That leaves the titular owners to run the buildings on little cash, face creditors, and assume the liability for slum code violations.

Slum traders often “sell” buildings to their own dummy corporations, giving themselves new “loans” each time and inflating the apparent value of the buildings. They then sell the buildings to paid front men, or to unsophisticated buyers who often do not realize their lenders are related to each other. Because each transaction taken alone appears to be standard, government agencies are unlikely to spot abuses.

And, there are abuses:

--The titular president of two slum trading corporations, Grover Black, apparently is a dog once owned by Westside real estate agent William Leyton, according to associates. Public records show that Grover Black has had two offices, hired at least two attorneys, signed court records, and claimed an interest in at least two major slum buildings.

Leyton declined an interview. His attorney, Milton Simon, who filed a federal bankruptcy petition signed by Grover Black, said he “preferred not to comment” on the identity of Grover Black.

--One of Los Angeles’ busiest and most flamboyant slumlords in recent years was a one-time Boston bank robber named Joe Fitzpatrick who financed his empire of several dozen apartment buildings through numerous loans from friendly bankers to what he himself described as “straws” and “shell” companies. One was named MLUS Inc., an anagram of SLUM. A close associate of Leyton, he has been accused in court of naming his dog president of one of his companies. Fitzpatrick claimed that the company president, “Teluce Black,” actually was his gardener.

Fitzpatrick, who acknowledged in a court case last year that he had been convicted of bank robbery about 20 years ago, left town last year after declaring bankruptcy. But he managed to get back at least one of his old apartment buildings by lying to the court about his relationship with his real estate agent, Leyton, records show. He could not be reached for comment in Las Vegas, where he has recently incorporated new companies.

--Inglewood lender Alexander Spitzer has financed many of the city’s most infamous slumlords for more than a decade, buying and selling slum trust deeds among his own companies. While his companies have taken in profits from high-interest loan payments, his staff has treated some of his borrowers--the slum owners of record--as “managers,” charges one borrower who is currently suing him for fraud.

Asked about the frequent property transfers, an attorney for Spitzer said they were “for business purposes.” Through the attorney, Spitzer declined an interview. Several of Spitzer’s business entities have recently begun defaulting on more than $90 million in bank loans and halted payments to investors. One has petitioned to reorganize under Chapter 11 of federal bankruptcy procedures.

Massive Civil Suit

Leyton, Fitzpatrick and Spitzer are among 142 defendants in a massive civil lawsuit filed last March by the city attorney, the Legal Aid Foundation and Litt & Stormer, a private law firm that is representing thousands of tenants. On July 12, the city settled its claims with 11 companies and individuals related to Spitzer with an unprecedented agreement that requires them to alter their lending practices and force their borrowers to make repairs on substandard buildings. They are still being sued by the tenants.

The suit alleges fraud, conspiracy and racketeering by the defendants in connection with their ownership roles in 11 selected slum buildings over the last decade. It argues that lenders, through imprudent or insider loans, have so much control over Los Angeles slum properties that they are de facto owners and should therefore be held accountable for living conditions in the buildings.

“At first we saw a conspiracy among record owners,” said City Atty. James K. Hahn. “Then there was a whole other level underneath it that we were completely unaware of, and that was the lenders. . . . The lenders were essentially using these people as fronts . . . uncredit-worthy people who could come in the back door and get exorbitant loans you and I could never get.”

Unanswered Questions

There are a number of questions surrounding the alleged schemes that Hahn and the other plaintiffs hope will be answered in court: How many of the defendants know each other? To what extent do slum lenders violate existing law, if at all? Why is it that some buildings seem to travel a slum circuit, passing from one trader to the next and falling deeper into disrepair with each new sale?

A review of hundreds of real estate records, as well as other public documents and interviews, indicates numerous links between certain slum traders. Many use the same attorneys, the same notary publics and, in some cases, the same offices. This story focuses on one “owner” and his financiers.

Robert Rooks is a small film company owner who got into the slum trade as many owners do, hoping to profit from an investment that required little money down. In 1986, he bought a 47-unit slum apartment building at 3972 W. 9th St. from a man who had defaulted on his loans and was headed into foreclosure. He said he got the property with no cash down in exchange for agreeing to assume the existing loans.

“I thought I’d buy this property and fix it up,” Rooks said in an interview. “I didn’t know what I was getting into.”

Like many owners of slum properties who think they are getting a good deal, he did not order a title check. That, he now acknowledges, was a “big mistake.” The $1-million loan he had agreed to pay turned out to be a “wraparound” trust deed, which contained payments to several other note-holders whose identities were not disclosed to him at the time, he said. Over the next year, he said, new notes on the property kept surfacing until there were “about 11.”

Note Is Sold

At first, he made his mortgage payments to William Leyton, who controlled a real estate investment company called Zimo 5 Inc., at an office just south of Beverly Hills.

Then, he said, Leyton told him he had sold the notes to his longtime business associate, Alexander Spitzer, who owned several industrial loan companies at 160 S. La Brea. Over time, Rooks said, he developed a relationship with Spitzer and his staff that was so close he spoke with Spitzer’s staff daily and consulted them on major repairs he was making.

“Spitzer told me he liked me because I was ‘workable’ and I could deal with Hispanics,” Rooks said. “(He told me) how blacks weren’t good to have (as tenants) because they knew their rights more than Hispanics who don’t have their green cards, and pay on time.”

Black women “with lots of kids in their apartments (who) had welfare checks . . . and no husbands so they couldn’t just move out” were also acceptable tenants, he said he was told.

Debts Increase

To help repair the apartment building, he took out two new loans and put up his $300,000 Monterey Park home as collateral. Spitzer told him that other buildings would become available from time to time if he wanted to take them over.

Meanwhile, his debts increased and he couldn’t keep up with all the repairs on the building.

“There was a pipe under the building with about 20 patches on it,” he said. “It would have been cheaper in the long run to put in a new pipe.” But, he said, he couldn’t get enough cash to do so.

“I asked to lower the (mortgage payment) to fix the building and put it back into shape. But they wouldn’t do it,” Rooks said.

The city began prosecuting Rooks for slum violations. He installed new fire sprinklers required by the city, he claimed. Then, he said, one of Spitzer’s business entities foreclosed and took back the building, claiming he was in default.

Suit Alleges fraud

Rooks is now in court, suing several companies owned by Spitzer and Leyton for fraud in what he claims was an illegal foreclosure. In court records, Spitzer’s attorneys argue that the case is a straightforward example of a lender foreclosing on a borrower who didn’t pay his debt.

“Finally I figured it all out. . . . I was an employee rather than an owner,” Rooks said in an interview. “They run the loans up to the market value of the property. You collect the money and give it all to them. You take all the punishment. Mr. Spitzer didn’t take the (slum) violations, I took 29 counts--and then after you fix it up, they take it back.”

In all, Rooks said, he paid $10,000 in fines for his slum-related violations, lost his building and nearly lost the home he put up for collateral. His old building is now owned by another major slum investor who has taken over many of the buildings financed by Spitzer’s A & B Loan Co.

‘Wonderful Dog’

The president of one of the companies holding a $1-million note on Rooks’ property was one Grover Black. Several sources, including Michael Medved, a television talk show co-host, said Grover Black was Leyton’s dog.

“Grover was a really wonderful dog,” Medved said in an interview. “A black dog.”

Grover Black’s corporate address was a rental post office box on Wilshire Boulevard.

According to the California Department of Motor Vehicles, there is no Grover Black licensed to drive in the Los Angeles area. And there is no registered voter named Grover Black in the area. Asked how to reach Grover Black, Leyton’s attorney, Milton Simon, said: “That’s a very good question. I don’t know.” Asked to describe him, he answered, “I’d prefer not to.” Asked point blank if Grover is a dog, he answered: “I never met a dog. I don’t think I can talk about this.”

Complicated History

Grover Black is still listed as president of Zimo 5 Inc., an active California corporation. Zimo 5 transferred one trust deed on the Rooks apartment building three times in less than one minute, according to attorney Abrams, who said the real estate history of Rooks’ property was the most complicated he had ever seen.

“The way they tossed this note (loan) around . . . is amazing,” Abrams said. “You never knew from day to day who owned it. . . . They set up companies on the left hand so they could turn money over to the right hand.”

Such transfers are known in the slum trade as “churning.”

“There are maybe 300 or 500 unreinforced brick buildings (in Los Angeles) that are constantly churning,” said Louis Scalise, a major investor in such properties until the mid-1980s, when he said he left the business.

Clouded Titles

Churning is not real estate as most people know it. Properties get traded often, sometimes every few months. Occasionally, in a series of preplanned maneuvers, properties change hands several times within a minute. The mortgages, too, are sold often, and sometimes used as collateral on other buildings. Run-down old hotels that would appear to be worth next to nothing wind up with six, eight, or 10 mortgages. One slum hotel was weighed down with 14 trust deeds.

Title to the buildings becomes so clouded that only the most gullible--or the most savvy--of investors will touch them.

Meanwhile, the owners of record, including “straws” who are paid or duped into taking title, are slapped with code violations, utility bills and taxes. The noteholder avoids the responsibility and takes in the cash, foreclosing whenever he wants a new “owner.”

A foreclosure sale wipes the slate clean of all debt, and the cycle can start all over again.

Likened to Insider Trading

“Churning is the real estate equivalent of insider trading, a method of creating tax-free dollars,” asserted Bill Wakeland, a former slum task force member who witnessed it first-hand after he went to work as a consultant fixing up old buildings.

“They buy distressed property and begin to manipulate its value by selling it back and forth to each other. After a while, nobody makes payments. It gets ready to go to foreclosure. Then the lender takes it back and resells it to the same people under a different name.”

Since 1980, when the city attorney’s office formed its “slum task force” to work with fire, health, and building inspectors, officials have seen frequent transfers of slum buildings.

“Initially when we saw properties changing hands, we thought they were transfers in avoidance of prosecution (for code violations),” said Deputy City Atty. Stephanie Sautner, current head of the task force. “Later we realized the transactions were a means of making a few people a lot of money, that they were designed to inflate the property and take out all possible equity.”

Cash Attraction

For both the record owner and his financier, the main attraction is cash--up to $50,000 a month from old buildings that are crammed with immigrants.

There are probably as many different variations on churning as there are investors. Most are extremely complicated.

By selling a building often, its value rises artificially, giving investors a larger tax base to use for depreciating the property and writing off their large profits.

Scalise said some rents are collected in cash, permitting a further tax dodge.

“You can also say to the IRS that you’re taking in $5,000 (a month) and you’re really taking in $20,000, so on paper you have a net loss,” Scalise said. “I never did it. And I really took a lot of money home from these buildings anyway--every month.”

Pecking Order

When the person in control of the building decides it is time for profit-taking, the record owner is usually so delinquent on his many loans that the financier can foreclose at will. His companies may hold the first note, the third and the seventh. If he uses the third note to foreclose, the people who own the fourth, fifth and sixth notes lose their money.

Meanwhile, the buildings fall further and further into decay. The aging, 47-unit building owned by Rooks is an example.

A Leyton-related company submitted into the court record a balance sheet for one month that it had owned Rooks’ building. According to that sheet, the company took in $13,524 in rents, paid virtually no maintenance costs, and still listed a net loss.

According to the sheet, $136 was spent for elevator work, $80 for pest control and zero for “maintenance.” More than $9,300 was spent on mortgage payments. About $2,200 went for overhead fees: “management,” “legal,” “sales” and “wages and commissions.” With utility costs, the result was a net loss of $949.

Writing Off Losses

Innocent investors write their losses off on their income taxes. And, because the slum trader may have defaulted on a note held by one of his own companies, he is probably in a position to write his “loss” off as well.

There is nothing illegal about creating one new company after another.

“There’s nothing wrong with creating 100 new companies or 1,000 new companies,” said Jim Reber, spokesman for the state Franchise Tax Board. “That’s perfectly legal. But if you don’t file tax forms, they will be suspended.”

Many of Leyton’s companies are suspended for failing to file state income tax returns, the public record shows.

Numerous Leyton-related corporations have filed for bankruptcy. In an apparent violation of bankruptcy regulations, records show, Leyton failed to disclose to the court on more than one occasion that he held a major interest in several companies that previously filed for bankruptcy.

Flash in the Pan

One such corporation, PHC Finance Inc., was extremely short-lived.

According to state records, PHC Finance was incorporated on Jan. 24, 1985. According to federal bankruptcy records, however, it “duly held and convened” a meeting of its board of directors on Jan. 23, 1985--the day before it came into existence. On that day, it decided to declare bankruptcy.

That means it went bankrupt before it was created.

On Jan. 25, it filed for bankruptcy, listing about $250,000 in debts on an apartment building. Its president, the busy Grover Black, listed as his “principal place of business” 1800 S. Robertson Blvd., Suite 384.

The “suite” is a rented post office box in a convenience store.