A Los Angeles builder used a $27-million loan insured by the U.S. Department of Housing and Urban Development to build a golf course and help finance a lavish clubhouse for a private, gated retirement community in Oceanside, HUD records show.
New homes in the development, called Leisure Village Ocean Hills, are selling for as much as $329,000 and feature individual back-yard fountains and hot tubs. Residents zip around the 400 acre-complex in golf carts and gather at the multimillion-dollar clubhouse, where two-story carved wooden doors lead to an auditorium with a parquet dance floor, a banquet kitchen, lapidary shop, woodworking shop, Nautilus exercise studio, darkroom, billiard club and wood-paneled “Wall Street Room,” complete with high-backed leather chairs.
Leisure Village, developed by Leisure Technology Inc. of Los Angeles, was approved by HUD in 1981 and dedicated in a 1984 ceremony hosted by Alexander M. Haig Jr., who joined Leisure Technology’s board of directors in 1983, after he stepped down as secretary of state.
“At the time we did it, we didn’t have any misgivings,” said Charles J. Wilson, manager of HUD’s San Diego office. “But looking back at it, in retrospect, it probably is elaborate.”
The funding for Leisure Village was obtained under Title X, a much-criticized loan-insurance program discontinued in June by HUD Secretary Jack Kemp, who said the program was “riddled with abuses,” had suffered enormous losses and had failed to benefit the needy. The program guaranteed $500 million in loans over the last 16 years and losses so far total $90 million.
Because Leisure Village has been financially sound--in that respect “one of the most successful (HUD) projects in the country,” according to Wilson--it has caused no losses for HUD. But neither has it provided any benefit for the poor. Only a few of the duplex homes that went on sale beginning in 1984 at prices starting around $100,000 were within reach of those with even moderate incomes. In fact, according to a Leisure Technology official, most buyers required no mortgage arrangements. They paid cash.
While allegations of influence peddling in HUD deals have been widespread in recent months, there was no indication that such was the case with Leisure Village. Haig became associated with the company after the $27-million loan was approved and officials say it was the only HUD project the company ever arranged.
Title X was established to provide loan guarantees for developers of vacant land who, in exchange, were supposed to set aside a percentage of housing units for low- and moderate-income families. But HUD officials concede that the set-asides were more of a suggestion than a requirement and Leisure Village is a case in point.
Plans for Leisure Village began in earnest in 1981, when officials of the firm, then based in Newport Beach, decided to exercise their $9-million option to buy 400 acres in northern San Diego County. They wanted to finance the construction of a retirement community on the site with the help of a HUD-insured mortgage, according to Joseph A. Gallagher III, president of the firm’s Southern California division.
Unsure of how to proceed, Leisure Technology officials approached DRG Funding Corp., a mortgage lending firm that was known to have great expertise in dealing with Title X projects, Gallagher said. DRG arranged the $27-million loan with an interest rate of 17.5% at a time when a similar loan without HUD insurance would have been made at a 21% interest rate, Gallagher said. An additional advantage was that it was a 10-year loan, rather than the normal 18-month construction loan, Gallagher said.
For DRG, as well as other lenders, there was a powerful incentive--the federal government assumed all the risk in the event that the borrower defaulted. The security offered by the federal insurance was to prove critical to DRG in later years as many of the firm’s HUD-backed loans--possibly as much as $500 million worth--fell into default in another HUD insurance program.
HUD has since canceled DRG’s right to issue HUD-insured mortgages and a federal grand jury is investigating allegations of fraud, theft and money laundering involving DRG. HUD officials say privately that Leisure Village may have been DRG’s most financially sound HUD-related venture.
Documents show that DRG received a “financing fee” of $541,422 from the proceeds of the loan to Leisure Technology. That income was in addition to the 17.5% interest that DRG charged on the loan.
When Leisure Technology and DRG made their initial proposal to HUD’s San Diego office in 1980, they planned to build about 1,900 duplex units in an area of rolling hills about seven miles from the coast in Oceanside. The expected prices would range from $80,000 to $125,000, according to HUD documents.
The documents also outlined the proposal for the 18-hole golf course, clubhouse, and other recreational facilities including a swimming pool and tennis, boccie ball and shuffleboard courts. The amenities are not open to the public, and are available only to residents of the high-security Leisure Village complex.
Because it was the first Title X project in San Diego County, local HUD officials who were unsure how to proceed consulted a HUD manual containing guidelines for such developments, Wilson said in an interview last week.
The handbook reads: “A swimming pool, golf course, clubhouse, tennis court and marina, are examples of recreation facilities which may be included in a Title X land development.”
“I remember in my own mind thinking, ‘A golf course. Why would the department do this?’ ” Wilson said. But, because the proposal appeared to meet all the criteria for Title X insurance, it was approved by the San Diego office and forwarded to HUD headquarters in Washington, where it received the final go-ahead, Wilson said.
According to the terms of the loan, the $27 million was to be used only for grading and improving the land and constructing the development’s common buildings. Leisure Technology was required to obtain private financing to construct the homes. Wilson said there was little his office could do about the prices of units since there were no specific requirements in the loan agreement about what the builder could charge.
The 1,000 square-foot units, the development’s cheapest, were to cost $80,000, but quickly shot up to $95,000 before any were sold, Gallagher said. The more expensive ones sold for $135,000, with the average price being $115,000, he said.
The company was forced to raise the prices because the previous owner of the land defaulted on an agreement to build a $5-million stretch of road needed to reach the development, Gallagher said. The cost had to be absorbed by Leisure Technology, he said.
Over the following year, prices rose another 10% to 15%, he said, and the size of the houses was increased to meet consumer demand.
“In all our discussions at the time (of the loan application), low income was never a consideration,” Gallagher said, adding that the company considered the $95,000 units “affordable.”
“It didn’t seem an inappropriate use of federal insurance,” Gallagher said. “It made HUD a lot of money (in insurance premiums). . . . I know that some developments didn’t work, but that seemed to be more because they were in the wrong location. I don’t think the concept was flawed, but people didn’t do what they were supposed to do.”
Not Fully Covered
Gallagher said the HUD loan did not finance all of the complex’s considerable amenities and that Leisure Technology spent about $1.4 million on improvements for the 27,000 square-foot clubhouse after using about $1.6 million from the HUD-insured loan. Also, he said, the company paid for construction of the back nine holes of the 18-hole golf course.
Construction of the golf course turned out to be an economically sound move, he said, because it provided the company with an inexpensive on-site area to dispose of tons of rock excavated at the housing sites.
Leisure Technology paid off the loan last January, so HUD is no longer involved in the project, according to John Kilduff, the firm’s executive vice president and chief financial officer in Los Angeles.
Leisure Technology, a developer of retirement communities in New Jersey, New York, Florida, Illinois and California, has grown rapidly over the last decade and two months ago announced it had reached a $1-billion agreement to build retirement communities with a Japanese firm.
At the Oceanside complex, the company has moved away from duplexes and is now building detached single-family homes that are sold to upper middle-income buyers, many of them from the Los Angeles area, who have developed substantial equity in their homes, Kilduff said.
The “San Remo,” described as a “private villa” in the development’s Village of Hydra, is the top-of-the-line model and sells for $329,990. It features three bedrooms, a master bath suite, two full guest baths, a powder room, “a magnificent oversized living room with walk-in wet bar” and a two-car garage, according to a sales brochure.
The full range of facilities of the Ocean Hills Country Club comes with package, the brochure says. And, it notes, “Prices Are Subject To Change Without Notice.”
Times staff writers Douglas Frantz in Los Angeles and William J. Eaton in Washington contributed to this story.