Project in Peril, Records Show : Redevelopment: Taxpayers are in danger of not being repaid for loan Los Angeles made to renovate hotel for low-income people, city officials allege.

A widely touted public housing project in Downtown Los Angeles, billed three years ago as a model of public and private partnership, is now mired in financial improprieties and could default as soon as next month on city-authorized bonds, public records and government officials allege.

The Los Angeles Housing Authority is likely to default on a $13.4-million revenue bond that was sold to raise funds for the acquisition and renovation of Hayward Manor--a 525-unit, single resident occupancy hotel at Spring and 6th streets serving low-income people--according to the rating agency Standard & Poor’s. Last week, S & P again downgraded the issue to a CCC rating--junk bond status--saying the bonds were “vulnerable.”

Taxpayers also are in danger of not being repaid for an additional $10.4-million loan the city made to the development group led by Studio City-based Bell Diversified Development, officials said. In an effort to protect its investment, the city has forced the project into receivership.

Scrambling to put the best face on the situation, city officials said they remained confident that they could salvage the original $24-million public investment. But they and other sources acknowledged that the troubled project has fallen months behind in renovations and has not generated enough income to meet its obligations to investors. In documents filed on behalf of its request to place the project in receivership, the city also has accused the developers of serious financial improprieties.

A Bell executive said he was unaware of the allegations and placed the blame elsewhere.

The setbacks represent a major embarrassment for the city, which in 1993 trumpeted the Hayward as part of the most ambitious affordable housing effort in Los Angeles history.

“If it had worked, [the Hayward] would have been a laurel” for the city, said Ken De Gon, assistant director of the Housing Authority, a state agency that assists the city with affordable housing. “But as the evidence began rolling in that this was a bad deal, there should have been some caution. There were points along the way where this could have been stopped” by city officials, he said.

Documents, including an audit report, and interviews with financial and government sources indicate that the Hayward deal is teetering on the brink of collapse because the city initially paid too much for the project, the developers and their property managers kept poor financial records, and the city did not act quickly enough to correct early problems. City officials are alleging in court documents that some of the money may have been diverted by the developers, threatening renovation efforts.

Meanwhile, tenants at the building still must contend with bad plumbing, unfinished repairs and severe rodent and cockroach infestation. The ongoing repairs have caused the roof to leak.

“You smell that?” the building manager asked one recent visitor. “Dead rat.”

The current crisis is a far cry from spring, 1993, when the outgoing Administration of Mayor Tom Bradley touted the Hayward as part of a $110-million citywide project hailed as the most ambitious affordable housing effort in city history.

The endeavor covered 15 projects intended to build or rehabilitate more than 1,100 units for low-income people. The goal was to reduce a serious housing crunch that has plagued the poor for years. According to the city Housing Department, the other 14 projects have avoided the serious problems afflicting the Hayward.

But the Hayward was the biggest and most expensive of the projects.

Before an audience of more than 100 city employees and housing developers, Bradley saluted the entire project, including the Hayward, as “a statement . . . of our commitment to the future.”

Six months earlier, the City Council had unanimously approved more than $10 million in city loans and $13 million in Housing Authority bonds for the Hayward.

But the council acted despite warnings that the developers were paying too much for the building, a battered 1920s landmark near Skid Row.

The city administrative officer noted in a memo addressed to the mayor and the council’s redevelopment committee that the entire Hayward project would cost nearly $7 million more than the building would be worth after the proposed renovation.

“The $6.9-million difference [between the project cost and ultimate appraised value] . . . indicates that [the developers] may be paying more with the assistance of city financing than the building is worth,” the administrator wrote.

“Maybe they paid too much for the property,” De Gon said. Minus completed renovations, “the building is [currently] worth $5 million to $7 million” in the depressed real estate market.

But Housing Department General Manager Gary W. Squier said that affordable housing projects typically cost more than their buildings’ appraised value might suggest. He added that once federal tax credits and other benefits are factored in, the Hayward’s value should be close to $25 million.

Once the financing was secured, one of the project’s main developers, Bell Diversified Development, and its property managers, Los Angeles-based Alpha Property Management, kept poor or nonexistent financial records, according to numerous documents and interviews with city officials.

Accounting giant Ernst & Young, hired this year by the Housing Authority to investigate the Hayward’s finances, reported that it could not complete the job because of a lack of available documents, including rental rolls, occupancy data and Section 8 housing payment data.

When the financially foundering project was placed in court-ordered receivership in August, city officials again sought data about the Hayward’s operations--and again came up empty-handed.

“It appeared that the [financial] records were not maintained. When they were requested [by city officials], they were not available,” said Deputy City Atty. Laurel Lightner. This prompted the city attorney to suggest a possible “diversion of funds” by the developers, according to court documents. Lightner said her office made the accusation because the developers and property managers could not provide an appropriate accounting of funds.

Thomas Bell, president of Bell Diversified and a former deputy director in the state Department of Housing and Community Development, said he was unaware of the allegations regarding diversion of funds. He also blamed most of the project’s problems on Alpha Management, which was responsible for day-to-day management.

“I believe there was insufficient bookkeeping and [the property managers] are responsible for getting the books in order,” Bell said.

But housing officials are disinclined to let Bell duck responsibility for the project.

“As the developer, the owner and the general partner, this is [Bell’s] puppy all the way,” De Gon said.

Yet the city may share some blame as well. Officials failed to act quickly after early signs that the project was in trouble, according to documents and interviews.

In summer, 1993, just a few months after Bradley’s speech, Bell told the Housing Department that he would need more money to complete construction, Squier said. Thus began a two-year dance between the city and Bell, as officials vainly sought financial documents and grew increasingly nervous about the fate of the project.

After an auditor reported in early 1994 that the project manager’s financial records were “woefully inadequate,” the city balked at Bell’s additional funding request, Squier said. Meanwhile, S & P was beginning the first of several bond downgrades.

But it was not until August that the Hayward was finally placed in receivership, after the city attorney warned that the city was in “imminent danger of losing its [entire] $24-million investment in the project.”

Squier denied that the city had been dithering.

“It was our judgment that we had to exhaust [other] remedies before going to court,” he said. “We were proceeding deliberately, trying to work things out.”

Yet the loss of time proved critical. The project will begin losing crucial tax credits in January, and Squier blamed at least part of that delay on an unsatisfactory initial deal arranged by the developers.

The project also is in danger of losing Section 8 funding from the federal government, which mandates specific rehabilitation criteria for affordable housing projects. “The building is apparently experiencing much higher wear and tear than originally anticipated,” S & P noted in a report.

City officials have indicated that they may give up seeking repayment on a $4.8-million loan for partial payment of the Hayward’s purchase price and a $5.7-million loan for construction.

Finance experts and city officials have said the project’s best hope at this point lies in a financial restructuring. Squier said a key component of that restructuring will be securing federal tax credits, which are pending.

Pam Berkowitz, an S & P analyst specializing in public finance, said the project also could avoid default by raising rents or infusing cash through a city grant, loan or some other means. Berkowitz said it is uncommon for a government-issued bond to face imminent default. If the project does indeed enter default, bondholders might file suit and the Housing Authority’s reputation among investors could be damaged, which might mean higher costs on future bond issues, finance experts say.

Regardless of the outcome, some officials remain perturbed by the entire affair.

“There is an arrogance in all of this that is very annoying,” De Gon said. “People say to me, ‘So there’s a default. What are they [bondholders and taxpayers] gonna do about it?’ I say, ‘Excuse me, but it’s our bonds that will be downgraded. And on top of that, the city’s name is written all over this.’ ”