CRA May Sell Loans at a Loss

Officials at Los Angeles’ cash-starved Community Redevelopment Agency are considering selling much of its troubled loan portfolio at a loss that could total $50 million to $70 million.

The CRA has been unable to collect payments on many of its loans because most are structured with terms highly favorable to borrowers. In many cases, developers have not paid principal or interest for more than a decade on the loans, which were used to build or refurbish apartments, offices and shopping centers.

As a result, Mayor James K. Hahn and redevelopment officials say it might be worthwhile for the city to sell the loans to private investors for cash, even at a discount, and use the money to build more affordable housing and keep the agency operating.

But critics said the practice of discounting agency loans is a giveaway to developers, some of whom have contributed to the political campaigns of Hahn and other local officeholders.

“The CRA has consistently wasted money, loaning it out to politically influential people with no intent of collecting on it,” said Jerry Schneiderman, board chairman of Colony Bancorp, which owns 20 large buildings in the Hollywood redevelopment area.

Nonetheless, Hahn has factored the possible sale into his new budget, which estimates that the CRA might receive $24 million by selling $75 million to $94 million of poor-performing loans it has made to developers of housing and commercial projects.

The proposal comes at a time when the CRA is struggling to remain a force in the effort to rejuvenate rundown parts of Los Angeles.

The agency was created under state law to use property taxes and debt to help finance development in blighted areas of the city that might not attract private investment. Because many of the CRA’s projects are risky, agency officials say they must make loans with terms benefiting the borrower.

In many cases, loans made by the agency are subordinated to bank loans taken out by developers. As a result, if something goes wrong, the city is at the back of the line to recoup its investment.

CRA Chief Executive Officer Robert Ovrom issued a report last month warning of a financial crisis for the agency. He proposed laying off as many as 28 of the agency’s 208 employees to compensate for the likely loss of millions of dollars in state funds.

Agency critics say part of the CRA’s decline can be attributed to its mishandling of money, including the portfolio of $483 million in loans it has made to commercial and residential developers. Loans range from a couple of thousand dollars to fix up a house in a poor neighborhood to millions for downtown high-rise office buildings.

The last report drafted for the CRA board on the issue said $73.9 million of the loans was in default, about 15% of the portfolio. That report was made in 2001, before the agency stopped the practice of providing the board with quarterly reports on the defaults, but agency officials estimate that about 15% of the loans are still in default.

Many of the loans are in “technical” default, for failing to provide required financial documents and proof of insurance.

The rest -- 102 loans totaling $33.8 million -- are delinquent because payments are more than 90 days past due, or the total loans have come due and the agency has not been paid, officials said this week. At the end of the loan term, even if no monthly payments have been made, most agency loans require the principal and interest to be paid.

The CRA has been unable to collect on another large pool of loans -- “residual receipt” loans where the borrower is not required to make monthly payments to the CRA until after the developer recovers expenses. Such loans make up 77% of the agency’s lending.

CRA budget director Jay Virata said payments are being made on only 10% of the residual receipt loans.

In discussing the loan portfolio, CRA officials emphasize the agency’s unique mission to stimulate development in blighted neighborhoods.

“The goal of the loans the agency does is other than financial,” said Randy Wilkins, the agency’s chief financial officer. “They are known upfront to be all high risk and can’t be funded by traditional lending institutions.”

However, he added, “there is a huge default amount, and it’s something I’m not cavalier about.”

In its move to sell “nonperforming” loans, the CRA recently negotiated a discount agreement allowing the developer of the downtown Grand Promenade apartments to repay only $6.4 million of an $11.4-million debt to the agency.

Agency records indicate that no payment had been made by the Grand Promenade developers for 15 years.

Grand Promenade Ltd. is a partnership of Goldrich and Kest Industries and Shapell Industries Inc.

Jona Goldrich, Nathan Shapell, their development firms and family members have contributed $49,000 to city candidates in the last five years, including Hahn.

CRA officials argued that $6.4 million is the present-day equivalent of the $11.4 million debt repaid over 30 years.

Agency officials confirmed that they are negotiating a similar discount settlement on the more than $10 million owed the agency by Forest City and affiliated partnerships.

Forest City companies have made 43 political contributions totaling $20,475, including funds to 12 of the 15 City Council members, and City Atty. Rocky Delgadillo.

Schneiderman said the transaction with Grand Promenade and its politically connected owners provides an insight into what will happen with the sale of the larger portfolio.

“My reaction is skepticism,” he said. “It may be just another subterfuge to move out of those loans they made to their buddies.”

Chris Shabel, a founder of a CRA watchdog group called the Hollywood Project Area Committee, said she is concerned that big borrowers will be getting unfair breaks at taxpayer expense.

“It’s outrageous,” Shabel said. “It’s a cash cow that they use to give money to all of their friends.”

Los Angeles is following the lead of other cities that are cashing out on under-performing loan portfolios. The New York Department of Housing Preservation and Development recently sold the rights to cash flow on $600 million in loans it held for $250 million in cash, according to Chuck Brass, a New York City spokesman.

Los Angeles Deputy Mayor Jonathan Kevles said the initial “ballpark” evaluation sought by his office said the city might be able to sell much of its portfolio for $23.7 million on the low end to $35 million on the high end. In addition, the city would negotiate a contract with the purchaser to receive a share of any profits once the loans were paid off.

Kevles said the city gets the cash as well as the social benefit of the loans, because covenants requiring a percentage of the housing to be provided to low-income families will stand even after the loans are sold.

“We shouldn’t even be in the business of managing loans,” he said. “We should sell those loans, turn them into cash, and make more loans, turn them into cash and make more loans and turn them into more cash. It’s just a smarter way of doing business.”