CRA Loan Portfolio to Be Audited

The city controller has launched an audit of the Los Angeles redevelopment agency’s troubled loan portfolio as Mayor James K. Hahn pushed forward this week with a proposal to sell off some of the poor-performing loans at a discount.

Controller Laura Chick said her audit would also look into the Community Redevelopment Agency’s subsidies to developers and its sales of real estate acquired for development projects.

CRA Administrator Robert Ovrom, who has struggled to remake the agency since he was hired a year ago, said he welcomed the scrutiny.

“If people can give me constructive advice on how to do things better, I’m wide-open,” Ovrom said. “I would be surprised if there isn’t room for improvement.”

Agency critics charged Friday that the CRA’s financial problems had largely been caused by its practice of offering loans at terms that were too generous, often not requiring any repayment unless a development made a profit.

“They are not aggressive in collecting on loans, and they are writing many off,” said Jerry Schneiderman, board chairman of Colony Bancorp, which owns 50 properties in Hollywood. “Some very rich, powerful and influential people have received loans and not been required to pay them back.”

Schneiderman, who once served on a citizen panel that advised the CRA, has criticized the agency for years. Last year, he denounced its decision to allow the developer of the Grand Promenade apartments downtown to repay only $6.4 million of $11.4 million in debt after the developer failed to make any payments for 15 years.

The agency also provides millions of dollars of subsidies each year. Most recently, Schneiderman questioned the CRA board vote last week to provide $4.5 million to the CIM California Urban Real Estate Fund for a loft project in San Pedro, with as much as $3.5 million being a grant.

The agency has also been criticized for selling real estate without getting the best deal. But the loan portfolio has drawn the most attention.

With the CRA not receiving regular repayments on most of its loans, Ovrom has had to make difficult cuts in agency operations.

The CRA had 357 employees 10 years ago, but economic troubles and budget shortfalls led the workforce to be slashed to 220 last summer. This month, the agency board approved a further cut to 205 employees during the next year.

The reduction in staff has taken place even though the number of redevelopment project areas has doubled in the last decade. There are now 34, up from 17.

Part of the budget challenge is that the state is shifting $7.25 million in tax revenue from the agency to help balance California’s budget, up from $3.9 million this year.

But the problem is compounded by tens of millions of dollars loaned out by the agency that are not being paid back, according to internal CRA documents.

In a report to the CRA board in March, agency officials said 77.6% of the $496 million in loans to property owners and developers were residual receipt loans requiring no monthly payments unless the projects generated profits. Officials estimated last year that regular payments were being made on only 10% of those loans.

An additional $32 million has been given out in deferred loans, which require no repayment until the loan matures.

Only $43.7 million in loans require fixed periodic payments.

The most recent CRA report indicated that $12.9 million in loans were in default, down from the 2002 figure but still a concern.

On Thursday, Hahn signed a budget that calls for the CRA to sell a portion of its underperforming loans at a discount to generate $24 million for the city’s Affordable Housing Trust Fund.

At Hahn’s request, the agency has hired a company to help determine which loans should be sold. Ovrom said Friday that the report was still being completed. “I am comfortable with the mayor’s budget and our ability to get that amount of money,” he said.

CRA board Chairman Paul Hudson said he would not make a judgment on whether the portfolio was mismanaged until after he received the report and had a better idea what part of the loan portfolio was collectible.

Hudson, president and chief executive of Broadway Federal Bank, said it was not necessarily a problem that most of the loans did not require regular repayments.

“As a banker, it would be a concern,” Hudson said. “But the mission of the CRA is such that these residual receipt loans are set up with the understanding that these are difficult projects and the loans are made to help them work.”

The loans are issued for a public purpose, to encourage investment in blighted areas, said Randy Wilkins, the agency’s chief financial officer, not to earn the highest rate of return. Wilkins said that the management of the loan portfolio had been adequate but that he would not be surprised if Chick’s audit recommended improvements.

The controller said her audit would look at whether the agency had adequate standards for loans to developers, whether it was properly monitoring loans and subsidies, and whether officials were aggressively collecting on the loans.

“We did an overall survey of issues within the department and identified those areas that contained the greatest amount of risk,” Chick said.

Schneiderman said the audit would shed light on a serious problem.

“She is going to find that it is one of the worst-managed portfolios around,” he said.