Developers Default on $41 Million in CRA Loans

Developers have defaulted on $41 million in loans from the Los Angeles redevelopment agency, which has failed to properly check the background of borrowers, negotiate strong terms and aggressively collect what is owed, according to an audit released Tuesday by the city controller.

The city’s Community Redevelopment Agency gave three dozen developers 74% of $496 million loaned by the agency to development firms, including some that received multiple loans despite repayment problems, according to City Controller Laura Chick.

“What my audit found was a long-standing failure in the management of these loans, which in the short term places public dollars at risk for fraud and abuse,” Chick said.

In the long term, Chick said, the “disorganized, haphazard” loan operation “hinders the CRA’s ability to fund projects critical to the economic development and well-being of our neighborhoods.” She said the agency is failing to follow its own policies in awarding loans.

The auditors found that nine borrowers had outstanding tax liens and seven had Franchise Tax Board suspensions. The firms were not named.

Redevelopment agency officials said they agree that additional safeguards are needed and are taking steps to make sure future loans have additional protections.

Robert Ovrom, the agency’s chief executive officer, said he saw “potentially problematic” issues with the loan portfolio shortly after he was hired in March 2003. He then asked Chick for an audit.

Agency officials said some of the problems were the result of by staff reductions stemming from state budget cuts that affect agency funding.

But Ovrom said that the agency is going to make risky loans because its mission is to invest in blighted neighborhoods.

Chick said officials could still do much more to protect the city property tax dollars used to make the loans.

The audit conducted for Chick by Nunez & Associates looked at the CRA’s portfolio of 1,200 loans and found that $384 million is in the form of residual receipt loans, in which monthly repayments are not required as long as the project is not making a profit.

The use of such loans when combined with lax oversight means that the agency’s portfolio has “an unnecessarily higher risk.”

Auditors said $41 million in loans were in default as of March, many because they are 90 days past due on payments. But the board was told by redevelopment agency management that only $15 million in loans were in default, because the staff uses narrower criteria than is reasonable, according to Chick.

Other findings included:

* Eleven percent of the borrowers account for 73.6% of the money lent, showing a high concentration of risk.

* Loans are submitted to the redevelopment agency board for approval after most terms have been finalized, making it difficult for the board to question elements of loans.

* The agency does not require sufficient collateral to secure loans, making it impossible at times to recover money when there is a default.

* The agency’s weak loan monitoring efforts mean it does not discover, in a timely way, when loans are not performing.

The agency also fails at the beginning of the loan process. “The CRA’s practice of awarding loans without conducting an in-depth loan underwriting evaluation of the developers and the project costs has resulted in the CRA giving loans to developers with credit problems and legal entity status problems,” the audit said.

Chick is set to release companion audits critical of the agency’s management of subsidies provided to developers and sales of real estate acquired for development projects.

Chick said the audits “paint a picture of an agency that has no overarching vision for the city, no strategic plan on how its going to achieve its goals, no way to measure goals.”