City Manager Jim Starbird acknowledged this week that there were signs that not all was as it seemed with Advanced Development & Investment Inc. — the affordable-housing firm embroiled in a federal fraud investigation that, in the past five years, has received nearly $34 million in city assistance.
Starbird said he was "tremendously concerned" by allegations that ADI executives fraudulently transferred up to $80 million in company assets to personal accounts, and potentially gave improper gifts or donations to public officials. But he acknowledged that in hindsight, there were potential warning signs, namely spiking costs for the firm's most recent projects.
"Yeah, you start to ask, why are the numbers going up so dramatically?" he said.
The fraud allegations stem from a report by David Pasternak, a receiver appointed by a Los Angeles County Superior Court judge as part of a divorce proceeding involving the company's former president, Salim Karimi, and Jannki Mithaiwala, the daughter of company founder Ajit Mithaiwala.
During the last 20 years, ADI has built more than 50 affordable-housing projects across the state, including in Los Angeles, Glendale, Anaheim, Fresno, Long Beach, Sacramento and San Diego.
In his report to the court, Pasternak alleged that the firm significantly inflated budget estimates and submitted fraudulent invoices and other doctored documents for their housing projects. He cited the nearly completed Vassar City Lights on San Fernando Road in Glendale as an example.
He also alleged that the firm's top employees transferred up to $80 million in company assets to personal accounts, and may have engaged in quid pro quo with public officials, although none were named, and investigators have declined to comment on the matter.
Karimi and Mithaiwala have both been removed from the company, and ADI's interim chief financial officer declined to comment on Friday.
At a court hearing on Tuesday, Pasternak asked the court's permission to comply with subpoenas for records from a federal grand jury, but a U.S. attorney's office spokesman on Friday declined to comment, saying he could not confirm or deny an investigation unless charges were filed.
"If these accusations, or some of them, or parts of them are true, it is a huge concern to the city and a major disappointment," said City Councilman John Drayman.
Councilman Dave Weaver also said he was "shocked" by the news.
Since 2005, the city has committed $33.8 million to ADI for four Glendale projects through a combination of redevelopment dollars set aside for affordable housing and federal housing grants.
The majority of the additional financing came through state tax credits with relatively small financial contributions from ADI.
The City Council earlier this year approved a fifth ADI project, Central City Lights, which was set to break ground next month. That project has now been halted.
Now, city officials are cooperating in a major audit, and reviewing what they now say were signs that something was amiss.
Construction costs on ADI's third and fourth Glendale projects jumped dramatically compared to the first two, which were built in conjunction with developer Squier Properties LLC.
Within a span of just a few years, construction-related costs spiked 62% for ADI's first solo project, Glendale City Lights, which was completed this year to a tune of $31.9 million, in addition to land acquisition costs of $4.5 million.
Costs were equally high for the adjacent Vassar City Lights.
Both projects have only a handful more units than Metropolitan City Lights, which was completed for $13 million less, although they do have a higher proportion of three-bedroom units.
The rising costs came during the same time period that other city projects — driven by a competitive market during the protracted recession — saw construction bids that were far lower than projected.
At the same time, the quality of construction at the ADI buildings, while not prompting health and safety concerns, was noticeably poorer, Starbird said.
"If you walk through their first two projects, you see a very different level of quality and attention to detail than you see in the next two projects," he said.
City officials had secured assurances from ADI that higher quality would return for the planned Central City Lights project, Starbird said.
Looking back, the high costs — attributed in large part to inflated invoices, such as a $738,500 bill for drywall to the city that actually cost $140,000, according to court records — did not jive with the subpar work, Starbird added.
"I don't think we got $36-million worth of value with construction," Starbird said. "That doesn't mean we got shoddy construction. I just don't think we got the kind of quality that we would have expected to see in a project that had this kind of cost per square foot."
Officials are working to craft additional safeguards for future projects, he said.
It is unclear whether there are similar discrepancies on invoices related to the other Glendale projects because, so far, only Vassar City Lights and two Los Angeles projects have been examined.
"Eventually we will look at all the projects," Pasternak said. "Each individual project is fairly massive, so we have just made our way into three projects."