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CRA May Sell Loans at a Loss

Hahn and other city officials say move would generate needed cash.

May 01, 2003|Patrick McGreevy | Times Staff Writer

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.

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