Yolo County Grand Jury faults Woodland for real estate loans

May 28, 2014
By Jim Smith
Daily Democrat

When it comes to managing real estate loans, the city of Woodland is doing a poor job, the Yolo County Grand Jury found in a report released Wednesday.

The Grand Jury called for a series of actions to more effectively manage its affordable housing loan program, including developing and implementing policies, preparing annual reports and generally "make it a priority to maintain trained administrative services necessary to effectively manage its affordable housing loan portfolio."

Jane Naekel, forewoman for the 2013-14 Grand Jury, reported the body undertook the investigation after receiving a complaint the city was not properly executing its duties on a loan it made in 1995 to Leisureville Community Association.

The city manages and administers a portfolio of affordable housing loans in excess of $24 million, according to the report.

However, it has "not established a viable system for tracking or reporting on these loans."

"Between 1995 and 2013, the city neglected to manage the LCA loan which requires the city to review and approve annual budgets and semi-annual performance reports, to participate in the selection of the management firm responsible for managing the complex, and to receive residual receipts of operations to offset the interest of the loan," the Grand Jury reported. "The city was made aware of the deficiencies in managing the LCA loan in July 2013 and responded by initiating actions to remedy the situation."

According to the report, the city is in the process of determining the full extent of its responsibilities and establishing protocol for managing its portfolio of affordable housing loans.

"While the city is taking positive steps to ensure the LCA loan is managed as specified in the loan documentation, the Grand Jury recommends that the city create a database of its real estate loans, develop policies and procedures for managing the loans and report annually to the City Council on the status of its loan portfolio," the jury stated in its report. "These additional steps would help to ensure that similar problems would not occur with other loans in its portfolio now or in the future."

Leisureville is located at 1313 E. Gibson Road, and is a cooperative formed in 1995 with all residents buying into the cooperative and that 51 percent or more of those residents meet low-income requirements.

In 1995, with the assistance of the city of Woodland and the Yolo County Housing Authority, Leisureville Community Association purchased the Leisureville Mobile Home Park. The purchase was made with a combination of commercial and federally supported loans. The total loan from the city was $1.2 million. Payment on the principal of the loan is delayed and interest continues to accrue, until 2025 when the original loan, plus accrued interest, is due.

According to loan documents, Woodland is required to receive and approve Leisureville's annual operating budget prior to adoption by the Leisureville Board of Directors; review and approve management contracts; receive and review semi-annual progress reports from Leisureville; and accept annual payments for residual receipts to pay toward accrued interest.

In turn, the LCA's primary areas of responsibility to the Woodland include submitting budgets for review, submitting semi-annual financial reports, obtaining approval for management contracts, remitting residual receipts each year to offset accrued interest and repaying the entire loan plus interest to the city by 2025.

"The city excuses its negligence by saying that typically, real estate loans have a term much longer than the typical city employee stays in a position," according to the Grand Jury. "Nonetheless, the city has a responsibility for developing systems and processes that extend beyond the employment of any given individual."

The Grand Jury noted that the same complaints it received were also reported to Woodland and beginning in July 2013, the city submitted a claim for residual receipts for 2012-13 and began insisting on annual budgets and mid-year reports from Leisureville.

The City has also taken steps to stabilize the management of the Community Development Department such as transferring the affordable housing duties, including management of the real estate loan portfolio, to the Community Services Department which had been previously known as Parks and Recreation.

"After reviewing the LCA financials, the Community Development Department staff recognized that the LCA may not be able to make a 'balloon' payment of approximately $3 million (principal plus accrued interest) in 2025. The city manager and the mayor, in a letter dated Sept. 5, 2013 to LCA's Board of Directors, informed LCA that the city may reconsider refinancing the loan subject to approval by the Woodland City Council in 2025."

"The Grand Jury has seen no guidance in the rules or regulations, or in the contract, that suggests the mayor or city staff have the authority to make these adjustments and promises," according to the Grand Jury.

As a result of its inquiry, the Grand Jury is recommending:

• That by Sept. 1, 2014, the city create a database of its portfolio of affordable housing loans to ensure that the provisions of the loans are met.

• That Woodland direct the Community Services Department, the current agency administering the city's loan portfolio, to develop a policy and procedure manual for real estate loans, identifying who is required to manage loans and how, and on whose authority, a loan can be modified. This policy and procedure manual should be completed by Jan. 31, 2015.

• That Woodland develop an annual report to the City Council regarding the real estate loan portfolio. It should include an updated database, the value and status of each loan and important outstanding issues. The first report should be presented by Sept. 1, 2014.

• That the city make it a priority to maintain trained administrative services necessary to effectively manage its affordable housing loan portfolio over time.