In late 2008, as foreclosures flooded the local housing market and the nation’s economy hovered on the brink of meltdown, the San Diego City Council scrambled for ideas to tackle the crisis here.
Desperate to show leadership on a red-hot political issue, it turned to its affordable housing agency for help.
The San Diego Housing Commission responded with a plan: It could buy foreclosures and tackle the city’s epidemic head-on. But the commission, which is overseen by a board of unelected appointees, first wanted to be set free.
The agency wanted to buy properties without the City Council’s approval. Waiting as long as 90 days for the council to approve the bids would unnecessarily delay highly competitive deals that had to be done quickly, the commission argued.
The City Council agreed. At a March 2009 public meeting, it approved a new policy for the agency, handing it the power to spend public money buying property with radically reduced oversight. Given that this was about fighting the foreclosure crisis, Councilmen Tony Young and Ben Hueso reasoned that cutting down on bureaucracy made sense.
“Now we’re actually going to address this issue,” Young said then.
In the two and a half years since that meeting, however, the Housing Commission has rarely used its new power to buy foreclosures.
The agency has bought just eight foreclosed single-family homes and one foreclosed apartment building in that time. That’s 45 units out of 756 units the commission has bought or built since then.
Rather than mopping up after the foreclosure crisis, the agency has instead used its new freedom to spend more than $70 million buying non-foreclosed apartment buildings and lending developers tens of millions of dollars to build new affordable apartments.
The commission has been able to make those deals while bypassing the City Council, avoiding the public scrutiny it once would’ve faced.
Three of the City Council members who approved the Housing Commission’s new rules now say they had no idea the power would be used for anything but tackling the foreclosure crisis.
Former Councilwoman Donna Frye called the policy a “Trojan horse” that has allowed the commission almost free reign to build a huge affordable housing portfolio using public money, while facing little public oversight.
Commission officials and the policy’s chief proponent, Councilman Todd Gloria, say they made every effort to communicate the far-reaching effect of the agency’s new power when the policy was approved.
A report sent to the council members before the meeting spells that out, they said. Three other City Council members who voted on the policy said they understood the extent of the power they were handing the commission and said the move reduced unnecessary bureaucracy.
But the stated motivation for the new freedom, the public hearing in which it was approved and even the report to the City Council all came under the banner of addressing foreclosures. The need for the new power was never fully explained to the City Council or the public. Nor did the agency ever explain how the policy was actually supposed to help it fight foreclosures.
The freedom was also granted at the same time the commission prepared to enter a new era as a heavyweight property investor and developer, an endeavor that was far riskier than simply buying up foreclosures.
The commission’s expanding role gave it all the more reason to properly explain the implications of the new rule, said Councilman Kevin Faulconer, one of the three council members who say they were duped.
“The focus of that policy change was clearly on the issue of foreclosures,” Faulconer said. “If, in fact, the Housing Commission wanted to go and do something different, what I expect is for them to come and get permission to do so, and then to follow the rules.”
Affordable Housing’s Next Big Player
|Photo by Sam Hodgson|
|Riverwalk Apartments in Nestor is one of six public-private partnership deals the Housing Commission has put together since March 2009. The project required a loan of almost $4.5 million of public money and was never discussed at a public City Council meeting.|
In early 2009, few political buzzwords had greater cachet than “foreclosure.” Across the city, the wreckage of the busted housing market had created neighborhood eyesores and destroyed family dreams.
At the same time, the Housing Commission was on the move. It had just hired a new CEO, replacing the agency’s former leader, Betsy Morris, who had led the agency for 14 years.
New chief Rick Gentry was a veteran of the affordable housing industry and had taken the reins at an exciting time. A massive real estate deal was about to flood the commission’s coffers with almost $100 million to spend exclusively on acquiring new property.
That move had been in motion long before the City Council asked the commission for help on foreclosures. Before leaving the agency in 2008, Morris had signed off on a deal to transfer more than 1,300 properties from the federal Department of Housing and Urban Development’s public housing program to the commission.
The plan was to take out loans against those properties, giving the agency the cash to spring onto the local affordable housing development scene in a big way.
It was a marked change for an organization that had previously served more as an administrator of federal money. The commission was poised to begin developing hundreds of new affordable apartments for working San Diegans.
So as commission officials prepared their foreclosure plan in early 2009, their agency was about to start buying or investing in an unprecedented number of properties. Indeed, the commission was already in the process of lining up more than $95 million in loans to spend on such acquisitions.
But the commission wanted to make those deals without first discussing them at public City Council meetings. Gentry and Gloria, a former housing commissioner, said that would reduce bureaucracy, allowing the agency to quickly take advantage of the slumping market by bidding on deals.
Being able to make deals unilaterally represented a significant change in how the commission did business. Since the agency‘s creation in 1979, it had been required to bring each of its acquisitions to the City Council for approval.
Changing that requirement faced one crucial hurdle: The City Council had to be convinced that devolving such far-reaching power to the commission was necessary.
Commission officials presented the sea change to the City Council as a minor element of their broader plan to tackle foreclosures.
They needed five votes.
‘A Wonderful Response to a Big Problem’
|Photo by Sam Hodgson|
|The Housing Commission proposed its new policy as one part of a plan to tackle the city’s foreclosure crisis. Three City Council members believed the commission planned to buy foreclosed, single-family homes.|
Spirits were high when the City Council met on March 24, 2009. The Housing Commission had a plan to tackle the foreclosure epidemic, the council was relieved, and the platitudes were flowing.
Councilman Tony Young said it was the first plan he’d seen that would actually attack a crisis that was leaving boarded-up homes in his district.
Likewise, Councilman Ben Hueso lavished praise on the commission, singling out Gentry and Gloria as leading the charge and creating “a wonderful response to a big problem.”
That got three crucial votes for the policy change.
How would the policy actually address the foreclosure crisis? Nobody asked. And nobody explained it.
In the absence of any explanation, Frye, Faulconer and Councilman Carl DeMaio thought they understood the plan: The commission would buy foreclosed single-family homes that would otherwise fall into disrepair — the boarded-up homes Young had talked about.
Councilwoman Marti Emerald said recently that she knew the policy also applied to non-foreclosed homes, but thought the commission’s spending limit was $250,000, which would have limited its purchasing power to single-family properties.
That got another vote.
Hueso, Young and Gloria were on board, too. They’d met privately with Gentry in the run-up to the meeting. They later said they fully understood what was going on, and knew the change would allow the agency to make any acquisitions without prior City Council approval.
A spokeswoman said Councilwoman Sherri Lightner also knew the policy didn’t only apply to foreclosures.
The council’s decision to sharply reduce public oversight over the spending of tens of millions of dollars took 27 minutes.
It was approved unanimously.
Just Another Investor
|Photo by Sam Hodgson|
|Housing Commission CEO Rick Gentry and Councilman Todd Gloria, a former housing commissioner, share words before a council meeting in August.|
Now the Housing Commission had more power and more freedom.
Gloria and Gentry said the commission originally planned to use its new power to buy foreclosed apartment buildings to convert into affordable housing. That was part of the agency’s plan to address the foreclosure crisis, they said.
But the commission only bought one foreclosed apartment complex and was outbid on another.
Even if the commission had bought more than one foreclosed apartment building, it wouldn’t have done anything to fight the foreclosure crisis.
Unlike foreclosed single-family homes being boarded up, foreclosed apartment buildings were hot properties in 2009. They still are today. In San Diego, so-called “vulture investors” have been snapping up foreclosed apartment buildings as soon as they go on sale. That’s one way investors have taken advantage of the slumping real estate market.
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The commission had really gotten permission to become one of those investors: It wanted the freedom to snap up distressed bargains that lots of other people also wanted to buy.
Someone would’ve bought those foreclosed apartment buildings anyway. Whether it was the Housing Commission or some other investor made no difference to the city’s foreclosure epidemic.
Local housing market expert Gary London said taking advantage of the foreclosure crisis is fundamentally different than helping stabilize the market or aiding struggling homeowners.
“The Housing Commission perverted the foreclosure crisis for reasons of their own profit,” London said. “Call it what it is, it has nothing to do with helping foreclosures and to suggest it does is either felony stupidity or downright lying.”
‘Along for the Ride’
|Photo by Sam Hodgson|
|Work progresses at the site of the Mercado del Barrio project in Barrio Logan. The Housing Commission is one of several partners in the project, in which it’s invested $7 million.|
Since the 2009 meeting, the Housing Commission has been on a development tear, investing almost $30 million of the public’s money to develop six apartment projects from Nestor to Torrey Highlands.
Those deals weren’t about boarded-up homes or foreclosures. And they were far more complicated and risky than the simple property purchases half the City Council expected.
Those development deals most concern Frye, DeMaio and Faulconer. They’re furious the projects weren’t brought to the City Council for a final discussion and vote.
Development projects have a far greater risk of going wrong than straightforward property purchases. Construction can go awry, costs can shoot up and financing can go sour. The commission is largely beholden to the private developer it chooses as a partner, because the developer oversees construction and selects the company that manages the building once it’s built.
That developer also receives a fee, paid out of public dollars. On most of the development deals put together by the commission, that fee was $1.4 million.
Those are exactly the risks and concerns the City Council needs to vet publicly, DeMaio said.
“When you’re talking about a development deal, you’re talking about an entirely different set of public policy issues that need to be explored,” DeMaio said. “Those issues are not addressed in the purchase of a house, because you’re just buying the house and it’s yours, the Housing Commission’s. You can trust yourself to do the right thing.”
Like any other investor in a property deal, the commission depends on its partners to fulfill all of their obligations. If they don’t, the agency and the public pay the price.
Yehudi Gaffen, CEO of Gafcon, a construction consultancy firm that has worked for the commission on several deals, said development projects involving multiple partners are always more complicated.
“If you’re just an investor, you’re really just along for the ride,” Gaffen said. “It’s much more risky.”
|Watch: On March 24, 2009, Housing Commission CEO Rick Gentry told the City Council he would make sure his staff got a “direct personal response” every time they informed the council of a forthcoming property deal.|
While they may not have understood exactly what was going on, DeMaio and Frye knew one thing back in 2009: They were handing over power to the commission, and they wanted to make sure they retained at least some control.
The commission had proposed a string to be attached to its newfound freedom: It would notify the City Council seven days before every property deal was finalized. That would allow the council members a week to examine the deals and put a stop to them if they wanted.
DeMaio and Frye wanted to know exactly how that would work. At the 2009 meeting, they peppered Gentry with questions: What exact form would these notifications take? How could he guarantee the council members had received them? If they wanted to call a project in for a public meeting, how could they do that?
Gentry wasn’t ready to deal with such specifics.
At one point in the meeting, he admitted that he “hadn’t thought through” how his agency would notify the City Council about the multimillion-dollar deals.
DeMaio was especially concerned that the commission would have a system in place to guarantee council members not only received the notifications, but acknowledged them. That would avoid the communications getting lost in the vast amounts of mail each office received, he said.
Gentry assured DeMaio and the City Council that would happen.
“We will make sure that we get a direct personal response from a member of your staff, and you can tell me who. If it’s your chiefs of staff, I’ll make sure your chiefs of staff acknowledge receipt of it,” he said.
That didn’t happen.
The commission emailed reports on all of its pending acquisitions to each of the council offices. And commission spokeswoman Maria Velasquez said Gentry’s personal assistant hand-delivered manila envelopes containing the reports to the receptionists at each council office.
The fact that the receptionists received the envelopes amounted to the “direct personal response” that Gentry had promised, Velasquez said.
Frye, DeMaio and Faulconer said they don’t recall ever seeing the notifications.
“The council was promised by Mr. Gentry that there would be receipt confirmation of these documents, because the council was concerned that with the amount of email and mail they receive, this would get overlooked,” said Faulconer’s former spokesman, Tony Manolatos.
“That appears to have happened,” he added.
|Watch: On June 27, 2011, Housing Commission CEO Rick Gentry explained why the commission had bought so few foreclosures.|
In late June, the Housing Commission made a presentation on its acquisitions to the City Council. DeMaio, who had recently been interviewed for this story, grilled Gentry on the lack of foreclosures that the commission had bought.
“The policy was sold to us at the time as a vehicle to deal with the foreclosure crisis,” DeMaio said. “But it looks like you’re investing in a number of properties that were not foreclosed. Can we figure out why?”
Gentry told DeMaio that the local real estate market changed in the year after the commission got its new powers. More speculators moved into the market and the agency realized that fewer foreclosures were actually available. That’s when they started moving in another direction, he said.
But the commission was already moving in that new direction when Gentry presented to the City Council back in 2009.
The agency already had three major development deals in the pipeline that it had been working on for months. Two involved buying old apartments and renovating them, one was a new construction project.
None involved buying foreclosed properties. They were all complex development projects that the City Council would have had to fully vet — if the policy hadn’t been changed.
But the policy was changed, and the commission was freed to press ahead with those projects, channeling almost $15 million to private developers.
None of those projects was ever voted on by the City Council.
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This article relates to: Government, Housing, Investigations, News, Public Safety
Tags: Affordable Housing, Ben Hueso, betsy morris, business finance, Carl Demaio, department of housing and urban development, Donna Frye, Foreclosure, gafcon, Gary London, Housing, Kevin Faulconer, maria velasquez, Marti Emerald, massive real estate deal, property, property investor, rick gentry, San Diego City Council, San Diego Housing Commission, Sherri Lightner, Todd Gloria, Tony Manolatos, Tony Young, yehudi gaffen