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WAV Condos in Ventura

A WAV Of Financial Trouble Traps Ventura

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“When everybody owns something, nobody owns it, and nobody has a direct interest in maintaining or improving its condition. That is why buildings in the Soviet Union — like public housing in the United States — look decrepit within a year or two of their construction…”
—Milton Friedman, Nobel Peace Prize economist

 

THE WAV CONDOS – A FAILED PIPE DREAM

[The Proof is in the Pudding]

Our former City Manager, Rick Cole and former Mayor, Bill Fulton, sought to implement their visions for Ventura. They have moved on but they left the citizens of Ventura with financial problems.

Each arrived from the LA area with populist visions, advocating for a community with less cars, more public transportation, more public housing all driven by the concepts outlined by the New Urban Congress. Their visions were embraced by a vocal minority – the art community, architects and low income housing advocates and special interest builders and planners that could live off the Redevelopment Agency dole. Their visions were a financial disaster. Mr. Cole’s contract was not renewed. Mr. Fulton packed his suit case and moved to Washington. Most citizens “waved” goodbye. A few are still awaiting Mr. Fulton’s new book on how the New Urban experiment worked in the City of Ventura, particularly the 69 residents of this subsidized housing units in this project that has cost taxpayers $985,072 per living unit.

The WAV Condos. Ventura’s attempt to build an “arts” city.

In January 2012, we treated one aspect of this project – the 13 market rate condominiums and 6,100 sq.ft. of commercial space along Ventura Avenue at the corner of Thompson Boulevard. The sale of these units and the lease of the commercial spaces were supposed to provide a source for repayment of construction loans to CHASE and the City of Ventura.

Chase holds the note on Ventura’s WAV Condos. The city stands to lose $2.5 million if the WAV condos do not sell by 2016

To make the market rate condos and commercial space development work, the City loaned $2,000,000 to the developer ($2.5 million now due with interest), and subordinated that loan to a first trust deed in favor of CHASE in the sum of $4,000,000.  Those loans were scheduled to be paid on the sale of the 13 condos, or by March 1, 2012. They did not sell and the commercial space did not lease. Facing foreclosure, and loss of our money, the City entered into a contract with CHASE to extend the due date to December 1, 2016.

This was not the result the City planned when this project was started. The City selected a person named Chris Velasco to “develop” the project, using our taxpayer dollars of course. Mr. Velasco signed the contracts, operating as a Minnesota non-profit company called PLACE. He gushed about the project. Here is one example:

“WAV’s market rate condominiums (priced from $625,000 to $875,000) are now for sale…WAV’s forward thinking configuration comes with an up market price tag. The average price per square foot for condominiums in the same zip code is $274; WAV’s pricing is $368 per square foot; however, buyers will be living green and helping underwrite WAV’s community. Besides the artists, and the public who flock to Ventura’s Art Walks and galleries, it includes those at 15 section 8 apartments”

So how reliable was the original plan? Not, by all accounts. The realtor involved with trying to sell the WAV units and lease the space recently shared his thoughts with us:

“These condos could only be sold for cash, or with a portfolio lender, due to Fannie Mae guidelines restricting the lending side. Its what I was up against for the three years. I had the listing together but was faced with the fact that the City refused to recognize that the condos were priced almost 1/3 higher than the market would bear. They would not entertain lowering them to market value.

“The condos were never worth $850K, at the most somewhere in the mid-$600s But even then the economy was turning down with buyers running for the hills. Add to THAT the fact they let my listing run out because I didn’t sell any. They said they wanted to take ‘another direction’.

“Now, perhaps they’re worth $479 tops – but you can’t use a traditional bank. Portfolio lender rates are usually at least 2 points higher, but a cash is the only way. Once one sale exists, there is a comp. Until then, its a big guessing game…”

            —Jerry Breiner, Realtor

 

Editors Comment:

Dump the WAV Condos as fast as possible.

Our City stands to lose $2.5 million if the WAV condos do not sell by 2016. It is likely they will not sell. An objective person cannot avoid the obvious problem in marketing these condos — bad views (freeway), bad location, no parking, low income neighbors and bad design. Our goal should now be to sell them for what we can to avoid a potential total loss through the foreclosure process. In other words, forget the cheese and just get out of the trap.

 

BANKRUPTCY LOOMS FOR CITIES

[The Good, The Bad and The Ugly]

The election is over but the business prospects for California cities remains dismal. Moody’s, a business rating service has placed the debt of 30 California cities, under review for downgrade. With the rating downgrade each of these cities will have great difficulty in raising money to operate essential government functions by borrowing municipal bonds.

THE BAD

On the list for downgrade are Oakland, Fresno, Sacramento, Azusa, Berkeley, Colma, Danville, Downey, Fresno, Glendale, Huntington Beach, Inglewood, Long Beach, Los Gatos, Martinez ,Monterey, Oakland, Oceanside, Palmdale, Petaluma, Rancho Mirage, Redondo Beach, Sacramento, San Leandro, Santa Ana, Santa Barbara, Santa Clara, Santa Maria, Santa Monica, Santa Rosa, Sunnyvale, Torrance and Woodland.

The rating examinations will potentially affect $14.3 billion in lease-backed and general obligation debt on the books of these cities. Why? Because these cities did not address their internal cost structures, did not reduce personnel costs in the face of looming debt and used accounting gimmicks in the hopes that the economy would change. It has not changed. Add their unfunded pension and debt obligations to their itemized costs and they are in trouble.

THE UGLY

The cities of Vallejo, Stockton, San Bernardino and Mammoth Lakes filed for bankruptcy. Their revenues from real property taxes and sales taxes dropped precipitously while fixed costs, such as public safety pensions remained high.   Public safety personnel refused to modify their benefits to help with the budget issues of their city. The fight between public safety unions, who refuse to modify their pension contracts, and the bond holders who loaned the cities money, looms large.

THE GOOD

 At the beginning of the recession the City of Ventura lost $5 million when Washington Mutual (WAMU) collapsed and $5 million when Lehman tanked. Tax revenues plummeted from $100 million to $82 million currently (estimated).   The City has tried to adjust for this 18% revenue reduction but the unfunded pension benefits for police and fire departments increased from $43,496,873 in 2008 to $68,385,380 in 2011. That is an increase of 57% for public safety. Add to that the $21,327,225 in unfunded benefits for all other City employees and we owe $89,712,605.

The positive news is that in the last four years is that the City has recovered $1.5 million of the WAMU investment. The City Council has also been trying hard to adjust their expenses and live within their means. Standard and Poor provided our City with a rating of AA.

One of the key individuals in achieving the S&P rating and urging fiscal restraint is our Chief Financial Officer, Jay Panzica. He has been instrumental in guiding the City through this difficult economic period. He was the driving force behind the Budgeting for Outcomes.

Chief Financial Officer, Jay Panzica, wasinstrumental in guiding the Ventura through this difficult economic period.

Mr. Panzica was also instrumental in setting the stage to help refinance the bonds owed for past water and waste water building projects. The first step was to seek an increase of water rates. This step, reviewed by a citizens committee in the fall of 2011, resulted in increased rates for all water users. The counsel prudently adopted those rates, on the recommendation of the citizens committee, thus setting the stage for a major refinance effort in 2012. Increased rate (revenue) by users provides the security for payment of the bond premiums in the future.

To take advantage of today’s lower interest rates, to refinance existing debt for Water and Wastewater projects and to obtain new money for new projects he asked our interim City Manager, Johnny Johnston, to seek approval from the City Council authorizing the issuance of $52 million in Water Revenue Bonds and $23 million in taxable Series A and tax-exempt Series B Waste Water bonds.

On October 8, 2012, the Council approved the request to:

  1. Refinance the existing water bonds ($27,410,000 issued in 2004)) and issue new bonds for additional $25,000,000 for future projects.
  2. Refinance the existing waste water bonds ($25,075,000 issued in 2004) for $23,000,000.

The bonds sold. As a result of a substantially reduced interest rate our City will save $1.8 million on the old water bonds and $2.3 million on the waste water bonds that we otherwise would have had to pay under the terms of the 2004 bond issue. A savings of $4.1 million plus financing costs, and another $25 million in new money for future water improvements is a very positive step forward.

Editors’ Comments:

Good is a relative concept. Creating a basis from which we can build infrastructure and thus create a solid foundation for future economic growth is the right course for government.

“If you put the Federal government in charge of the Sahara Desert in 5 years there’d be a shortage of Sand”

As for government trying to engage in business and compete with private enterprise the words of Milton Friedman says it all “If you put the Federal government in charge of the Sahara Desert in 5 years there’d be a shortage of Sand”

 

Editors:

B. Alviani           K. Corse             T. Cook

J. Tingstrom      R. Mccord         S. Doll

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$850,000 Players Club Loan by City

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It will be of little avail to the people that the laws are made by men of their choice,
if the laws are so voluminous that they cannot be read, or so incoherent that they cannot be understood; (or) if they…undergo such incessant changes that no man who knows what the law is today can guess what it will be tomorrow
—James Madison, Federalist Number 62

VENTURA THE ART CITY, OR IS IT THE GAMBLING CITY?

[The $2,000,000 bet on Players Club]

Ventura is financing Players Club Casino’s move to the Auto Mall.

The City Council has failed in their last two efforts to increase the taxes of the citizens of this community; however, our City Manager and the Council continue, facing another $2,000,000 shortfall in the next budget, are exploring new ways to raise money – without your vote but using your tax money.

The latest effort involves an $850,000 loan to The Players Poker Club, aka The Players Casino, now located at the old Volvo dealership in the auto mall area, at 8% interest.

The City is borrowing $850,000 from Rabobank at 4% interest, using tax revenue in our general fund as security for the loan.

The City is borrowing $850,000 from a foreign bank – Rabobank – at 4% interest, using tax revenue in our general fund as security for the loan.

The justification for this unusual step by a municipality is set forth in and administrative report authored by Jay Panzieka, the Chief financial officer for our City. You can view that report on the City of Ventura website by scrolling down, click on “public meetings”, and under City Council click the March 19 Council meeting.  It is agenda item number 9. The Council approved the proposal.  Here are the verbatim key points:

  • The City faces severe revenue constraints due to the lingering impact of the recession.
  • The Players Club pays a 15% tax on their revenue. This was approved by voters in 2005.
  • The Players Club wants to add two more gambling tables, a restaurant and lounge that will be serving beverage (alcohol).
  • In 2010 the Players Club was allowed to expand their operation from 6 tables to 18 tables.
  • Until the recent move the Club was paying $250,000 a year in taxes, however since the move to the new site in July, 2011, they have paid $261,066 and $262,696 in the first and second quarters respectively. They estimate they will pay a similar amount in taxes in the final two quarters.
  • This tax revenue of an estimated $1,053,773 per year is based on 16 tables. The addition of two more tables is estimated to return another $65,000 per year per table plus revenue from the sale of food and alcohol.
  • There is a risk of failure should the Players Club not meet their obligation; however because of their history of success during difficult economic times the benefits outweigh the risks.
  • The loan is to be paid off over a two year period during which time the City will earn $37,000 in interest. Payments to start May 1, 2012.

Players Club relocates to the Auto Mall.

So why did the City take this unusual step in financing a gambling casino?  The arguments in favor of the loan goes as follows: the City has a monopoly on gambling tables until 2020, that it is the only gambling establishment in our county, and that due to the dismal prospects for new tax revenue this loan may result in more tax revenue.  The entire model is predicated on the assumption that if they build it “they will come to gamble”.

Calwatchdog had this to say:  “California redevelopment agencies may have been phased out. But cities are getting into the business of loan sharking to offset a decline in sales and property taxes.

This is a version of a “buy low” and “sell high” strategy. Only in this case it is “borrowing at a low interest rate” and “lending at a higher rate.” It’s called arbitraging in finance.

Arbitraging is expressly forbidden with tax-exempt bonds. That is because local government is a tax-exempt organization. It could potentially borrow cheap money at tax-exempt rates and re-invest it at a higher market rate. It thus could reap a profit with the public’s cheap money. All this is illegal under Regulation 1.148-0(a) of the I.R.S Code.

This explains why the city of Ventura used a private lender in the Netherlands to borrow money from instead of using bond funds. It is not illegal to arbitrage bank funds. The way the City of Ventura spins it: it is “restoring confidence and lending to a casino.” The city also denies that the city itself is a “bank.”

But if these loans are not a high risk why is the interest rate doubled? Interest rates serve as a substitute or indicator of risk. In fact, they are often called a “risk rate.” The higher the risk, the higher the interest rate and vice versa. A loan for double the normal interest rate would indicate a loan with double the risk. Eight (8%) percent would be a “junk bond” interest rate in the private sector today.

But if the risk in fact is low, as Mr. Panzieka and the City Council suggest, then the city is engaged in arbitrage, a form of speculative investing, and they are doing it with public money.  Thus, it appears that City government, deprived of their redevelopment money and dismal tax revenues are venturing into very dangerous waters.    Calwatchdog said – “redevelopment agencies are getting into the loan sharking business. A loan shark is informally defined as “one who lends money at exorbitant interest rates…”

But probably the bigger questions are:

  1. Was the Players Club Casino not able to secure a loan of their own in the market place?
  2. Should City Councils be doing the job of private enterprise using the public treasury as the guarantor?
  3. Should the City be risking public funds as collateral for a loan to a gambling enterprise?

Given that at least 85% of the current budget is used to pay salaries, health care and pension to employees, of which 58%  is devoted to police and fire, it is pretty obvious where these hoped for new sources of revenue will be spent.

Players Club represents a new revenue source for Ventura.

Now consider if you will the current proposal of Mayor Tracy to hire 6 more police officers and the City Council decision to pay $1 million dollar for a new fire truck, and it becomes crystal clear that the City is more interested in finding any and all sources for new revenue, fees and pursuing innovative revenue schemes rather than pursuing effective cost controls or reforming pension plans that are absolutely not sustainable.

This Council can talk about reforms and pretend that they made great strides in reforming the police and fire contracts, but the reality is that between 2008 and 2011, the unfunded obligations for police and fire alone increased from $43,496,873 to $68,385,380.  That represents an increase of 57% over a 4 year period during which no officers or firemen were added.

Look for cities to start using their permitting powers together with loan arbitraging to create or enlarge more businesses that don’t create real wealth or increase overall productivity, but instead only generate short term tax revenue.

Editors Comments:  

We do not share the view of CALWATCHDOG in its entirety. Mr. Panzieka has presented a logical means for increasing tax revenues.  It is a legitimate function of our City to help, and encourage local business to grow even if it is gambling, however doubling the interest rate to 8% is troublesome, because it does reflects there is  greater risk in the transaction,  and it is in effect state sponsored and financed capitalism.   If the Players Club succeeds, as we hope, then the gamble will have worked. If they fail then we will suffer a triple whammy – pay off the $850,000 loan to Rabobank, loss of $1,000,000 in tax revenue and then have to shop for someone else to acquire the gambling license.  That is a $2,000,000 bet.

 

Editors:

B. Alviani        K. Corse          T. Cook

J. Tingstrom  R. Mccord       S. Doll

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WAV Condos in Ventura

Water Funds Diverted to WAV Project

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“I am not a crook”[1]
—Richard Nixon

“There are no direct (City) tax dollars in the WAV” —Bill Fulton, former mayor (5-13-2011)

 

 

 

 

 

THE WAV REVISITED

In August, 2011 we suggested that you take a walk and visit the WAV, located at 175 South Ventura Avenue, Ventura.  If not, take a virtual tour by clicking here.

This is a subsidized housing project consisting of 54 residential units for low income artists, 15 units for the homeless, 13 market rate condominiums and 6,000 square feet of commercial space.  The projected cost was $57,000,000, but when it was completed in October, 2009, the real cost was $65,000,000 — all tax payer money in one form or another.

Chase holds the note on Ventura’s WAV Condos. The city stands to lose $2.0 million if the WAV condos do not sell by 2016

The 13 condominiums, at the corner of Thompson Boulevard and the Avenue, did not sell and the commercial space along Ventura Avenue remains vacant to this date.  The condos and the commercial side of this development failed.  Last year, to avoid a foreclosure by CHASE of their senior construction loan of $4,000,000 the  Ventura Redevelopment Agency, which holds a promissory note of $2,000,000, secured by a second trust deed on the condo portion of this project, received a reprieve and dodged a bullet by obtaining a 5-year extension of the CHASE  loan.  If the condominiums do not sell by 2016 the probability is that this $2,000,000 will be lost.  In the meantime the 13 condos have been leased.  It is unknown if these leases are producing a profit, or not, since operating statements have not been provided by the company operating the units.

Our former Mayor, Bill Fulton, at every opportunity proudly announced that this project would “produce 25,000 visitors a year and would stimulate the local economy, resulting in $75,000,000 in new investments”.  We do not know the basis for his prediction, but there is scant evidence, if any, to support such prognostication.   As for the sources of funds here is what he said about the use of general fund tax money at a public event:

“…city invested a mere $1.5 million in affordable housing set-aside funds–funds that could only be used for affordable housing (there are no direct tax dollars in the WĀV).”

—Former Mayor Bill Fulton, As quoted by Liveworkworld. com  (5-13-2011)

When Res Publica suggested that money from the general fund of the City of Ventura was used on this project the Mayor stridently asserted that the only money used to build this project was from the Federal Government, the State of California and the Ventura Redevelopment Agency.  The City Manager, noted for his numerous blogs to “clarify matters” or to achieve “transparency”, was silent.  Well, it turns out that City funds were in fact used to the tune of $2,581,858.

First there is the $2,000,000 referenced above.  One-half of that money came from the RDA; however the other $1,000,000 was taken from the Capital Improvement Fund of the Water Department, transferred to the Public Art Fund then loaned to the RDA to make up the $2,000,000 loan.  That promissory note says – “Holder (the City) does not currently need the funds which are unencumbered.  The Loan proceeds will be used by the Borrower (RDA) to help facilitate the construction of the Working Artists Ventura (“WAV”) development in the City of Ventura”.

The city Council approved this loan on February 4, 2008.  The loan was to have been repaid and placed back in the Water Department funds on January 26, 2010.  That did not happen.  What the Council did do however is extend the due date twice with the result that the loan is not due to be paid back until March 1, 2016.

City Councilmembers approving money for WAV building conflicts with their role on the RDA.

This was a major mistake. The folks on the City Council are the same people that act as the RDA.  This transaction was not arms length and drips of conflict of interest.  Who was watching out for the interests of all of the citizens of this community in making the loan and/or obtaining payment of this loan?  It certainly wasn’t the City Council because they, acting as the RDA wanted to claim fame and create their dream public housing (art?) project.  Now it is too late to obtain payment.  The RDA has no money, it is defunct and all we can do now is list this loan on a long list of other RDA loans that the State of California may or may not pay someday.  Just remember this transaction when the City Council asks to increase your water rates claiming that “we” do not have enough money.

Another twist in this Byzantine financing scheme centers on the Planning Department and Building and Safety.  When a builder or homeowner wants to build anything they must obtain permits, which are only issued after scheduled fees are paid for the project.  These permit fees are used to pay for the salaries and benefits of the personnel in these two departments, and are a major budget line item.  In the case of the WAV however the City Council, on August 2, 2007, voted to defer payment of $1,581,858 in permit fees to be paid over a period of 55 years bearing interest of 3%.  Having foolishly given public funds to accomplish their pet project it is little wonder that the City Council found it necessary in the last four years to impose greater and greater planning fees and costs on anyone who wants to develop or build in this City.

USE OF PUBLIC WORKS MONEY, WATER RATES, “ART”AND WAV PROJECT

[“How many legs does a dog have if you call its tail a leg?—A. Lincoln]

Using public works money for the WAV building violates Prop 218

Government Code § 5499.7 [Proposition 218] requires that in providing water and wastewater services to the citizens of any community the amount billed for those services may not exceed the funds required to provide the service, and that the fee may not exceed the proportional cost of the service provided to the individual owner upon which the fees is imposed.

Seems clear.

During a series of hearings before a Citizens Rate Advisory Committee, conducted between October 12, 2011 and January 25, 2012, to consider a City staff proposal to raise water and waste water rates to fund $265,000,000 in new projects over a ten (10) year period, what was discovered is that the City staff, under the direction of the City Manger, interprets Proposition 218 in a most liberal manner.

First, there is the $1,000,000 taken from the Water Department and channeled through the RDA.  This money came from the homeowners and property owners who pay their water bills and waste water bills.  That should not have happened and is ostensibly contrary to the provisions of the Government Code.  We can thank the Howard Jarvis Taxpayer Association for having obtained a court ruling on what this money (utility charges) can and cannot be used for, and public housing projects are not one of them.

“…the fee or charge revenues may not exceed what it costs to provide fee or charge services…the key is that the revenues derived from the fee or charge are required to provide the service, and may be used only for the service…”

—Howard Jarvis Taxpayers Ass’n v. City of Roseville (2002) 97 Cal. App. 4th 637, 647-648.

This committee next learned that not only had this loan been made to the RDA, but that the City Council had taken the position that the water and waste water funds were fair game for any “art project”, and that they were entitled to extract 2% of any money used for capital projects to provide the citizens with water and waste water services.

As of January 2012 the accounting department set aside (extracted) $3,145,620 for the Public Art Program from the water and waste water money collected through water bills.  They reported the following:

VENTURA WATER

PUBLIC ART PROGRAM STATUS JANUARY 2012

Budget for Administration $   432,207.94
Budget for Art Projects $2,713,413.03
Total Sums set Aside for Art $3,145,620.97
Sums spent for Administration $   432,207.94
Art Projects completed – spent $   581,351.86
Total Sums spent for Art Projects $1,013,559.80
Cash in the Bank for Future Art Projects $2,132,061.17
WAV Loan – receivable $1,000,000.00

 

The City Attorney, Ariel Calonne, provided a written opinion to the Citizens Rate Advisory Committee, that the Ventura City Charter, Section 1406, provides the legal basis for the City Council allocation of 2% of all money used for water projects to art.  He further argued that “as the City’s ratemaking authority, (the Council) has determined that the public art program constitutes a reasonable cost of service for capital improvements attributable to Ventura Water”.  The Citizens Advisory Rate Committee did not agree.   On January 25, 2012, this citizen committee rejected the 2% for art allocation as part of any water rate increases, stating “It is time to rethink all public funding and priorities.  This is an opportunity to effect some needed change”.

On Monday, February 27, 2012, at 6 P.M. the City Council will take up the matter of increasing water and waste water rates.

Editors Comments:    

Diverting funds from public works for housing borders on unethical

A plain reading of Proposition 218 and common sense dictates that water and waste water funds should not serve as the slush fund to pay city administration costs or building costs unrelated to the costs of operating our water and waste water departments.  So when your water rates are increased by 30-40%, or another tax increase is placed on the ballot, remember that here is another $2,581,858, squandered.

Actions by our City Manager are not without approval and acceptance by our City Council. If our elected representatives lack the understanding, the capacity to ask the deeper questions or political will to stop these types of actions, we need to make fundamental changes.

Editors:

B. Alviani          K. Corse          T. Cook

J. Tingstrom    R. Mccord       S. Doll

[1] Nixon denied that any of his re-election campaign funds were used to pay   the Watergate burglars, or that a  slush fund has been created for this purpose. In July 1973 Nixon admitted he had attempted to cover up the break-in to hide the fact that funds were diverted from one source to another for an  illegal use.

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