Fred Reyes

Fred Reyes and his children Natalie, 4, and Nicholas, 7, stand next to the vacant lot where his mother's home of nearly 40 years had stood before the city of Santa Ana acquired it and knocked it down. (Bob Chamberlin / Los Angeles Times)

By Jessica Garrison, Kim Christensen and Doug Smith, Los Angeles Times

October 3, 2010

Second of two parts —
Cities across California have skirted or ignored laws requiring them to build affordable homes and in the process mismanaged hundreds of millions in taxpayer dollars, a Times investigation has found.

At least 120 municipalities — nearly one in three with active redevelopment agencies — spent a combined $700 million in housing funds from 2000 to 2008 without constructing a single new unit, the newspaper's analysis of state data shows. Nor did most of them add to the housing stock by rehabilitating existing units.

In case after case, The Times found, cities spent substantial sums for little return:

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-- The San Gabriel Valley city of Irwindale spent $87 million from 2000 to 2008 but produced only 42 homes and 62 rehabilitated units. Some of the money was spent on industrial land next to an old gravel pit and warehouses, a site that officials now acknowledge was unsuitable for housing. New plans call for building a hot-sauce factory there.

-- In Santa Ana and Avalon, officials spent millions on projects that knocked down homes, displaced low-income people and worsened blight without producing anything in its place. Block after block in a 94-acre area east of Santa Ana's civic center is lined with boarded-up buildings and vacant lots. In the Santa Catalina Island city, where housing is so scarce that workers sometimes sleep in the bushes, a half-block of property where cottages were razed to make way for more homes has sat, sun-baked and undeveloped, for 15 years.

-- Rancho Cucamonga paid $42.5 million to a politically connected developer to keep about 550 units below market rate for 99 years — even though a consultant to the city said the price was "unwarranted" and city officials were told that an appropriate price for slightly fewer units would be about $13 million.

-- Nearly three dozen cities, including Monterey Park and Pismo Beach, reported spending most of their affordable housing money over the decade on "planning and administration" — but never built a single unit. Asked to account for the $361,000 spent by Pismo Beach, Administrative Services Director George Edes said some of it paid the salaries of staffers who were "thinking about concepts of how do we get something going … but we never did get to the point of taking those to the council with a concept that was developed."

State law requires municipal redevelopment agencies to spend 20% of the approximately $5 billion in property taxes they collect each year on building and preserving homes for poor and moderate-income people.

But affordable housing is not politically popular, and The Times found that many projects face inexplicable delays. Others end up worsening blight and hurting the people they were supposed to help. Land ostensibly set aside for affordable housing was in some cases turned over to commercial developers, raising questions about whether cities ever intended to build the housing in the first place.

State officials do little to ensure that cities spend the money properly or report accurately on their activities. The Times found numerous discrepancies between what officials told reporters they had produced and what they told the state.

Citing limited funds, the Department of Housing and Community Development stopped auditing redevelopment agencies three years ago.

"The state has unleashed this incredibly powerful land-use and financial tool that is redevelopment with virtually no effort, no time, no resources spent to hold these agencies to account," said Catherine Rodman, a San Diego lawyer who has sued several agencies over their use of housing funds. Puzzling explanations

The state's approximately 400 municipal redevelopment agencies control the largest pot of non-federal money available to build and subsidize affordable housing.

These little-understood arms of government are run by city council members and county supervisors — or, in big cities like Los Angeles, by political appointees. The agencies, which often work in concert with private developers, are funded by increases in property tax revenue from blighted areas they improve.

Nearly 35 years ago, amid concerns that agencies were razing the homes of poor people and leaving them nowhere to go, the Legislature passed the law requiring that one-fifth of redevelopment money be spent on affordable housing.

The law gives officials great flexibility in addressing the housing needs of poor and moderate-income families; in Los Angeles, that would be those with incomes of up to $75,600 a year for a family of four. The agencies can do more than build homes: They can buy and fix foreclosed homes, provide grants to homeowners to improve properties and pay to keep existing units affordable.

However, they are generally required to set the money aside for housing, and to develop the land they buy within five years. They are also required to replace any units they destroy.

John Shirey, the head of the California Redevelopment Assn., and others involved in redevelopment projects said that the vast majority of cities use their dollars well and that many cities have been confused by the reporting process and actually produced more affordable housing than state records indicate.

The records show that from fiscal years 2000 to 2008, municipalities used the money to build more than 50,000 affordable housing units.

"We have bought abandoned pickle factories, a tomato processing plant, gas stations, you name it … really blighted, ugly sites … and turned them into something nice," said Linda Mandolini, executive director of a Hayward nonprofit that has built thousands of units.

But during the eight-year period, more than 20 agencies produced less than one unit of new or rehabilitated housing for every $1 million spent, according to the Times analysis of state records. A ballpark estimate for building a unit and keeping it affordable for 55 years ranges from $350,000 to $500,000, experts said.

Much of the money might have been legitimately spent. But in interviews around the state, many officials from agencies that had produced little or no affordable housing gave explanations that were puzzling or murky.

Among the big spenders was Irwindale, a town of about 1,500 astride the 210 Freeway, where $87 million produced slightly more than 100 new or rehabilitated units.

Paul Zimmerman, executive director of the Southern California Assn. of Nonprofit Housing, said it was "perplexing how the city of Irwindale could spend these large sums and produce such a little amount of affordable housing."

City officials said $32 million was spent refinancing old debt, $3 million on planning and administration and $13 million on housing subsidies and construction.

About $11 million was used to buy a 23-acre industrial parcel on Azusa Canyon Road, across the street from a giant gravel pit. It turned out that people did not want to live there because it was too far from the municipal swimming pool and other amenities, said Interim City Manager Sol Benudiz.

A city lawyer, Fred Galante, cited another obstacle: A train derailment nearby had made people see the site as unsafe.

Six years after buying the property, officials signed a deal with Huy Fung foods, which manufactures Sriracha hot sauce, in which the company will pay $15 million for the land. Most of the purchase is to be financed by the city.

Irwindale stands to benefit by selling to a commercial entity, capturing any new property tax revenue it generates. Proceeds from the land sale will go back to the housing fund, and the search for suitable property must begin anew.

In their defense, Irwindale officials said they face unusual challenges, including a shortage of land in a town marred by gravel pits and a shortage of fill to place in the pits. Benudiz said the city was hoping for dirt and debris displaced by extension of the 710 Freeway — but that controversial public works project has been stalled for decades.

"The city has taken a real long view of housing," he said.

Moving them out

Santa Ana officials spent the last decade buying and bulldozing single-family homes and apartments east of downtown, uprooting homeowners and low-income renters.

"A lot of people got moved out and were told a story that something good was going to be done," said Fred Reyes, whose family had owned a 1901 Victorian for nearly 40 years when the city acquired it from his mother and knocked it down.

"You drive through there and you go, wow," said Reyes, 41. "You'd think by now something would have been done."

Sandi Gottlieb, a project manager with Santa Ana's Community Development Agency, said it took a decade "to get a good cohesive development site" because the agency bought properties as they became available rather than acquiring them through eminent domain. She said the city now has a viable plan with a "quality developer" and could begin construction next year on a housing project near vibrant new shops.

"Obviously, we would like to have gotten going sooner than now," she said.

Although redevelopment agencies are generally required to develop land for housing within five years of acquiring it, state records show that as of 2008, the agencies had been holding more than a quarter of their undeveloped land for periods longer than that. Nearly 15% had been held for more than a decade.

On Catalina Island, Avalon spent $2 million of its housing money in 1995 to buy land once covered in dilapidated cottages across the street from then-Mayor Ralph Morrow's house. Dozens of people were displaced.

Morrow, now a council member, proposed the acquisition on behalf of his neighbor, a friend, but recused himself from voting on it. He said the cottages were so blighted that they had to go. "They were awful, just awful," he said.

Officials pledged to build affordable housing in place of the cottages, but plans were vague and ever-changing. Current Mayor Bob Kennedy said many residents were opposed. One concern was additional traffic — although most people on the island get around in golf carts.

Avalon, a resort town of about 4,000 year-round residents, has had a dire housing shortage for decades. Many workers sleep in shifts in crowded rentals or in the bushes near the golf course.

In 2008, after auditors warned city officials that they were violating the law by continuing to hold the undeveloped land, the redevelopment agency sold most it for about $2 million. It went not to a housing developer but to the Catalina Island Museum Society, which planned a museum.

The proceeds went back into the affordable housing fund. The lot remains vacant.

Few consequences

It's difficult to compel redevelopment agencies to live up to their affordable housing obligations.

"There is no enforcement mechanism ... so if an agency isn't complying, there are few consequences," said Craig Castellanet, staff attorney with the California Affordable Housing Law Project.

"If you give a report that you haven't produced any housing,

and you were obligated to produce housing, the state doesn't come and require you to produce units."

State officials did not dispute that. "Is it a perfect system for enforcing state laws?" said Cathy Creswell, the state's deputy director for housing policy development. "Some would argue not."

Before the Department of Housing and Community Development quit auditing housing activity three years ago, it had found dozens of violations in about 40 cities: cities that did not set aside the full amount of money they were supposed to, overstated the number of units built or used the money for inappropriate purposes.

These days, cities are required to make annual reports on their housing activities and financial status to the housing department and state controller. But there is little to ensure the information is correct or that agencies do what they are supposed to.

A recent report by the state Senate Office of Oversight and Outcomes found a $1.3-billion discrepancy between the controller and the housing department over how much money local agencies were holding.

In Lynwood, officials conceded during a recent lawsuit filed on behalf of residents that they could not fully account for how they had spent millions in affordable housing funds over more than a decade. They also admitted that they had not been putting the full 20% of revenue aside for housing, as required by law.

"There is no keeping track of the project files and there isn't any control … as far as what should go in the file and where it's kept… I mean, there's no list," then-Assistant City Manager Lorry Hempe testified in a 2008 deposition.

Public Counsel, a pro bono law firm, settled the lawsuit last year after the city agreed, among other things, to build 91 homes.

In recent interviews, officials including City Manager Roger Haley said the sworn depositions and other admissions were not correct and that the city had used redevelopment money appropriately. "There were legal errors and missteps at the time of the case," Haley said.

Housing advocates also have filed lawsuits over the years against Escondido, Brea, Poway, Pittsburg and other cities, in which agencies agreed to put more money into their housing funds or build more housing.

But taking cities to court one by one is expensive and time-consuming.

"We cannot be the sole watchdogs," said Shashi Hanuman, directing attorney of community development at Public Counsel.

'Beautification' grants

If taxpayers and low-income residents are sometimes ill-served by redevelopment agencies, local officials and developers can make out very well indeed.

In several cities, city workers or council members received "beautification" grants or purchased homes from the redevelopment agencies.

In Grand Terrace, City Councilman Walt Stanckiewitz said he was startled to learn that three foreclosed homes purchased and fixed up with redevelopment dollars went to city employees and one to a city manager at the time. "I hate to use the word 'abuse,' but this is questionable," said Stanckiewitz, who looked into the deals at the request of The Times.

The former city manager, Tom Schwab, said he eventually reimbursed the city around $140,000 for his home — the appraised value, according to the city. Schwab said the city offered it to him because living in Grand Terrace was a condition of his employment.

But Stanckiewitz said that the home was meant for people of limited means, and that the money Schwab paid back went into the city's general fund, not to the redevelopment agency. "He got a special deal," Stanckiewitz said. "As far as I'm concerned, he took a house away from a deserving low-income family."

In Fontana, the city handed a developer a lucrative deal in 1982, and taxpayers have been paying for it ever since.

City leaders back then agreed to pay 15.5% interest on a $20-million flood control channel and other infrastructure improvements in the Jurupa Hills redevelopment area that were financed by the firm now known as Ten-Ninety. Then the project ballooned to $179 million.

Unable to renegotiate terms, the city thus far has paid Ten-Ninety $150 million in interest without reducing the principal by a cent. With all of its revenues going to the developer for interest payments, the redevelopment agency has used none of it to build affordable housing in that area.

"It was just a terrible deal for the city, and how they got talked into doing it is just beyond me," said John Husing, an Inland Empire economist.

In nearby Rancho Cucamonga, as well, taxpayers appear to have ended up on the wrong end of a deal with a developer.

In 2007, City Council members voted to pay $42.5 million to nonprofit housing developer National Community Renaissance to keep about 550 already-low-income units affordable for 99 years.

It's not unheard of to pay developers to keep rents low, but in this case most of the units were already subsidized until at least 2024 by the city. The money represented the developer's estimate of the difference between the future market rate and the affordable rate, and nearly wiped out the agency's housing fund.

The deal went forward despite a consultant's report that said the payment would "significantly exceed the estimated market value for these properties." According to San Bernardino Deputy Dist. Atty. John Goritz, officials had been told that a more appropriate sum was about $13 million.

In a criminal case indirectly related to the transaction, prosecutors accused Councilman Rex Gutierrez of pushing for the deal to curry favor with the nonprofit's chairman, whose help he had allegedly sought in securing a job with the county assessor's office.

Gutierrez was charged with theft in that job. His first trial resulted in a hung jury and he is now being retried.

Referring to the housing deal, Gutierrez's attorney, James Reiss, said his client "thought it was a good deal for everybody."

Orlando Cabrera, the president of National Community Renaissance, said the city made out well. "It's a very plausible way to preserve [affordable] units," he said.

But proponents of affordable housing said they were aghast.

"It's a bad deal," said Castellanet of the Affordable Housing Law Project. "It certainly doesn't provide benefit to low-income residents of Rancho Cucamonga."

jessica.garrison@latimes.com
kim.christensen@latimes.com
doug.smith@latimes.com