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Will Sunnyslope Bankruptcy Case Put the Brakes on LA’s Affordable Housing Scams?

IMPORTANT READS

CORRUPTION WATCH-When the federal Ninth Circuit Court issued its decision In re Sunnyslope on May 26, 2017 (WL 2294746), it may have saved Los Angeles from disaster. 

As CityWatch readers know, back in 2001 when Garcetti was first elected to be Hollywood’s councilmember from CD 13, the city embarked on the massive destruction of poor people’s homes and since then over 22,400 rent-controlled units have been destroyed and the pace continues. That date also ushered in the era of New Urbanism with its concomitant corruption.  

Sunnyslope Was Not So Sunny for Los Angeles’ Mamzer-Goniffs 

On May 26, 2017, the federal courts may have initiated LA’s salvation with the Sunnyslope case.  Almost no one knows about this case, but it impacts us all. Sunnyslope deals with the recondite issue of the evaluation of Affordable Housing projects during bankruptcy. Housing scams of various types have been the bedrock of Garcettism. Every project receives unanimous city council approval despite the fact that the vote trading agreement under which the city operates was criminalized by Penal Code § 86. 

Pre-Sunnyslope Scams to Convert Affordable Housing into Market Rate Housing 

Housing projects constructed with Affordable requirements are not worth as much as identical projects without affordable requirements. Thus, developers get public financing by claiming that their projects will provide housing for the poor, e.g. Affordable Housing; then they to go bankrupt so that the court will kill off the Affordable Housing requirements. As if by magic, all low-income housing disappears and the complex is worth a ton more money as luxury apartments or condos. 

In the case of Sunnyslope, the lender First Security had $5.05 million at risk, which it sold during foreclosure for $7.65 million without an Affordable Housing requirement which the court had kindly killed. If that component had remained, the project would have been worth only $2.6 million. In May 2017, the Ninth Circuit re-imposed the lower evaluation based on the Affording Housing requirements. 

The Gap Between $7.65 M and $2.6 M is Significant 

These numbers show why developers want Affordable Housing money and then go bankrupt in order to get rid of the affordable aspect. While the exact numbers vary with each project, the same principle applies: Build Affordable, go bankrupt, sell as market rate. 

But Wait, There’s More 

In the ancient pre-Garcetti days, lenders would provide money for projects and then hold onto their loans collecting the payments of principle and interest over 30 or 40 years. Thus, lenders had a strong incentive to make wise loans, but with the advent of the New Urbanism which the City so fervently embraces, lenders re-sell their loans as soon as possible so that they can then move on to finance another project pretending to be Affordable housing. This was the essence of the SubPrime Scam before 2008 -- make bad loans on homes and then sell the mortgages to a Wall Street firm to get immediate cash to underwrite another bad loan and sell it to Wall Street, etc. 

If Los Angeles did not have a glut of apartments constructed within the last 15 years, lenders would finance market rate housing projects. Since we do have a glut, they are not financially viable, which brings construction to a halt. When HUD will guarantee loans that purport to be Affordable Housing, the lenders will finance these projects. However, due to their low rents, Affordable Housing is highly undesirable from a developer’s standpoint, so it is necessary to go through bankruptcy to have the Affordable requirement removed. 

Sunnyslope Kills the Secondary Market for Affordable Housing Loans 

After the lower court had initially voided the Affordable requirements, First Security had sold its loan for $7.65 million, which was $2.5 million higher than its investment. That was a quick $2.5 million gain. After a higher federal court nixed First Security’s $7.65 million sale, the lender was stuck with receiving only $5.05 million over 40 years at an interest rate of 4.4% plus a non-interest-bearing balloon payment at the end of 40 years. 

Per the, wink-wink, behind the scenes agreements, lenders know in advance that the projects are to be all market rate and that the Affordable portion of the projects will evaporate so that they become all market rate projects with maximum income rents. 

Sunnyslope causes a significant problem for these tricksters. When the projects cannot shed the Affordable requirements with their eternal low rents, there will be little or no financing for all the fancy projects that Garcetti desires. That money was to be made by the switcher-roo between Affordable and market rate housing. Let’s watch the project at 14241 West Magnolia. 

Theory Schmearry 

Many attorneys hawk myriad work-arounds of Sunnyslope, but none can guarantee that five or ten years from now, a court will accept evasions of Sunnyslope. Sunnyslope went into default in 2009, so its initial loan had to be more than ten years ago. What rational developer or lender is willing to wait around a decade to find out whether his scam to convert public housing money into a windfall for billionaires will work? 

Sunnyslope Ends the Gravy Train 

In the pre-Sunnyslope days, the billionaire developers and the City Hall politicos made out like bandits. Post-Sunnyslope, lenders will not finance TOD projects on the ruse that they are Affordable Housing since the court will refuse to void the Affordable requirements. In brief, if a developer says the project is X% Affordable, those low rents become an immutable feature of the project. 

Why Transit Oriented Districts Are Financial Losers 

Whenever a small parcel of land has a large development, the price per square foot escalates.  DTLA’s price per square foot is $680, while in South Los Angeles’ cost per square foot, where poor people live, is $352. Thus, the cost of land in DTLA is significantly higher. What businessman pays $193% over value, especially for low-income housing?    

It should not take an Einstein to realize that building “Affordable” housing at a premium of 193% was never designed to benefit the poor. Rather, it was a scam to get taxpayer dollars to construct luxury apartments and condos on the pretense of building Affordable Housing.   

How Sunnyslope may Save Los Angeles 

If Sunnyslope stops the financing of the Manhattanization of LA, it can save us. Unless LA de-densifies and de-centralizes now, it will die a slow death

De-densifying will improve our Quality of Life and that will retain Family Millennials and protect our future tax base. It would be naive to think that the criminals will simply walk away from looting the city treasury. Sunnyslope, however, may give us a fighting chance to save Los Angeles.

 

(Richard Lee Abrams is a Los Angeles attorney and a CityWatch contributor. He can be reached at: [email protected]. Abrams views are his own and do not necessarily reflect the views of CityWatch.) Edited for CityWatch by Linda Abrams.

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