Lend-A-Hand project could end up in court (Updated)

Fort Smith city government could soon be heading to court.

The Board of Directors heard recommendations from Matt Jennings, director of community development for the city of Fort Smith, on Tuesday (Sept. 25) regarding a $150,000 loan issued to Barlee Properties II Limited (Barlee) in 1998.

Barlee, a partnership comprised of Lend-A-Hand, Inc. (LAH) and Aaron’s, Inc., was established to develop and operate commercial enterprises. The loan amount was received as part of the Community Development Block Grant (CDBG) and HOME Investments Partnership Programs, but never repaid.

Barlee had a less-than-1% interest in the original project, which was established for the construction of 23 affordable housing units in the Koller Place Addition on Koller Avenue.  At that time, LAH, a certified Community Housing Development Organization (CHODO) proposed, and the City Board approved, a 1% interest rate over a 10-year period. LAH held a .3% stake in the development while Aaron’s held approximately 0.7%.

Outside of Barlee’s claim to the development, the remaining 99% was held by a limited partnership consisting of Aaron’s (84%), Rod Coleman (10%), and ERC Properties, Inc. (5%). When the plan was established, Chuck Fawcett signed representing Lend-A-Hand, while Ernest R. Coleman signed for Aaron’s and Rod Coleman signed for himself and ERC. Only three of the 23 units were built with city HOME funds.

In a Sept. 19, 2012, memorandum, Jennings writes that the 1998 Board (of Directors) executed an agreement with Barlee on Nov. 16 of that year. However, according to a 2003 audit report of LAH activities conducted by city staff, the city received no further interest payments on the 1% annual rate after 2000.

Files pertaining to the loan were destroyed in a flood “at some point during the ensuing years,” Jennings said.

An attorney representing Barlee delivered a copy of the City-LAH agreement to Jennings in July 2011, after which the city “froze all funding to LAH until arrangements could be made to repay the loan.”

“At that point, I met with the City Attorney and discussed the matter with him and the city requested the financial statements of the partnership so we could understand the structure of the project and determine its ability to pay back the loan. Neither the city nor LAH was able to obtain these financial documents even to this day,” Jennings said.

In December 2002, the general managing partner of Barlee (Aaron’s) requested that the city defer the loan on “the purported basis of inability of the rental units to charge sufficient rent to pay the obligations of the project,” but no agreement was reached.

LAH did provide a “plan on hiring an attorney and unraveling all of the issues,” Jennings said, leading the city to unfreeze funding that would allow the organization to continue work on open agreements with the city’s HOME funds.

The problem, Jennings points out, is that Aaron’s (Ernest R. Coleman) would not allow LAH to sign over their interest in the partnership to the city, so the city could pursue loan repayment.

On Tuesday Fort Smith Administrator Ray Gosack told The City Wire that Fort Smith government officials had met with Coleman to discuss the Koller Place Project on Sept. 12, 2012. According to the Sept. 19 memorandum, that meeting was unsuccessful because the “partner indicated that he believes it is only an obligation of LAH and does not intend to repay the loan,” adding, “The city attorney has opined that there are contract and equitable principles that indicate otherwise.”

THE OPTIONS
As a result of the communication breakdown, Jennings recommended to the board that the city “file a lawsuit prior to the expiration of the statute of limitations to recover the $150,000 loan proceeds and $7,500 in interest that are within the statute of limitations.”

Jennings believes doing so would “compel the general partner” to prove there is no equity available to pay the funds back, but foresees “a lengthy process that will be costly and possibly prevent LAH from carrying forward future projects.”

City Attorney Jerry Canfield did not know the exact expiration date on the statute of limitations, but said that the “city should act before the end of October.”

Other options available to the board include repaying the loan “strictly from non-federal city sources” and “requesting that the Department of HUD (Housing and Urban Development) allow the city to take a reduction in the next allocation of HOME funding for Program Year 2013.”

The “non-federal city sources” option would place the burden of the original loan on the backs of Fort Smith taxpayers, Jennings said. “Public perception of forgiving the repayment of public funds for a private entity’s profit,” was cited by Jennings as an additional con.

The “reduction in HOME funding” option would also bear that perception as well as reduce the amount of low- to moderate-income homebuyers the city would be able to serve. Additionally, “Others in the city program’s loan portfolio may request forgiveness as would be given to the developer,” Jennings said.

DELAYED DISCUSSION
Nothing was decided on Tuesday, in part because only four directors (Andre Good, Don Hutchings, Kevin Settle and Steve Tyler) were in attendance. As a result the directors bumped the issue to the Oct. 9 study session so the entire board would have the opportunity to participate in the discussion.

That did not stop Good from stating that he “did not think it’s right to assume the responsibility for paying this debt should fall on the city.”

“One thing I haven’t seen is, since the development has happened, the properties have been sold as single family housing or they’re rentals. Who has that money?” Good asked.

John Alford, attorney representing Barlee, responded that the property had not been sold and that it was “still under the same partnership as the day it was formed,” adding that he believed the city's stance was “not accurate with regard to the obligation of the city to repay it (the loan) or the city losing funds.”

“There’s a process you go through in order to have the loan or grant, whatever it is, forgiven,” Alford said. “And one of the reasons that loans have to be repaid is when the CHODO doesn’t use the funds properly or the project for which they received funds is terminated. In this case, there’s no allegation that these funds were not properly used to provide subsidized housing and have been and will continue to be for another two years. There’s a 15-year restriction on the properties, and they went in to service in 1998. So the purpose, again, was to provide subsidized housing and that’s what the money went for.”

Alford also pointed out “some other issues that need to be addressed if you’re talking about repaying the loan.”

“Under the regulations, CHODOs are allowed to keep a certain percentage of the monies that are distributed. I think it’s up to 15% in some situations and 5% in others. So this is not some situation where some contract is entered in to with a non-profit, and the non-profit owes the money and now somehow you’re going to sue. The housing project that lowered its rents—there’s a lot more complication that goes in to it than just that,” Alford said.

Good said “the money went through Lend-A-Hand to have these homes built. I still see no documents or reports, whether they should be provided by Lend-A-Hand, the limited partners, or the city of Fort Smith. There had to be a number of people sign off on this particular loan. That means there should be a number of people responsible—the city should be responsible, the limited partner, the managing partner, and Lend-A-Hand should be responsible—and I think we should have as much documentation as possible before we make a decision.”