OPINION: Where’s the $2 Million? (Part III)

By STAN FENDLEY
Falls Church Times Staff

January 3, 2010

Since July of last year, we have followed the issue of the City’s $2 million no-interest loan to Falls Church Housing Corporation for a purchase option on property at 360 S. Washington Street.  The property was to become part of a 174-unit affordable housing project covering 350, 360 and 370 S. Washington.

Under the terms of the agreement, if the Housing Corporation did not  exercise the purchase option, the property owner would repay $1.9 million to the City, and the Housing  Corporation would repay $100,000.

By last summer, it had become clear that the Housing Corporation did not intend to exercise the option.  The Housing Corporation had withdrawn the 174-unit proposal, and the property owner of 360 S. Washington had placed the property on the sale block for $3.6 million.  As a result, the $2 million of taxpayer money was sitting in someone else’s account, drawing interest the taxpayers should have been drawing.

We called upon the Housing Corporation to formally notify the property owner that the option would not be exercised.  The idea was to trigger repayment of the money to the City and limit the amount of interest foregone by the taxpayers.   This would have become particularly helpful as the City’s budget situation worsened and large shortfalls accumulated.

Unfortunately, no such effort to trigger repayment occurred.  The money remained with the property owner until the purchase option expired in December.

Following the option expiration date, we inquired of Housing Corporation and City officials as to the status of the loan and whether it had been repaid.  City spokesperson Hyun June Lee responded with the following information on December 23:

“Thomas E. Sawner and the Falls Church Housing Corporation are in the process of repaying the loan to the City. Sawner, who is a guarantor on the loan for $1.9 million, has repaid $968,826.15 to the City thus far and FCHC has repaid its required $100,000. Sawner is expected to repay the balance of the loan by the end of January 2010. The City continues to work with Sawner and FCHC to ensure full repayment of the loan and has several deeds of trust on properties owned by Sawner and FCHC, the value of which exceed the outstanding balance on the loan.”

So if the City’s expectations are met, the full $2 million will be repaid by the end of the month.  Arguably, the property owner will be better off than before, in that he got to keep $100,000 and the property.  Of course, he also gave up the right to sell his property to someone else for a period of time, although it’s not clear what his prospects were in a down real estate market.  The loss to the Housing Corporation is clear — it paid $100,000 as a result of a proposal that tanked. And City taxpayers lost $20,000-$40,000, assuming an interest rate of, say, 1-2%.

But at a time in which the Falls Church Housing Corporation is seeking another $2 million loan from the city – this time for a project one-third the size of the previous proposal – it’s worth reviewing the experience of the first loan to see if we can learn lessons.

Obviously, a threshold  question is whether the citizens of  Falls Church want to subsidize a new affordable housing project at all during a budget crisis.  A number of people around town have asked that question, but for discussion purposes let’s assume the answer is yes.  In that case, it seems right to consider how much money the Housing Corporation really needs for its new proposal.  If it needed $2 million for a 174-unit project earlier, why does it now need the same $2 million for a 66-unit  project?  There may be a good answer, but it is not obvious.

A related question would go to the proper form of the financial support.  In the case of the 2008 loan, why did FCHC provide the full $2 million as a purchase option?  Why didn’t it just pay the property owner $100,000, which is the amount he ultimately was able to keep?  Then the City could have kept $1.9 million in its coffers until needed, gained interest on the money, and eliminated any possibility of non-repayment.  Reportedly, the property owner needed a new place to put an existing  business.  But could he have rented that new space until the Housing Corporation exercised its option?  Or could he merely have kept it where it was until the option was exercised?  Providing an amount larger than actually needed for a purchase option just seems imprudent.

And any loan agreement should contain a provision allowing the City to call the loan if it is not being used for its designated purpose.  It is particularly galling that the 2008 loan continued after the original deal died, because during this time City employees were laid off to help balance the budget.

In the end, the City Council needs to be cautious with taxpayer funds.  Although the Housing Corporation’s mandate is an honorable one, no organization has a right to taxpayer money.  The 2008 loan proved to be poorly conceived, with both the Housing Corporation and the taxpayer paying the price.  If the Housing Corporation is willing to take that risk, that’s its business.  Taxpayers, however, are understandably risk-averse in hard economic times, and the City Council should take every precaution to avoid risks the taxpayers don’t want to bear.