City Left Holding Bag on Shopping Center
By Dean Gray; July 10, 2008, 11:30 p.m. Pacific
Desert Hot Springs, CA – “It’s the most asked question I get,” says Desert
Hot Springs City Manager Rick Daniels, “What’s going on with that place?”
“That place” once promised a higher class of nearby shopping and now may
end up costing the city a half million dollars to clean up.
Some people bought homes in Desert Hot Springs and the Mission Lakes
Country Club with the promise of a dream. That was two years ago. Then the
project stalled.
Now the shopping center at the corner of Mission Lakes Boulevard and Little
Morongo Road is no longer stalled, but a fading shadow and a sadly
deteriorating unfinished eyesore.
Worse, the city is without normal financial securities required of builders to
finish the half-done streets in front of the project or to put in a traffic signal
and street-side landscaping.
As lathing from unfinished plaster work peels in the wind and exposed
framing first soaked by rain and now warping in the humid heat of the desert
summer sun, it’s obvious something’s wrong.
What’s going on is a developer gone broke, a lender in Chapter 11 and a city
holding worthless guarantees some say legally and ethically should never
have been accepted.
For months Michael Risman, managing partner of the development
company Dorama LLC, and his partner, Councilman Al Schmidt, spoke
confidently around town portending an angel of new funding saving the
shopping center. Risman’s elusive angel has always been just out of reach
as no anchor tenant, essential for the venture, has been found.
The state of the economy crashed with the lender pulling the plug on further
construction.
“Our lender [Estate Financial]… is having their own financial problems.”
Riseman wrote on March 2 of this year in a letter to Max Liebermann,
publisher of Desert Local News.
In January, Estate Financial filed a notice of foreclosure on The Village
shopping center. By February they filed a notice rescinding the foreclosure.
Risman and Schmidt were optimistic their real estate venture would
rebound with new funding. They expressed a buoyant self-assurance at a
business expo in April even as the shopping center’s half finished buildings
were becoming more derelict.
A letter of credit (from Estate Financial) purportedly guarantees $250,000
due the city. At the beginning of the year, however, the real estate meltdown
was destroying the real estate business all over the country, including Estate
Financial, a small investment management fund for private investors in
Paso Robles backing the letter of credit AND funding construction.
Estate Financial, forced into involuntary Chapter 11 bankruptcy last month,
thrusts the city into losing not just $250,000 but also bearing the costs of
completing the unfinished roadway and other public improvements Dorama
agreed to provide.
The costs of those improvements are estimated at another $250,000.
Pavement in front of the project is not complete; the area lacks street lighting
and road markings. A required traffic signal has yet to be built. A manhole
cover rises two feet above the roadway creating a hazard to any wayward
auto wandering onto the unfinished road adjacent the blacktop.
Making the matter worse for the city, the standard financial security
instrument, a bond, was not used to guarantee completion of those offsite
improvements. A bond provides a government regulated "safety net"
purchased by the developer as a condition of approval, enabling a city to
complete work at no expense to the public if the developer runs into financial
problems.
A bond is secure at all times whereas a letter of credit, especially one drawn
on a private funding business like Estate Financial, proves essentially
worthless in time of trouble.
“There’s no bond,” admits Daniels. “The former city manager [Anne Marie
Gallant] made an exception for this project. She did not follow protocol or the
municipal code.”
Why an exception was made is unclear. But it is clear one city employee,
Community Development Director Steven Mendoza, considered it so out of
the ordinary he saw fit to include what he called a “save my ass” memo in
the project file. Mendoza's memo says Gallant is responsible for the
exemption.
The project was approved two years ago at a time when Schmidt served as
chairman of the planning commission. Nothing has been found proving
Schmidt suggested Gallant make the extraordinary move allowing the letter
of credit substituting for a bond or cash payment.
The letter of credit saved Dorama paying for bond. City policy then and now
requires cash paid to the city at time of receiving the building permit or a
bond, not a letter of credit.
Discovering how a financial guarantee of the unusual letter of credit came to
pass may now be a worthless exercise no matter who initiated it. Two state
agencies have Estate Financial under investigation with bank accounts
under court control.
Last week a Superior Court judge froze all Estate Financial assets. The city
could not exercise the letters of credit if it wanted to.
If that was all there was to it, then a stalled construction project and a
worthless financial instruments could all be written off to the lending crisis
sweeping the country. There is more however.
Councilman Schmidt has been visiting Paso Robles to attend meetings with
Estate Financial along with hundreds of other investors and developers
seeking answers regarding their financial troubles. Risman acknowledged
Estate Financial’s troubles in the March letter.
Schmidt, despite the negative impact to the city, never disclosed the faltering
condition of Estate Financial to Daniels, the city attorney, the city council or
city staff, possibly leaving the city exposed for the entire $500,000 when it
might have at least had a chance to cash in the letter of credit and finish
public improvements and impacts associated with the project.
“I had no idea,” said Mendoza upon learning of the bankruptcy from this
Desert Valley Star reporter.
“We’re now aware of the issue and are developing a plan to deal with this,”
said Daniels.
Daniels made it clear the project's approval was not approved under his
watch. Mayor Parks was then councilwoman at the time of approval and the
only present day council member having oversight on the project when the
special relaxed letter of credit was accepted.
Gallant resigned from her position last year to be replaced by Daniels.
Schmidt was an outspoken advocate to keep Gallant in her position as city
manager.
The city now faces the dilemma of what to do with the property and how to
complete the roads, lighting and landscaping. The Desert Valley Star will
examine the financial feasibility of the project in part two of this series.
By Dean Gray; July 10, 2008, 11:30 p.m. Pacific
Desert Hot Springs, CA – “It’s the most asked question I get,” says Desert
Hot Springs City Manager Rick Daniels, “What’s going on with that place?”
“That place” once promised a higher class of nearby shopping and now may
end up costing the city a half million dollars to clean up.
Some people bought homes in Desert Hot Springs and the Mission Lakes
Country Club with the promise of a dream. That was two years ago. Then the
project stalled.
Now the shopping center at the corner of Mission Lakes Boulevard and Little
Morongo Road is no longer stalled, but a fading shadow and a sadly
deteriorating unfinished eyesore.
Worse, the city is without normal financial securities required of builders to
finish the half-done streets in front of the project or to put in a traffic signal
and street-side landscaping.
As lathing from unfinished plaster work peels in the wind and exposed
framing first soaked by rain and now warping in the humid heat of the desert
summer sun, it’s obvious something’s wrong.
What’s going on is a developer gone broke, a lender in Chapter 11 and a city
holding worthless guarantees some say legally and ethically should never
have been accepted.
For months Michael Risman, managing partner of the development
company Dorama LLC, and his partner, Councilman Al Schmidt, spoke
confidently around town portending an angel of new funding saving the
shopping center. Risman’s elusive angel has always been just out of reach
as no anchor tenant, essential for the venture, has been found.
The state of the economy crashed with the lender pulling the plug on further
construction.
“Our lender [Estate Financial]… is having their own financial problems.”
Riseman wrote on March 2 of this year in a letter to Max Liebermann,
publisher of Desert Local News.
In January, Estate Financial filed a notice of foreclosure on The Village
shopping center. By February they filed a notice rescinding the foreclosure.
Risman and Schmidt were optimistic their real estate venture would
rebound with new funding. They expressed a buoyant self-assurance at a
business expo in April even as the shopping center’s half finished buildings
were becoming more derelict.
A letter of credit (from Estate Financial) purportedly guarantees $250,000
due the city. At the beginning of the year, however, the real estate meltdown
was destroying the real estate business all over the country, including Estate
Financial, a small investment management fund for private investors in
Paso Robles backing the letter of credit AND funding construction.
Estate Financial, forced into involuntary Chapter 11 bankruptcy last month,
thrusts the city into losing not just $250,000 but also bearing the costs of
completing the unfinished roadway and other public improvements Dorama
agreed to provide.
The costs of those improvements are estimated at another $250,000.
Pavement in front of the project is not complete; the area lacks street lighting
and road markings. A required traffic signal has yet to be built. A manhole
cover rises two feet above the roadway creating a hazard to any wayward
auto wandering onto the unfinished road adjacent the blacktop.
Making the matter worse for the city, the standard financial security
instrument, a bond, was not used to guarantee completion of those offsite
improvements. A bond provides a government regulated "safety net"
purchased by the developer as a condition of approval, enabling a city to
complete work at no expense to the public if the developer runs into financial
problems.
A bond is secure at all times whereas a letter of credit, especially one drawn
on a private funding business like Estate Financial, proves essentially
worthless in time of trouble.
“There’s no bond,” admits Daniels. “The former city manager [Anne Marie
Gallant] made an exception for this project. She did not follow protocol or the
municipal code.”
Why an exception was made is unclear. But it is clear one city employee,
Community Development Director Steven Mendoza, considered it so out of
the ordinary he saw fit to include what he called a “save my ass” memo in
the project file. Mendoza's memo says Gallant is responsible for the
exemption.
The project was approved two years ago at a time when Schmidt served as
chairman of the planning commission. Nothing has been found proving
Schmidt suggested Gallant make the extraordinary move allowing the letter
of credit substituting for a bond or cash payment.
The letter of credit saved Dorama paying for bond. City policy then and now
requires cash paid to the city at time of receiving the building permit or a
bond, not a letter of credit.
Discovering how a financial guarantee of the unusual letter of credit came to
pass may now be a worthless exercise no matter who initiated it. Two state
agencies have Estate Financial under investigation with bank accounts
under court control.
Last week a Superior Court judge froze all Estate Financial assets. The city
could not exercise the letters of credit if it wanted to.
If that was all there was to it, then a stalled construction project and a
worthless financial instruments could all be written off to the lending crisis
sweeping the country. There is more however.
Councilman Schmidt has been visiting Paso Robles to attend meetings with
Estate Financial along with hundreds of other investors and developers
seeking answers regarding their financial troubles. Risman acknowledged
Estate Financial’s troubles in the March letter.
Schmidt, despite the negative impact to the city, never disclosed the faltering
condition of Estate Financial to Daniels, the city attorney, the city council or
city staff, possibly leaving the city exposed for the entire $500,000 when it
might have at least had a chance to cash in the letter of credit and finish
public improvements and impacts associated with the project.
“I had no idea,” said Mendoza upon learning of the bankruptcy from this
Desert Valley Star reporter.
“We’re now aware of the issue and are developing a plan to deal with this,”
said Daniels.
Daniels made it clear the project's approval was not approved under his
watch. Mayor Parks was then councilwoman at the time of approval and the
only present day council member having oversight on the project when the
special relaxed letter of credit was accepted.
Gallant resigned from her position last year to be replaced by Daniels.
Schmidt was an outspoken advocate to keep Gallant in her position as city
manager.
The city now faces the dilemma of what to do with the property and how to
complete the roads, lighting and landscaping. The Desert Valley Star will
examine the financial feasibility of the project in part two of this series.
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| Local news of the desert written and crafted by local people. We ae not the sun but the star. |
Michael Risman (right) in
better days, celebrating with
Dorama "idea man" Jim Merrik
(left) at Paradise Springs,
another Dorama development
in financial trouble. Former
mayor Bias (middle) joins in.
better days, celebrating with
Dorama "idea man" Jim Merrik
(left) at Paradise Springs,
another Dorama development
in financial trouble. Former
mayor Bias (middle) joins in.
Unfinished roadway on Mission
Lakes Blvd. looking west.
Failed financial guarantees
now require the city to pick up
the tab.
Lakes Blvd. looking west.
Failed financial guarantees
now require the city to pick up
the tab.
Unfinished buildings taking a
beating from the weather.
beating from the weather.
Schmidt's campaign signs, like
flags atop the Titanic, remind us
of the a real estate market gone
bust in America.
flags atop the Titanic, remind us
of the a real estate market gone
bust in America.
| The desert landscape takes over. |
Realtor and developer
Councilman Al Schmidt.
Councilman Al Schmidt.
 |