DACHA, the Davis Area Cooperative Housing Association, is a financially troubled project that is part of our Davis affordable housing program. The cityÕs Redevelopment Agency finally has decided that our best option is to initiate the foreclosure process against DACHA to protect our investment and to protect the affordability of the DACHA homes. We would like to explain how the city came to this decision.

The DACHA cooperative was proposed, designed and developed by Neighborhood Partners, which is a for-profit affordable housing corporation whose principals are Davis residents David Thompson and Luke Watkins. The idea behind DACHA was to provide a form of home ownership for low- and moderate-income families that would stay affordable over time. Like all cooperatives, residents would not own their homes outright but would purchase shares and make monthly payments in exchange for the right to occupy one of the homes.

DACHA has a number of characteristic features which, in its totality, have made it a somewhat atypical limited-equity housing cooperative. Rather than consisting of a single building or cluster of buildings, it consists of a number of geographically scattered single-family homes, duplexes and a triplex.

DACHA also contractually obligated itself to Neighborhood Partners to expand regardless of future conditions. DACHA was contractually obligated to pay all direct costs of acquiring these future properties and to pay Neighborhood Partners a fee of at least $8,000 to $12,000 for each of these new units, plus any additional but unspecified ÒextraordinaryÓ associated costs.

Eventually, Neighborhood Partners sued DACHA for $500,000 in such unpaid fees, including fees for units that had not been built or acquired.

How DACHA was created, financed

Before the first DACHA members were recruited, Neighborhood Partners selected an initial non-resident DACHA board. In 2002, this board formalized the administrative and legal structure of the organization. One of its first actions was to sign the contract with Neighborhood Partners for continued consulting services for what was to become 60 additional units; this is the contract that gave rise to the lawsuit.

The cityÕs Redevelopment Agency initially provided $1.24 million to DACHA to help purchase DACHAÕs first seven houses. Of this, $100,000 was paid to Neighborhood Partners for costs and compensation for the creation and development of DACHA.

DACHAÕs struggles

We cannot point with certainty to a single factor that is responsible for the deterioration of DACHA, but from the beginning, DACHA struggled to find buyers to pay the full share price of $20,000.

This might have been due to a lack of interest in this particular cooperative ownership model, or because the carrying costs had become equal to or greater than market-rate rents. The carrying costs were a function of such factors as the underlying cost of the home, the loan arrangements, the management fees, the consulting and development fees that Neighborhood Partners charged, and costs involved in the continuing required expansion of the cooperative.

Due to the difficulty finding members who could pay the $20,000 membership fee, DACHA received loans from David Thompson and Twin Pines Cooperative Foundation (whose president is also David Thompson) to help finance membership fees. These loans had adjustable rates and prepayment penalties.

Some shares were sold to people who could not afford the monthly carrying charges or the loan repayments. Other members were required to pay only a portion of the share price without any loan requirement. There was no uniform share price for DACHA.

Hence, while members could buy in, DACHA lacked an adequate financial plan to cover its loan obligations for balloon payments, prepayment penalties and adjustable rates. All of these decisions were made during the time Neighborhood Partners was the primary consultant to DACHA.

Why did the city step in?

In May 2005, DACHA residents submitted written concerns to the city that their carrying costs had risen above market-rate rents and above affordable housing standards, and reported problems finding new members.

As the primary lender to DACHA, the agency commissioned a financial audit in 2006, which revealed problems with missing records, inadequate accounting practices, problems with the business model and problems with project financing. To protect affordability and viability of DACHA and its investment, the agency completed a comprehensive refinance of DACHA, including repayment of loans from banks, Twin Pines and David Thompson.

These re-payments included pre-payment penalties that Thompson and Twin Pines refused to waive. As part of this refinance, the agency established reserves for DACHA, and DACHA used a portion of the loan proceeds to equalize residentsÕ share investment at one common and affordable amount by repaying those residents who had overpaid for their membership.

The lawsuit

The DACHA board decided it was not financially feasible to expand the cooperative by pursuing additional units, nor to continue to pay Neighborhood Partners for consulting work on an expansion it hoped to avoid. Up to that point, Neighborhood Partners had received more than $200,000 to cover their labor and related expenses involving the development of this project and its planned expansion.

In December 2006, Neighborhood Partners filed a lawsuit against DACHA, asserting that DACHA owed it more than $500,000, partly for consulting work it said had been performed but for which it had not previously submitted invoices. The remaining fees were for services not performed but that Neighborhood Partners would have earned in connection with the purchase of new housing units that Neighborhood Partners believed DACHA was required by contract to acquire.

In 2009, Neighborhood Partners and DACHA submitted their dispute to a private binding arbitration, which resulted in a decision awarding Neighborhood Partners $331,872. This award included $282,000 for development fees on housing units that have never been built or acquired by DACHA, such as unbuilt units in proposed projects that were never approved by the city.

The arbitrator emphasized that Òit is not the task of the arbitrator É to determine the viability of the business model or the financial health of DACHA …Ó

The city had hoped to facilitate a settlement between Neighborhood Partners and DACHA, but Neighborhood Partners has to date rejected this option. The city is not a party to this lawsuit.

The financial state of DACHA today

At the time of the arbitration award, Neighborhood Partners tried to collect its judgment, but DACHA did not have the funds to pay Neighborhood Partners. In October 2009, Neighborhood Partners placed a levy on all DACHAÕs bank accounts and collected more than $57,000. This left DACHA with no funds for regular operating expenses and loan payments.

Meanwhile, some members have moved out but DACHA has not been able to pay them for their shares. DACHA has not been able to find new members, and is currently in default on its loan payments to the Redevelopment Agency.

Where we go from here

As a lender, the agency initiated the foreclosure against DACHA to maintain the affordable housing units and protect its investment, since DACHA is unable to bring its loan out of default and cannot afford to file bankruptcy or secure legal representation due to Neighborhood PartnersÕ levy on its funds.

Although the outcome for DACHA as an organization is uncertain, DACHAÕs board supports the foreclosure decision and the agency continues to take actions to protect the 20 affordable homes and the communityÕs affordable housing program.

Ñ Bill Elmen is DavisÕ city manager and Elvia Garcia-Ayala is the cityÕs community services director.