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City Council Meeting 6°2-81 Santa Monica, California
SUPPLEMENTAL STAFF REPORT
T0: Mayor and City Council
FROM: City Attorney
SUBJECT: Claim for Vested Rights from Emergency Building
Moratorium, Claim Number M-018, by Delaware
Investors, A Limited Partnership for a Vested
Right to Construct 8 Condominiums at 2022 Delaware
Avenue
In its earlier staff report, the City Attorney's office
recommended that this case be referred to a hearing examiner for
further factual information. Following last week's council
meeting, the City Attorney was apprised by the claimant that its
loan commitment would expire if the City Council did not take
action at tanight's meeting. Based upon the urgency, the City
Attorney had a hearing examiner meet with the claimant on Friday,
The hearing examiner°s report is attached to this
Supplemental Staff Report. In addition to the hearing examiner's
report, the hearing examiner obtained substantial documentary
evidence concerning the claimed liabilities listed in the
application.
Based upon his review of the documents, the City Attorney
recommends that the City Council approve the claim for vested
right to proceed with construction of the building. Claimant
has the final permit necessary for construction of the building
and has incurred substantial liabilities in reliance thereon
prior to the adoption of the moratorium. Since claimant does not
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have a final subdivision map, claimant does not necessarily have
a vested right to complete the project as a condominium project.
Whether claimant can ultimately complete the project as a
condominium will depend on compliance with the Subdivision Map
Act in the future.
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CA : Ri~.P4 : RFC :1
Council Meeting 6/2/81 Santa Monica, California
STAFF REPORT
T0: Mayor and City Council
FROM: Raymond F. Correio, Hearing Examiner
SUBJECT: Supplemental Report, Claim for Vested Right/Hardship
Exemption: Pfl-018, 2022 Delaware Avenue, by
Delaware Investors, A Limited Partnership,
Robert J. Sacker and Anthony R. Brackett, General
Partners and Authorized Representatives
BACKGROUND
On May 29, 1981, a hearing was. held at the City Attorney's
Office. The purpose of the hearing was to enable a hearing examiner
to prepare a report for the City Council on the vested right]
hardship exemption claim of Delaware Investors, A Limited Partnership-:
The general partners and authorized representatives of claimant
partnership, Robert J. Sacker and Anthony R. Brackett, appeared at
the hearing.
PP.OPERTY ACQUISITION AND FINANCING
Escrow on the subject property opened on July 29, 1980.
(Exhibit l.) An examination of escrow instructions indicate that
Grace Moore was the seller of the property. The buyer is listed as
"Tr7illiam A. Harris, Jr. and/or nominee," to be determined prior
to the close of escrow. L4illiam A. Harris, Jr. listed his address
as "c/o DERR Properties, Inc., 5815 Larboard Lane, Agoura, CA 91301."
On October 14, 1980, the escrow instructions were amended
to reflect the substitution of Delaware Investors, A Limited Partner-
ship, in place of F+Iilliam A. Harris, Jr., as vestee of the property.
(Exhibit 1, p. 5.)
On October 22, 1980, escrow closed and a grant deed was
executed b_y Grace Moore granting the subject property to Delaware
Inv--~stors. (Exhibit 2.)
The original partnership agreement recorded on Pdovember 3,
1980, lists [~~illiam A. Harris, Jr. as the sole general partner with
Robert J. Sacker and William A. Harris, Jr. denominated as limited
partners. (Exhibit 4.) At the hearing, Mr. Sacker and Mr. Brackett
stated that shortly after the formation of the partnership, Mr. Harris
realized that the responsibility and time involved in running the
partnership were more than he could handle. As a result, [^Iilliam A.
Harris, Jr. withdrew as the sole general partner and was replaced
by Robert J. Sacker and Anthony R. Brackett. An amendment to the
partnership agreement reflecting this change was executed on
October 16, 1980 and on December 5, 1980. (Exhibit 5.)
The purchase price of tiie property was $217,000. In order
to finance the purchase of the property, the partnership executed
a note secured by a deed of trust on the property for $130,000 from
Imperial Bank on October 17, 19fi0. From the initial $130,000 in
loan proceeds, the bank deducted a total of $8,464.44 in title charges,
recording charges, loan fee, processing fee, appraisal fee, and
special allocation for interest during construction. (Exhibit 6, p. l.)
This left a balance of $121,536 available to the partnership for the
purchase of the property.
To supplement the Imperial Bank loan proceeds of $121,536,
Anthony R. Brackett and Robert J. Sacker executed a personal loan
for $95,000 from Security Pacific National Bank. (Exhibit 3.)
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Sacker and Brackett advanced the proceeds from their $95,000 personal
loan, plus $2,405 for closing costs and fees to the partnership.
The partnership then utilized the remaining proceeds from the
Imperial Bank loan (S121,536} and the Sacker and Brackett loan
($97,405) caith some miscellaneous funds to purchase the property.
(Exhibit 7.}
The note on the Imperial Bank loan ($130,000) calls for
monthly interest payments which reflect the current prime rate plus
2 1/2%. The partnership has paid $14,184 in interest payments on
or before April 22, 19H1. The principal on the note was due in its
entirety on April 16, 1981. The partnership is currently in default
with respect to the principal. However, by the terms of this note,
the penalty imposed for default is a 20 increase in the interest
charged. (Exhibit 6, p. 4.) Claimant's representatives stated
that the principal on this loan was to be paid from proceeds from the
construction loan.
The terms of the Sacker and Brackett personal loan called
for monthly interest payments reflecting the current prime plus 30
with principal due in its entirety three (3) months from the date
of execution of the note. (Exhibit 3.) Sacker and Erackett have
paid off the Security Pacific loan with funds secured from capital
contributions of the limited partners.
THE PARTNERSHIP
The Delaware Investors limited partnership is comprised
of two (2} general partners (Sacker and Brackett) and ten (10)
limited partrers. (Exhibit 8, p. 2.) Sacker and Brackett are also
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listed as limited partners having made capital contributions
of $2,500 each. The ten (10) limited partners have made capital
contributions which total $130,000. (Exhibit 8, ~. 2.)
Robert J. Sacker and Anthony R. Brackett have a combined
interest in the partnership of 51 12/130. Their interests reflect
a 25% interest each as general partners for which no capital
contribution is listed coupled with a 25/260 interest each reflective
of their respective capital contributions of $2,500. The remaining
eight (8) limited partners have a 4II 1/130 interest in the partnership
with individual percentage interests which reflect their various
capital contributions. (Exhibit 8, p. 2.)
In addition to holding a 51 12/13% interest in the
partnership as general and limited partners, Sacker .and Brackett
control Summit Building, Inc. which the partnership (Delaware
Investors) has contracted with to construct the eight (8) townhouse
condominiums. (Exhibit 11.)
In essence, Brackett and Sacker as controlling general
partners of "Delaware Investors," in which they have a 51 12/13
interest have contracted with themselves operating as "Summit
Building, Inc.," under a cost plus fee contract to construct the
eight (8) condominium projects. (Exhibit 11.) The terms of the
contract call for Summit Building (Sacker and Brackett) to receive
a $55,000 contractor's fee payable in installments from the
partnership. Additionally, Delaware Investors agrees to reimburse
Summit Building, Inc. for a variety of costs and fees. (Exhibit 11,
pp. 1-3.)
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CASH POSITION, EXPENSES, LIABILITIES
Cash collected by the partnership from capital contributions
from the ten (10) limited partners amounted to $130,000. Claimant`s
representatives, Sacker and Brackett, introduced a cash position
statement which they allege reflects the allocation and disbursements
related to the $130,000 capital contribution made by the limited
partners as well as a $6,000 loan made to the partnership by Sacker
and Brackett. (Exhibit 9, n. l.) What is manifestly clear from the
cash position statement is that Sacker and Brackett have already
been reimbursed from the capital contributions of the limited
partners for; (1) the principal and interest ($95,000 plus $4,575)
on the personal unsecured loan which they obtained from Security
Pacific National Bank, (2) $2,405 in closing costs on the property,
(3) $3,014 reflecting points on the Imperial Bank loan, and (4)
$5,930 for disbursements made on behalf of the partnership.
EXPE~QDITURES
Actual expenditures by claimant related to the project prior
to April 22, 1981 are as follows:
1. Acquisition of Land
Purchase Price of Property
Closing Costs
Interest on Imperial Bank
Secured Loan
Interest on Security Pacific
Loan
Points on Imperial Bank Loan
TOTAL
$217,000
2,405
14,184
4,575
3,014
$241,178
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2. Development and Construction Costs
In their original Claim for Vested Right form, claimant
attached "Exhibit B" which they allege sets forth actual expenses
related to the development and construction of_ the project made
prior to April 22, 1981. Closing costs listed by claimant of
$2,405, as well as $3,014 in loan costs, and $14,184 in interest
on the Imperial Bank loan paid prior to April 22, 1981 have been
listed in section 1 under expenditures related to acquisition of
the land.
Claimant lists expenses of $6,500 related to securing
investor capital. However, in response to questions posed by the
hearing examiner, claimant stated that $4,575 of the total reflected
interest payments on the Security Pacific loan and are properly
characterized as an expenditure related to the acquisition of the
land itself. The remaining $2,025 is allegedly related to adminis-
trative overhead of Sacker and Brackett in securing investor capital.
This amount has not been expended but Sacker and Brackett claim they
have a legitimate right to charge the partnership this fee. However,
they stated that they would waive it in lieu of their share of the
partnership profits at the time of sale. Since the $2,025 has not
been expended by the partnership, it is not properly included as an
actual expenditure made prior to April 22, 1981. The hearing examiner
has serious doubts as to whether the limited partners (other than
Sacker and Brackett) would recognize this expense as legitimate and
therefore reimbursable.
Claimant's representatives list $3,000 as an expenditure
related to preparation and amendment of the partnership agreement.
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At the hearing Sacker and Brackett stated that $2,500 represented
legal fees for legal iaork completed but not paid by the partnership
to date. Sacker and Brackett claim that $500 is related to their
administrative overhead. With respect to charges made by Sacker
and Brackett to the partnership for "administrative overhead," the
hearing examiner is at a loss as to whether these expenses are
related to Sacker and Brackett's activities as general partners or
in their capacity as representatives of Sununit Building, Inc. The
terms of the partnership agreement specify that the general partner(s)
is not entitled to a management fee for management activities
related to the business of the partnership. (Clause B.1, Exhibit 4,
pp. 13, 14.) Under section 13.3 of the partnership agreement the
general contractor (Summit Building, Inca) is limited to payments
amounting to 100 of the cost of construction plus 5% overhead. -
In any event the $2,500 attributable to legal fees is
related to work completed prior to April 22, 1981.
Claimant's representatives state that they have received
a bill for $20,000 in architectural fees. (Exhibit 16.) The
partnership has paid $4,000 to date and owes $16,000. Costs related
to landscape Dlans total $725 of which $225 has been paid (Exhibit 19.)
Sacker and Brackett claim a $5,000 expense which they
characterize as the cost for their administrative overhead during
the entire planning phase of the project.
An accounting bill for $1,960 for work completed was
submitted by claimant's representatives. (Exhibit 17.) Additional
legal fees related to a preliminary and final public report amounted
to $2,075 of which $1,075 has been paid. (Exhibit 15, p. 2.) With
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respect to Civil Engineering fees, claimant has disbursed $5,185
to date on a bill for $7,935 for services rendered.
Claimant's representatives, Sacker and Brackett list a
charge to the partnership of $8,262 for their preparation of
feasibility and marketing study as well as meeting with appraisers
and other customary fees. Since the partnership has not paid
Sacker .and Brackett this fee to date, it is clearly not an "expense"
made prior to April 22, 1981. In response to questions posed by
the hearing examiner as to the nature of the work performed by Sacker
and Brackett, both stated they functioned as loan brokers in
securing a construction loan and felt entitled to charge the part-
nership for their services. They both stated that they would waive
this fee in lieu of their partnership profit interest upon completion
of the project.
For purposes of clarity and understanding, the alleged
expenses of claimant made prior to April 22, 1981 are broken down
into four (4) categories: (1) work completed, £ull payment made;
(2) work completed, partial payment made; (3) work completed,
payment not made, and (4) work partially completed, payment demanded.
1. work Completed, Full Payment Made
Ficticious Name Statement and
Other Recording $ 52
Soils Engineering 650
Blue Prints
312
Plan Check Fees 1,050
Architectural Revieca Board 25
Filing Fee City of Santa Monica 350
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Overtime Man Checic Fee $ 500
Fees to Los Angeles County 1,290
Temporary Fence 200
Building Permit 3,705
Seiner Tax 2,200
TOTAL $ 10,334
2. Work Completed, Partial Payment Made
Architectural Fees $ 4,000
Landscaping Plans 225
Legal 1,075
Civil Engineer 5,185
TOTAL $ 10,485
3. Work Completed, Plot Paid (in whole or part}
Legal $ 3,500
Architect 16,000
Landscape Plans 500
Accounting 1,960
Civil Engineer 2,750
TOTAL $ 24,710
4. T4ork Partially Completed, Payment Demand by Sub-contractors
Concrete Contractors $ 3,904
Framers 2,500
Plumber 7,500
Summit Building, Inc.
(General Contractor) 5,000
Excavation (1/2 completed) 5,625
TOTAL $ 24,529
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Considering each of the categories of expenses listed,
actual expenditures (categories 1_and 2) coupled with land acquisition
costs made prior to April 22, 1981, would total $261,997. If
categories 2 and 3 were included, the total would be $311,236.
The hearing examiner has not included $15,287 in adminis-
trative, overhead, and broker fees claimed by Sacker and Brackett.
In the first instance, these alleged expenses do not represent actual
expenditures by the partnership prior to April 22, 1981. Second,
there is considerable doubt in the mind of the hearing examiner as
to the legitimacy of a large portion of these alleged expenses under
the terms of the partnership agreement and cost plus fee contract
executed by the same two individuals operating under separate
corporate and partnership identities.
LIABILITIES
Section X of claimant's original petition form lists
potential liabilities stemming from executed contracts for goods
and services. Claimant's representatives have amended the list
of contracts to include one with Jim Draper Air for $11,000 executed
on April 7, 1981. [^dith the exception of the specific contracts
mentioned in the previous section relating to the general contractor,
excavation, concrete, framing, and plumbing, no work has been
undertaken under any of the other contracts.
COST OF PROJECT AND FEASIBILITY OF
INCLUSION OF LOW/MODERATE INCOME HOUSING
Claimant's representatives, Sacker and Brackett, estimate
construction costs to be $710,000 without inclusion of the purchase
price of the property coupled with closing and holding costs.
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(Exhibit 9, p. 2.) If land acquisition and financing costs are
considered total cost for the eight (8} unit condominium townhouse
project would amount to approximately $953,378. The partnership
has secured a construction loan commitment from Imperial Bank.
(Exhibit 10.) This initial loan commitment is valid until June 4, 1981.
Each townhouse unit would consist of approximately 1,625
square feet. Considering both land and construction costs, claimant's
representatives estimated a total cost of construction of $119,125
per unit. Claimant's representatives foresee a sales price of
$145,000 per unit or $1,160,000 potential sales income from the
entire project. with a difference of $25,875 between cost and
selling price per unit, the partnership stands to make $207,000 on
the sale of the eight (8) condominiums. However, an estimated
6% sales cost must be included which reduces the potential gross
profits to the partnership to $194,580 for the entire project..
In analyzing the figures presented by claimant's
representatives as to potential profit, the hearing examiner is
obligated to make the following observations. Pursuant to the
partnership agreement the tuao general partners (Sacker and Brackett)
will receive 51% of the profits or approximately $99,236. The
remaining $95,344 in potential profit must be distributed among the
other eight (8) limited partners. These eight (8) limited partners
have made capital contributions amounting to $125,000.(See Exhibit
8, p. 2.) Based on the figures presented by Sacker and Brackett,
the portion of the potential profits to be distributed to the eight
(8) remaining limited partners .($95,344) would not constitute even
a return of their original capital investment. Instead it represents
a potential loss of $29,656.
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Since no intelligent and informed investor would normally
make capital contributions which would produce a loss rather than
a profit the hearing examiner can only surmise that claimant's
representatives are not disclosing the true sales price which they
will seek upon completion of the project.
At the hearing, claimant°s renresentatives indicated that
at least four (4) of the limited partners; Harris, Vorel, Keenan,
and Marves had operated in other limited partnerships involved in
condominium projects. Additionally, in Article 25 of the
partnership agreement, section (C), the following paragraph is
set forth:
Each Limited Partner has made other real
estate investments of a similar nature
and, by reason of his business and
financial experience or the business and
financial experience of those he has
retained to advise him with respect to
his investment in the Partnership, has
acquired the capacity to protect his
own interest in investments of this nature.
Given both the actual and assumed business experience of the
general and limited partners, there is no plausible explanation
apparent to the hearing examiner as to why investments would be
made in a project which will result in such a horrendous loss.
In conclusion, the hearing examiner can only reiterate his opinion
based on the credible evidence of record and common sense, that
claimant's representatives appear to be .misleading the Council as
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to the potential sales price of the eight (8) condominium townhouse
units.
In response to 4uestions posed by the hearing examiner as
to the feasibility of inclusion of a low/moderate income unit,
claimant's representatives stated that this would result in such a
low profit margin that a bank would not make a construction loan.
It should also be noted that Summit Building, Inc.,
(Sacker and Brackett) is currently involved in the development of
a five (5) unit condominium project located at 1030 Bay Street.
The project is presently in the construction phase.
Anthony R. Brackett has been a resident of Santa Monica
for nine (9) years. Robert Sacker stated he had received a
contractor's license approximately one year ago and had been
involved in construction prior to that time as an owner-builder.
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EXHIBIm LIST
EXHIBIT DESCRIPTIO~d PAGES
1 Escrow Instructions, 7/29/80 5
2 Grant Deed, (executed 9/29/80,
recorded 10/22/80) 1
3 Note for $95,000.00 loan to
Sacker & Brachett, (10/16/30) 1
4 Certificate and Agreement of
Limited Partnership of Delaware
Investors, (executed 10/20/80,
recorded 11/3/80} 30
5 Amendment to Certificate and
Agreement of Partnership,
(recorded 12/5/80) 5
6 Imperial Bank Loan Documents,
(various dates) 11
7 Closing Escrow Statement, 10/80 1
8 Amendment to Certificate and
Agreement of Partnership, 5/28/31 2
9 Cash Position and Project Cost
Data (submitted at hearing 5/29/81) 2
10 Construction Loan Commitment, 5/7/81 2
11 Development and Construction Contracts,
(various dates) 21
12 Clear-Span Corp., Statement, 5/5/81 1
13 J. & P. Builders, Inc., Statement,
5/4/81 1
14 B & J Plumbing, Inc., Statement,
4/27/81 1
15 Stroock & Stroock & Lavan, Statement
4/30/81 2
16 Katzman Assoc., Statement, 4/16/81 1
17 Richard & Hendrick, Statement,
3/31/81 1
EXHIBIT DESCRIPTION PAGES
18 Southwest, Invoice, 4/21/81 1
19 Natural Settings, Statement,
4/1/81 1
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