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Monday, July 9, 2007 | The deal was the first of its kind in El Cajon. The city took out a $1.3 million loan in 1999 from the federal government, and the nonprofit Heartland Foundation borrowed that money from El Cajon in order to purchase an office building.

The building would house both the nonprofit’s vocational training center and provide a revenue stream as it rented out office space to tenants, mostly other nonprofits. But the organization funneled the funds nearly entirely into renovating the building and setting up its programs instead of paying back the city for the loan.

The contentious deal approaches a final settlement this week. But disagreements persist about what went wrong during the seven-year arrangement and where to cast blame. Mark Hanson, director of Heartland, said city staff understood his priority was on providing services, not on paying the loan, and didn’t have a problem with it for seven years. But in November, when the City Council was told that El Cajon had paid nearly $1 million on the loan, while Heartland had paid little more than $12,000, it immediately voted to declare the loan in default and pursue repossession of the building through foreclosure.

“If he had paid everything, we wouldn’t be having this conversation,” said David Cooksy, El Cajon’s housing and redevelopment director.

Now, as the parties work toward a settlement, the city acknowledges its methodology must change if it wants to strike social-service deals like this in the future. The deal resulted in El Cajon spending federal dollars from one pot to pay off the loan from another.

The city spent nearly $1 million federal Community Development Block Grant dollars — designated for social-assistance programs — to make payments on the building loan over the past seven years.

But Hanson insists the foundation deserves no black mark, even adding a brazen request to a March 23 settlement testimony that the City Council consider paying Heartland and a real estate broker $50,000 each when the building is sold. The City Council rejected that request — a measure that Hanson admits was a bit of a stretch.

“We’re not about gouging people for money,” he said. “But we didn’t do anything wrong; we’re community heroes.”

The Heartland Foundation, running a career-training service center called Project Destination, won City Council support in 1999. The city agreed to secure the loan from the federal Department of Housing and Urban Development, which Heartland then borrowed to purchase the office building at 1068 Broadway.

Hanson said Heartland’s chief priority was renovating the building, several floors of which he said weren’t rentable in their prior condition, and getting its job training service running. Other groups with offices in or using the building for meetings included the San Diego Coalition for the Homeless, the Center for Social Advocacy and a branch of the Veterans of Foreign Wars. Hanson said he took no salary from the program, which he said served more than 2,000 job-seekers.

Hanson was a member of Heartland’s board when the deal with the city was struck and actually voted against it in 1999. But soon after, when he took the helm from former director Buddy Wilkerson, he said he chose to invest money in renovating and in the program rather than paying back the public loan he owed.

“We were not paying off the building, because it was not cost-effective,” he said.

Members of the City Council say they didn’t know of the payment disparity until November. That’s when they voted to declare the loan in default and proceed toward foreclosing on the building.

“It shouldn’t have gone as far as it did,” said El Cajon Mayor Mark Lewis. “We were just as surprised as everyone else was. It never should’ve reached that critical mass.”

In March, attorneys for the city and for the Heartland Foundation entered into a settlement that would bring court-ordered foreclosure on the office building and turn it over to the city to sell and pay off the rest of the HUD loan. Steven Boehmer, an attorney representing the city, said the City Council approved that settlement, minus Heartland’s $50,000 request.

Part of the financial drain came because Hanson said Heartland sympathized with the limited budgets of the nonprofit organizations that rented offices in the building and charged below-market rents accordingly. Three hundred dollars per month office rent rates were not unusual, he said.

And at first, Cooksy said, the city granted some time for the nonprofit to get on its feet and find tenants.

“Early on in the beginning, there was a grace period that they were given to get the building started up,” he said. “But after a while, these payments were not coming in. It didn’t work out, and then we were really forced to take action.”

When some federal grants didn’t come through for certain programs Heartland had planned, its promises of financial stability and positive cash flow on the office building rents also fell through.

And though Cooksy had some idea of the nonprofit’s activity, the City Council didn’t, said Lewis, the mayor.

“We didn’t know what was going on, so we just figured they were doing their job,” Lewis said. “What we found out was that they weren’t charging enough rent. There’s got to be another way of doing this; we have taxpayers’ money to think about.”

But Lewis believes what Heartland did was of ultimate benefit to the city.

“I think they did a valuable service, but now we have a building to take care of,” Lewis said. “Community agencies don’t normally have overflowing budgets. They reduced rents so that [the groups] would provide services, and we benefited as a community. But we have to go and take over the building … to make sure we have our heads above water.”

The settlement dated March 23 outlines two options for the turnover of the building to El Cajon, along with rental proceeds and utilities bills — foreclosure or transfer of the deed.

City representatives say they favor foreclosure as a formal, legal severance of the relationship with Heartland. After seven years of Heartland owning the Broadway building with little oversight from the city, El Cajon officials say they don’t want any surprises that could come about from a more friendly transfer.

Boehmer, the city’s attorney, says foreclosure would capture subordinate debt and revenue and “anything that we don’t know about.”

But Hanson says foreclosure — the black mark placed on a defaulting loan borrower’s credit file — is too harsh. He said negotiations are still ongoing that would clear Heartland of the stigma of foreclosure.

“Everything’s fine, there’s nothing against us, we did nothing wrong,” he said. “As far as I know, no, it’s not going into foreclosure.”

Whatever the legal avenue to transfer the property, El Cajon officials seem fed up with this deal and have resolved to do things differently should a “next time” come along.

“There’s got to be another way of doing this, to make sure we have our heads above water,” Lewis said.

Cooksy agreed.

“If we ever do one again, and that would be up to the City Council again, I think we’d have to be quite diligent,” Cooksy said, “[ask] how they were going to handle the business side.”

Please contact Kelly Bennett directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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