Redevelopment Morphs Into Loan Sharking

April 2, 2012 - By admin

April 2, 2012

By Wayne Lusvardi

California redevelopment agencies may have been phased out. But cities are getting into the business of loan sharking to offset a decline in sales and property taxes.

Last week the Ventura City Council voted 6 to 0 to borrow $850,000 at 4 percent interest from Rabobank. Rabobank is a self-described “sustainable lender” located in the Netherlands. In turn, the city loaned that money to “Players Casino” in Ventura at 8 percent interest for the expansion of their facilities.

This is a version of a “buy low” and “sell high” strategy. Only in this case it is “borrowing at a low interest rate” and “lending at a higher rate.” It’s called arbitraging in finance.

Arbitraging is expressly forbidden with tax-exempt bonds. That is because local government is a tax-exempt organization. It could potentially borrow cheap money at tax-exempt rates and re-invest it at a higher market rate. It thus could reap a profit with the public’s cheap money. All this is illegal under Regulation 1.148-0(a) of the I.R.S Code.

This explains why the city of Ventura used a private lender in the Netherlands to borrow money from instead of using bond funds. It is not illegal to arbitrage bank funds.

The way the city of Ventura spins it: it is “restoring confidence and lending to a casino.” The city also denies that the city itself is a “bank.”

It may technically not be a bank. But it is acting as a loan broker for private borrowers. And it is tacking on double the rate of interest for the trouble of brokering the loan.

‘Low risk’?

Cities such as Ventura claim such loans are low risk because they usually are for a small fraction of the total property value. Typically the loans are secured by the total value of the property as collateral.

The city also holds the casino’s gaming license. Thus, if the casino defaulted on the loan, the city could require any buyer of the casino to pay off the loan as a condition of assuming the license.

The city of Ventura further justifies the loan because it will receive $37,000 in interest on the loan over two years. It also will receive $177,000 per year in additional sales and business taxes. This is in addition to the $260,000 every three months it already receives in taxes from the operation of the casino. The casino is generating about $1.2 million per year in taxes to the city. The city operating fund budget is about $88.8 million a year.

The taxpayers of Ventura have no opposition to such lending practices because tax increases can be avoided. Instead, the city indirectly raises taxes on gamblers who patronize casinos. Ventura voters have reportedly rejected tax increases twice in recent years.

But if these loans are not a high risk why, is the interest rate doubled? Interest rates serve as a substitute or indicator of risk. In fact, they are often called a “risk rate.” The higher the risk, the higher the interest rate and vice versa. A loan for double the interest rate would indicate a loan with double the risk. Eight percent would be a “junk bond” interest rate in the private sector today.

But if the risk in fact is indeed low as the city claims, then the city must be acting as a loan shark. Arbitraging is a form of speculative loan sharking. Thus, cities that no longer have redevelopment agencies are getting into the loan sharking business.

A loan shark is informally defined as “one who lends money at exorbitant interest rates, especially one financed and supported by an organized crime network.” What the city of Ventura does is legal, however.

How will the money be spent?

But probably the bigger question is: What will the city of Ventura use the tax revenues it gains from such loans for?

If it is dedicated to defined benefit pensions and health benefits, this could obligate the taxpayers to pay greater and greater taxes for unrealistic pensions. There is no requirement in the city or county of Ventura to reform public pensions as a condition for getting into the loan sharking business. Liberal cities are apparently more concerned about symbolically borrowing money from “sustainable lenders” than reforming pensions so that they are sustainable.

A state moratorium bans new casinos until the year 2020. If the number of casinos is reduced, where will the city of Ventura stand with its dependence on casinos tax revenues?

It is perhaps symbolic that the Players Casino in Ventura is housed in the former Ventura Auto Center Mall facilities. Market capitalism has apparently died in Ventura and in much of California. It has been replaced with state capitalism that grants monopoly licenses for enterprises such as gambling that just redistribute wealth instead of creating real wealth.

The state of California has gotten into the business of financing unneeded and deadweight affordable housing, stem cell research, bullet trains, renewable energy and redevelopment. Look for cities to likewise start using their permitting powers together with loan arbitraging to create or enlarge more businesses that don’t increase overall productivity but generate taxes to keep “loan shark” governments with enough little fish to eat.

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Comments(0)
  1. Beelzebub says:

    Well, why not? The cities saw the banksters game the system, blow a hole in the economy and get rewarded for it. Why wouldn’t they want a piece of that action too? It’s easy money. Effortless money. Just resell a loan at a higher interest rate and reap the profit. If it blows up in their face threaten bankrupcy and get a state or federal bailout. Nobody gets punished. It’s just the cost of doing business and when the costs are pushed off onto the taxpayers it’s all good!

    This is the NEW capitalism in America. It’s called CRONY CAPITALISM. Jump on board while you still can! :D

  2. Wayne Lusvardi says:

    If Ventura had to go to voters to try and raise taxes (again) they would probably be faced with an ultimatum from voters for pension reform. But with raising revenues by loan sharking them can escape any reforms.

  3. Wayne Lusvardi says:

    CORRECTION – Last sentence of my above comment should read:

    But with raising revenues by loan sharking THEY can escape pension reforms or voter referendums.

  4. Wayne Lusvardi says:

    To put a little perspective on this, Michael Milken went to prison for something like this.

  5. Wayne Lusvardi says:

    Where are the Occupy Movement advocates?
    See here:
    http://crooksandliars.com/susie-madrak/bank-america-initiated-new-loan-shark

  6. The DA says:

    Absolutely nothing smells right about this transaction.

    Assuming that the casino is low risk, are we to believe that they would be unable to secure the loan for a rate a lot more favorable to them than 8%? Is there no other lending entity out there who could match or undercut the City’s proposed rate? What planet are we living on? I would have been happy to refinance my house in order to make that kind of a loan.

    Then there’s the question of “whose idea was this?” How strange is it for any business in need of expansion funds to go knocking at the City’s door for a loan? It simply isn’t the first place one would normally consider tapping for an $850,000 loan much less for an interest rate that seems ludicrous on it’s face.

    Was it the City’s idea? Very doubtful unless you believe there’s a whole group of City employees who do nothing more than sit around and figure out who might want to borrow money from the City at usurious rates.

    Perhaps this is a legitimate transaction that can only be understood by financial wizards, but to lesser lights such as myself, it looks more like a bribe disguised as a loan.

    I wonder if the casino could have expanded their facilities at all without City approval?

    Hmmmm?

  7. Frank says:

    The author mistakenly calls this action “arbitraging”. It is in fact an example of a form of “carry” trade. Carry trades are not arbitrages: pure arbitrages make money no matter what; carry trades make money only if nothing changes against the carry’s favor.

    The author’s accusation that Ventura is loan sharking doesn’t hold water either. Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful. California usuary law prohibits lending at interest rates above 10%. Clearly Ventura is not charging “loan shark” rates as the author charges.

  8. Beelzebub says:

    “Where are the Occupy Movement advocates?”

    Occupy got tired of getting sprayed in the face with mace and hauled off to the slammer in cattle cars while the rest of you were trashing them.

    Don’t forget that Occupy protested at the SF Federal Reserve Building (52 arrested), protested at Obama’s campaign HQ’s in DesMoines and marched on both the Capital Building and the Supreme Court in DC while you folks conveniently weren’t paying attention.

    When’s the last time the Tea Party took a stand or did anything that mattered?

    Last I read all the Tea Party heroes back in DC voted to raise the debt ceiling. :D

  9. Wayne Lusvardi says:

    Frank:
    I didn’t write that the loan was usury.

    Although I am not a lawyer, paying the carrying costs of a business would likely be illegal for a local government to do in California. This is not a joint venture for a “public-private” project.

    Could the city have waived permit fees and accomplished the same thing because the expanded facilities would generate taxes for the city?

    And what about the appearance of extortion: “we will give you your expansion permits if you allow us to make double the going interest rate on a loan to finance your improvements?”

    Think again Frank.

  10. Wayne Lusvardi says:

    FRANK
    It would be illegal to require a private business to enter into a lucrative high interest loan in return for approvals of zoning and a conditional use permit. I’m not saying, nor did I say in the article, that anything like that happened in this case.

    But if such a practice of making high interest business loans in lieu of conventional redevelopment (now defunct) was to become widespread, I can think of a number of cash strapped cities that might be tempted to abuse this. They could start selling zoning to the highest bidder. Once again, I am not making accusations. I assume everything was done on the proverbial “up and up.” What I am doing is discussing whether this is good public policy and practice since we are likely to see more of it.

    Example:
    Owner A comes along and wants to expand their property. But the city denies the expansion for ambiguous reasons.

    Owner B comes along in a nearly identical property and agrees to borrow money from the city and their expansion plans are approved.

    This is why if a local government entity is going to offer a loan (say for surplus property sale) it is better to have an independent appraiser set the market interest rate for the loan. Not doing a loan for market interest arouses suspicions.

    Doubling the interest rate is not necessarily usury, but it could create the appearance of a business buying influence or the city selling permit approvals to the highest bidder.

    A local government can sell surplus property and take back paper on an installment loan. But this is entirely different.

  11. Rellis Smith says:

    This is only another feather in the cap of the Gang in the Ivory Tower. (Ventura City Hall). About a year ago when the Ventura Housing Authority was caught using money in the wrong way they were told by the State to immediatly repair the loans they had received from the City, the County, and the School district. The Gang in the Ivory Tower simply forgave a $500,000 loan they had given to the Housing Authority which is simply the Ventura City Council with differant hats on. The Ventura County and the Ventura School district turned down the request to forgive their loans also.

  12. Rex The Wonder Dog! says:

    The author’s accusation that Ventura is loan sharking doesn’t hold water either. Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful. California usury law prohibits lending at interest rates above 10%.

    100% FALSE. Interest rates can only be regulated under the state the lender has their charter or corporate HQs (forgot which), that’s why no bank is chartered in CA per the SCOTUS. I guess you have not seen credit card rate the last 35 years in CA either-18%035% and even 140% for “cash call”, or try going to a “payday” lender where the annual interest rate is over 100%.

  13. Martha Montelongo says:

    Wayne, what about eminent domain? Can they still use it as easily as in a ‘redevelopment zone?’

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