State regulators are investigating a Paso Robles-based "hard money" lending firm in the wake of a spate of complaints by investors who allege that they haven't received promised interest payments and stand to lose millions of dollars.
The investors include dozens of senior citizens, as well as the North County Humane Society.
The firm, Real Property Lenders, is owned by Rodney Jarmin, a Paso real estate broker who only last March had his full professional license reinstated after a 2003 disciplinary action by the Department of Real Estate. He continued to legally run his business on a restricted license in the interim.
- PHOTO BY PATRICK HOWE
- PAPER TRAIL : Linda Berry once advised her elderly parents to invest their savings in development projects through the Paso Robles firm Real Property Lenders. Now she's trying to help her parents get their money back.
# As described by investors, the more recent troubles with Real Property Lenders follow in the path of those experienced by another Paso-based hard-money lender, 21st Century Financial, which closed its doors in the fall and left hundreds of investors scrambling to learn the status of their investments. When it closed, owner Linda Kennedy described her situation as a symptom of the troubles hitting high-risk lending businesses nationwide.
That's exactly the tack Tammy Jordan, one of the partners of Real Property Lenders, took in an interview when asked about investors' allegations of mismanagement. She said that while the housing slump has caused more than half of the projects the company brokered to stop "performing," she insisted that her company's situation is different from that of 21st Century.
"We're trying to do everything we can to get the best resolution for everyone involved," she said. "The rumor of RPL going out of business is not true."
She also said she's confident that an ongoing audit by Department of Real Estate investigators will clear the company of any suspicion.
The term "hard money" comes from the fact that such loans are backed by real estate. A typical scenario might have a developer borrowing money from a broker for a project and paying between 13 and 15 percent annual interest. The broker would take a percentage or two for servicing the loan, and the rest--12 percent or so--would be paid on a monthly basis to investors who contributed money toward a specific project.
Although hard-money interest rates are higher than those offered by banks, the hard-money loans have been attractive to developers in part because they often don't require builders to put any of their own money down for a project.
That setup has now become a problem for investors, as some builders, swamped by the market's plunge, have ceased making interest payments and, in some cases, abandoned projects altogether.
Eventually, many of those projects may be completed by other builders or simply put on the market in a semi-completed state. But in either situation, investors are likely to lose large portions of their money.
One of the reasons the investments were attractive is because state law requires a major cushion for the loans. Investors can only loan up to $750,000, for example, on a house that's been appraised to sell for $1 million. Real Property Lenders officials say the slumping market ate up all of that cushion and more.
Scott Erwin, a construction consultant working with Real Property Lenders, said investors should have been aware that investing in hard-money projects is risky.
"If you're 89 years old and you have 100 percent of your money in hard money, you may well not have done your homework," he said.
Still, because of the way the loans are structured--paying a monthly dividend to investors--they had become an attractive investment vehicle for retirees living on fixed incomes. For years, as the housing market soared, the loans delivered solid returns.
That's one of the reasons Linda Berry said she encouraged her parents to invest with Jarmin's firm.
Now Linda's 85-year-old father, James, and 81-year-old mother, Lila, have $125,000--virtually all of their liquid income--invested in three loans through Jarmin's company. Linda said the projects have stalled or have been abandoned, and her parents have so far been unable to get their money back.
Linda said she regrets the investment advice she gave her parents, particularly in light of her father's health--he's recovering from cancer--and limited pensions from James' work as a Paso Robles teacher and Lila's work as a secretary with the school district.
But Linda is trying to do something about it.
Linda has helped her parents file complaints about Jarmin's business practices with both the Department of Real Estate and state Department of Corporations. She's also helped her parents file complaints with local police, alleging consumer fraud.
The state offices and county District Attorney's office all said that they couldn't discuss the status of any investigations. But numerous other investors have contacted New Times to say they have also filed claims alleging, among other things, that Jarmin didn't properly supervise how contractors spent loaned-out money to guarantee that money was only loaned out when projects reached certain milestones. Others allege the company continued to lure new investors into projects that were already failing, virtually guaranteeing they wouldn't get any return on their investments.
Jordan and Erwin flatly denied both of those claims.
Yet the allegations echo some of the findings from the audit that led to the revocation of Jarmin's full license. Jordan said the action was caused only by "paperwork issues."
For her part, Linda has resigned herself to the fact that her parents aren't likely to get all their money back.
"I just would like to see the projects completed so they could sell them and get some of their money back," Linda said.
Linda's husband, Ron, has taken things even further, joining a group run out of the offices of Paso attorney Peter Josserand that's trying to take control of some of the stalled projects, both from Real Property Lenders and other troubled hard-money lenders. The goal is to get the projects completed so they can be put back on the market.
The group calls itself the Phoenix Recovery Group, and the signs it has placed outside of projects it has taken over read: "Project rescued by Phoenix Recovery Group."
Brad Clark, a Cambria-based builder and investor who lent money through Real Property Lenders for 18 projects, said he feels the loans were mismanaged.
"The way it's represented, the worst-case scenario is the builder builds the house and, if he can't sell it, after he sits on it for a year or so you can foreclose on it because the loan is supposed to be only 75 percent of the appraised value, so you can mark the price down 25 or even 35 percent and lose maybe 10 percent. That's a reasonable risk," he said. "But what's happening now is all the money in the loan is gone and the house isn't finished, so you've got to borrow money to finish it, and when you do sell it you might lose half or more. It was the broker's job to insure there was an adequate amount of money to complete the project and that the money was only released as the work was completed. Rod Jarmin failed to do either."
Not all investors are angry at Jarmin, however.
One of the groups with money owed it from Real Property Lenders is the North County Humane Society, which has $75,000 invested in two loans, neither of which are paying promised interest.
"It puts us in a little bit of a bind," said Kayce Daniels, director of animal care for the North County Humane Society. She said the interest payments had funded spay/neuter programs as well as general operating funds. Still, she doesn't see any wrongdoing on Jarmin's part.
"One thing I'd like to say is, if this was just [Real Property Lenders] having a problem, that would be one thing," she said. "But there are several other companies that have actually gone out of business."
Managing Editor Patrick Howe can be reached at firstname.lastname@example.org.