09-20 and 09-21-10 Special Called Regular Meeting of Fiscal Affairs Committee

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CITY OF LA PORTE, TEXAS Agreed Upon Procedures - Five Points Town Center Project (Continued) September 21, 2010 The promissory note requires the borrower (East A) to repay interest in the amount of $625.00, on the first of each month until the principal is repaid. However, it appears that interest was instead paid in a lump sum upon repayment in March as noted below. Exhibit 33 also specifies that East A will maintain insurance on the property and furnish proof of such insurance to the EDC. While were provided a copy of the insurance policy on the property that was effective during the time frame covered by the loan, we were not able to substantiate that a copy was provided to the EDC as required. The EDC had to request this from East A during our procedures meaning it was either not provided to the EDC as required in Exhibit 33, or was not retained by the EDC. On March 12, 2009, the release of lien was filed (Exhibit 35), two weeks prior to the repayment, to allow it to be placed in escrow with Stewart Title Company for the closing. The loan was repaid on March 27, 2009 by a wire transfer (Exhibit 34) in the amount of $153,183.70, $150,000 principal and $3,183.70 in interest. The loan was paid out of and the repayment booked to the same Five Points Project account as seen in Exhibit 5. The $3,183.70 in interest seems to be in line with the terms of the loan. Using the principal amount of $150,000, the interest rate of five percent and monthly compounding, one would expect annual interest of $7,674.29. The term between the borrowing of the amount on October 29, and the repayment on the following March 27, equates to a term of 149 days. Taking that term and assuming 360 days in a year would result in interest owed of $3,176.30. The difference (approximately $8) could be the result of differences in the way the interest was calculated or rounding differences and is insignificant. Obtain confirmation from the City to determine depositor of wire transfer used for relJayment of loan In order to determine the source of funds received in repayment of the loan to East A, we confirmed the holder of the account from which the funds were repaid through JP Morgan Chase (see Exhibit 36). The confirmation received shows only that the funds were received from Stewart Title Company. It appears reasonable that the repayment would go through a title company. It is our understanding from correspondence with the City Attorney that further information about the source of the repayment would have to be subpoenaed from Stewart Title which is outside of the scope ofthis engagement. lOA. Finding The City did not perform, or did not document their performance, of due diligence on East A or Garson Silvers to ensure he had the intention and fmancial ability to carry through on his portion of the Project. As a result, while the City performed its portion of the Project as outlined in the Memorandum of Understanding (Exhibit 7), East A has not. lOA. Recommendation The EDC should consider implementing due diligence procedures to require background checks, credit checks, proof of lines of credit, or other documentation to help ensure contractors and developers have the means to carry out their side of any economic development project. In addition, the EDC should consider developing contingency plans for major projects involving third parties in the event they are unable to complete their portion as agreed. 19