Gearhart’s control of Atascadero

December 1, 2010

Kelly Gearhart

(Editor’s note: This is the second in a four part series about the story of North County developer Kelly Gearhart and his political allies. Part one was Fraud, arson and betrayal.)


As he built his empire, Kelly Gearhart’s relationships with public officials made it possible for him to skirt building requirements, thereby saving him hundreds of thousands in development costs.

These exceptions risked public safety, cost the county revenue and negatively impacted the availability of low cost housing, according to several sources who spoke to CalCoastNews.

His relationships with community leaders in Atascadero, especially the Atascadero Chamber of Commerce and some City Council members and staff, provided Gearhart with the appearance that he was an upstanding civic-minded citizen when, in fact, he was breaking state and federal laws.

And officials in Atascadero either looked the other way or seemed powerless to stop him.

In numerous interviews and in the reading of countless documents, some obtained by walking door to door asking homeowners for copies of their housing records, CalCoastNews has learned that Gearhart regularly broke laws meant to protect the public and provide housing for the poor.

The image of him as a successful developer helped lure hundreds of local people to invest in his projects.

Kelly Gearhart in his jet

More than 1,200 investors, primarily seniors, invested more than $100 million into Gearhart’s projects, most of the funds are currently unaccounted for because of an alleged Ponzi scheme. In addition, Gearhart filed a personal bankruptcy claiming an estimated $45.1 million in personal debt.

Low Cost Housing

Public officials and employees in Atascadero, under the guise of assisting the poor or providing amenities to the community, made deals with Gearhart and his partners to provide low cost housing, open space and parks as part of their projects’ conditions of approval.

Low-cost housing programs, however, can be exploited by unscrupulous developers, either with the complicity of the governing body or when there are insufficient controls in place.

In 2002, Atascadero finalized a new general plan that rezoned large portions of the city for higher-density housing. Gearhart participated in many of the public meetings leading up to these changes.

The rezoning increased density allowing for more housing in a smaller area. In exchange, developers were required to provide a public benefit, such as setting aside a certain number of houses for the poor, providing open space or small parks.

But Gearhart regularly ignored these low-income requirements and placed family members and friends in the houses, CalCoastNews has learned.

When city staffers became aware of the alleged actions through complaints by the Housing Authority for San Luis Obispo (HASLO), they responded by eliminating the local housing authority oversight.

After discovering Gearhart had placed his mother-in-law into a low-income home in Atascadero, was not certifying home buyers and renters and was objecting to home inspections by HASLO, Carol Hatley, the executive director of HASLO sent an e-mail to the city asking how she should handle the situation. HASLO has a mission to assist the county’s lower-income citizens to secure and maintain long-term housing.

HASLO inspects low-cost housing and income certification for most of San Luis Obispo County. In addition, it owns and manages about 520 low-cost housing units in the county, including three projects in Atascadero.

In response to the e-mail, city officials stopped working with HASLO and instead took over the process of approving and monitoring low and moderate income applicants and properties developers used as part of their conditions of approval.

“They said they would handle it themselves,” Hatley said. “There is such a need. We are the third least affordable community in the nation.”

Kelly Gearhart

Without oversight, Gearhart continued to place his family members in the low cost income restricted homes, according to public records.

In 2004, Gearhart built a small 15-unit subdivision off of Portola Road in Atascadero with two low-cost housing units.

On Feb. 25, 2005, while one of the low cost units, a 996-square-foot, two-bedroom at 8945 Cason Ct., was still in his name, Gearhart was able to procure a $1.4 million line of credit using the home for collateral from San Luis Trust Bank, according to title records.

Two months later, Gearhart sold the deed-restricted, low-cost home to his stepson.

Low-income, deed-restricted properties should have been noted on the maps filed in the county by the title company.

Gearhart, however, used Cuesta Title, a company owned by his former partner in several projects in Atascadero, Tom Murrell.

In an odd twist, Melanie Schneider, an ex-employee of Cuesta Title who was a key person in the majority of Gearhart’s transactions, moved to Colorado with Kelly Gearhart’s brother, Doug Gearhart, shortly after several federal and state agencies began to investigate the builder for fraud.

In 2007, Gearhart purchased the home on Cason Court back from his stepson and began renting out the property, even though his income would not qualify him to purchase a low-cost, deed-restricted housing unit. Despite laws prohibiting Gearhart’s purchase, city officials have not questioned him about this particular purchase.

Meanwhile, Gearhart’s stepson is currently living in the home.

After needy families and the disabled are approved for low-cost rentals, the average wait time is approximately two years.

In the city file for the Cason Court property, the ‘L’ for low income is scratched out and someone hand wrote ‘M’ for moderate income in ink.

With a lack of oversight, the city’s Community Development Department determined properties with specific pricing and income requirements could be manipulated, which increased the price of homes and profits for Gearhart and others dramatically.

Bruce White

For example, in the late 1990s, Gearhart and his former partner, current San Luis Obispo County Planning Commissioner Bruce White, negotiated with the city of Atascadero for the right to build a high density subdivision in exchange for providing three low-cost homes, according to the Agreement for Density Bonus Providing Three Housing Units for Specific Sales Prices.

Reached by e-mail for comment, White did not respond.

Gearhart and White built 18 two-bedroom “efficiency houses” on three small streets off of Traffic Way east of U.S. Highway 101. The non-deed restricted homes were advertised at $139,900 a piece, according to a sales brochure.

The pair sold one of the low-income properties to an acquaintance for approximately the same price as the rest of the homes in the subdivision. Gearhart and White then transferred their 50 percent ownership in each of the remaining two low-cost houses to the other, county records show.

A few months later, Gearhart sold his low-cost home for a non-disclosed amount.

White moved his fiancee into the other home and kept it in his name until he sold it in 2003 for $297,926, even though, according to the agreement, it should have had a maximum sales price of $166,240.

California Health and Safety Code 50093 requires that those who purchase or rent the homes meet very low, low- or moderate-income levels.

City officials arrived at the higher maximum price by determining that the buyers were required to be moderate and that a different formula could be used to determine price than is in the contract.

“Our interpretation was that it could have been valued either way,” said Atascadero Community Development Director Warren Frace. “The buyer and the seller go hand and hand and it was consistent with moderate income.”

White sold the home as a three-bedroom after he tore out the firewall between the home and the garage – a health and safety code violation – and added a closet. The changes transformed the den into a third bedroom, all without getting the required permits.

Generally, illegal room additions are not recognized as part of a home’s resale value.

County records regarding the homes are inconsistent and the property deeds and maps in the county recorders office fail to note that the properties are deed restricted low cost housing units. At least two of the homeowners claim they had no idea they were purchasing a low-cost, deed-restricted home.

Staff members in Atascadero have noted that their documentation of White and Gearhart-built low-cost homes is incomplete.

“I have looked at the file, and the documents are not complete, and I do not see an existing agreement,” Kerry Morgason, associate planner, said in a 2008 e-mail regarding a low-cost home built by Gearhart and White.

Gearhart and White were also able to cut their cost of a surety bond required by their Subdivision Improvement Agreement with the city of Atascadero.

The bonds assure that if a developer fails to follow through on his agreement to provide public improvements such as sewers, streets, storm drains and utilities, the community will have the funds to finish the work.

In the case of White and Gearhart’s Traffic Way subdivision, a surety performance bond required by municipalities before construction begins would have cost the developers about $5,000 in premiums over two years. For more than a decade, most of Gearhart’s projects were not bonded through a licensed surety company, saving Gearhart hundreds of thousands of dollars in premium costs.

Instead, Hurst Financial, Inc. – Gearhart’s lender and one of the subjects of an FBI organized crime investigation – was listed as the surety bondholder even though it was not a bond company. According to the city’s agreement, staff as well as the city attorney were responsible for approving the bond.

Public parks

In 2006, Atascadero city officials agreed to allow Gearhart to put in a high-density subdivision next to Highway 101 on Marchant Avenue in exchange for a park-like area. However, instead of following through on the agreement, Gearhart put an illegal parking lot and a third driveway in place of a park.

After complaints were lodged, public works staffer Joe Chouinard ordered Gearhart to tear out the driveway and transform the area back to a park-like setting, according to the project review.

Gearhart fought the order and was accused of trying to bully some of the city’s community development staff to approve the changes. When the staff refused, their boss, Frace, went to bat for Gearhart and asked the planning commission to approve the changes.

One staffer responded by sending an angry e-mail to Frace in October 2008 in which he notes that Gearhart asked them to not only support his request but to also waive the planning commission authority over the change. The staffer wrote in an e-mail to Frace:

“The point of this e-mail is to remind you (and maybe myself) that city staff does favor Mr. Gearhart and routinely changes policy, skirts the code, allows building without permit, and provides service and preferential treatment that no other developers receive … My position remains firm that staff should present a staff report not influenced by the events of today’s meeting.”

The planning commission denied Gearhart’s request.

Shortly afterwards, Frace approved Gearhart’s request to leave the driveway and parking lot and change it into a park by covering it with artificial turf, according to an Oct. 26, 2006 letter from Frace to Gearhart.

Public safety

Gearhart also has cut corners in regards to utility safety requirements.

Gearhart built a 14-acre, 60-unit development near the Home Depot. Access to the DeAnza Senor Cottage community required that Gearhart build two bridges, one over a creek and the second over railroad tracks, in order to access the property.

After Gearhart built the bridges with only one conduit for utility lines, gas company officials informed him he could not run a gas line in the same conduit with electric lines because of safety issues. In response, Gearhart decided to purchase a large propane tank to supply the subdivision with fuel.

However, California Public Utility codes require that Gearhart had the property monitored for safety through the California Public Utilities Commission’s small operator safety program that includes monitoring such as yearly line safety checks. Gearhart failed to follow through on the state requirements.

Meanwhile, Gearhart’s hard-money lending schemes and questionable business practices have jeopardized the financial well being of hundreds of local seniors.

Rita is a 65-year-old Cambria resident who suffers from multiple sclerosis and can no longer walk. Her husband placed the couple’s savings, $830,000, with Hurst Financial into a Gearhart project prior to his death. He thought he had protected his wife’s future by guaranteeing her financial security.

“I need 24-hour care,” Rita said more than a year ago. “Without my interest and possibly my investment, I’m not going to be able to afford my caregivers and I will have to sell my house. I don’t know where I will end up. I am scared.”

Rita lost her home and is currently living in a low-cost care facility.

Some of Gearhart’s supporters contend that if he had been successful in bringing an Indian casino to Paso Robles, he would have had the funds to cover his debts.

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OMG Thats my house thy are talking about! I bought it from Bruce in 2003 and sold it after a huge ordeal to try to get out of the dead restriction and we had to do all kinds of stuff to sell it because of the fire wall being removed! I had to get the major and city council to help me be able to sell it for what I paid for it! the 297,000. does anyone know how to go about getting soe of the money back he over charged us?? I can’t believe how much thy know about the house. We bought at a time where real estate was skyrocketing and then almost got stuck with a house they said we were going to loose money on!Help!!

Check out the Tribune. Bruce White has resigned. Frank Mecham say’s that he will make a statement about it on Monday and Bruce isn’t talking. Keep up the great work CCN, the people of this county need you.

One crook down and many to go!!!!!!!!!!!!!

Thank you for this excellent information, if all of this is true, then those of you who have attorneys should get a writ of attachement on the remaining funds before Gearhart and his legal tricksters find a way to funnel out funds for his legal matters, there is sufficient good document cause to do so. Again, if this is true, at least a third of your losses may be abled to be recovered, hopefully and more.

Break down of a typical Hard Money Loan. (NOT TO BE CONFUSED WITH THE PRACTICES OF SOME)





Good post. Thank you.

You should mention that most loans have a LTV-Loan to Value. Usually a legitimate lender will require a LTV of 70%-80% which means that the person borrowing the money has the remaining percentage of funds invested in the project. Example would be that the project has a total value of say $300,000 which means that the lender will loan 70% or 80% of that amount. This format puts the borrower financially involved in the project. What happened in these cases is that inflated appraisals were made up and the hard money lenders lent 100% of the appraisal. Since the appraisal were inflated and 100% of funds were released what ultimately happened is that over 100% of the value was released and the rest is history.

This post hit the nail on the head. Good post

A construction loan from a commercial bank requires the builder to deposit the shortfall in money with the bank in advance and it’s added to the loan. The builders money is dispersed first, saving the builder interest money, but only after he reaches a milestone in construction as set out in the banks draw system. Before funds are disbursed, the bank sends an inspector to the job to verify the work is complete. The builder is not allowed to draw money in advance of the work being completed. None of these safeguards where in place. A builder turns to hard money when he can’t qualify for a much cheaper bank loan (in most cases) as we have seen there are builders that evem hustled the banks, using false documents and information.

So 30% goes back to the investors because the average project takes 2 1/2 years to complete? That doesn’t leave much profit when they finally cash out. I didn’t realize that an average project took that long. I would expect that they have all the permits and planning in place before they start raising the capital.

Thanks for the post roymann. What would you say the average profit margin is on residential construction? Like on a single family home verse a track of 5 or 6 homes. How about when they build high density? What is the difference in the margin on commercial development vs residential as I hear that residential has a higher return. You may or may not know these questions but if you have a good guess or better, I would appreciate your feedback, I’m just curious as I haven’t got the slightest idea.

An answer to your question is that the “legal” contractor will make an amount that is equal to what the market will bear. The profit margin is mostly based on market conditions and the efficiency that the contractor and/or developer can produce the profit. The old adage that time is money is correct and the usual time to construct a residence is around 4 months.

The problem with the “Ponzi” scheme is that the “crooks” actually borrowed more than what the finish product would sell for on the market. If one would look closely on some Title Reports you would note that since there was more money lent on the project than what it sold for that at times additional cash from the “crook” would have to be deposited into escrow in order to close the escrow. Somewhat confusing unless you know how it works.

Don’t forget the 6 months it takes to get a permit if your names not Gearhart, and the 3 months to have plans , civil engineerig, soils reports, structural engineering, etc completed.

All of this time erodes the potential profit for the hard Money Borrower.

Cindy, the bigger projects requiring the most borrowed money, Had to be designed and still go through the approval process, as in the case with many Gearhart projects, many were turned down. There is an instance where Gearhart purchased property in Templeton, decided he was going to get approval for a sixty lot subdivision, so borrowed money on all 60 lots. The sub-division was turned down by the County. The design of projects like this (and there were many) with all the environmental reports and requirements can easily take over 2 years prior to the appeal process. So money was borrowed on something that didn’t yet exist and still doesn’t. The contractors didn’t have plans and permits ready to go before they borrowed the money, they borrowed the money first to purchase the property and the size of the loan was based on what they ultimately thought would be approved on the land. You can be sure none of the investors were aware they were lending on something that required a risky sub-division approval. Basically as long as the market was going up, the appreciation in the land value could offset the high cost of the points and interest and the cost of buying and selling. In a flat market PROFITS were nothing more than a facade as points and interest ate them up and usually than some. This is why so many builders aggressively purchased every property they could find to keep cash flowing.

I spotted a good post from today that ended up at the bottom of the blog for some reason.

centralcoastcoyote says:

12/09/2010 at 8:58 am

Lets hear the heavy stuff, this is a blog and Im sure theres some of us that can help piece the puzzle together.

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