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.)

By KAREN VELIE

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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WiseGuy

People seem to neglect the fact that Gearhart’s co-conspirators are still free and entrenched in north county politics and business.


The only way Gearhart got away with any of that stuff is because others helped him and profited from it, while knowing they were involved in criminal activity. These are people who are still operating today, many considered “upstanding” community leaders.


Gearhart’s caught. At this point more focus should be placed on nailing his co-conspirators. The trouble is there are SO many of them, with such a big web of corruption. So many people would look foolish (or criminal) for supporting them all these years. And that is why so many in the north county would rather just sweep much of this under the rug and simply put all the blame on Gearhart.


But Gearhart was just a symptom—a big pustule—indicative of a disease that goes MUCH deeper.


This is similar to having to amputate a limb to save the patient. Few “movers and shakers” in this county have the nerve to amputate to save the community. Instead they let the disease creep on and the community continue to rot from the inside out.


Gearhart is only a symptom of a disease that remains in full bloom.


Ask Wade McKinney what he thinks of this theory.


WiseGuy

Man oh, man, wouldn’t we all like to know the real name of whoever would feel compelled to post a “dislike” on this comment! What’s to dislike?


Crusader

I’m rather amazed that Gearhart never got clipped — or at least crippled by some of those he screwed before he retreated to Ohio. Heck, I am amazed no one has followed him to Ohio and greased him there…


standup

Funny you say that Crusader. I think he would have met his maker had he stayed around here for much longer. I think as time goes by, people no longer want him dead but want justice as do I. For the money he stole from us, it wasn’t worth killing him but it sure would have been for some of the folks he ripped off. Now I would just like about five minutes in a dark alley with the pos to have a little discussion. I am so disappointed in Warren Frace and most likely McKinney for their actions. I really wonder what perks they received from the little fat man in all of this. If this is proven to be true, they both have to go and lose all pensions for the public wrong doing. They may prove in the future to be just as corrupt as Kelly himself.


Cindy

standup, As I read your post, I am reminded of Kelly Gearhart responding to the Dave Congalton Show back in 2008 when he was denying all these allegations (FACTS) and calling upon certain people to “man up”. I distinctly recall Kelly being the person to bring up the term “man up”. How surreal can it get?


standup

That’s probably him. It would be a shame if Warren was actually a part of this because he always seemed to be a very knowledgable person with regards to city ordinances and the like. Overall, he’s a really nice guy. I pray he didn’t take kickbacks or anything else from Kelly, however, I am starting to wonder as this situation evolves. I have always had utmost respect for him and will withhold any and all judgement until concrete proof is delivered. So far, a lot of this is hearsay but I am starting to see cracks in the dam.


whatdouno

Seems like it was to big for people employed anywhere in the City not to know. IF Warren wasn’t involved by action he was responsible by his lack of action. It would seem he didn’t want to give up his slice of the pie, no matter how big it was.


CitizenB

Wow. Just wow. I worked on my fair share of development projects, and I know that most developers are always looking at ways to cut their costs, but I have never encountered anything like this reported collusion between a developer and city official to defraud the city itself! That is what blow me away — yeah, Gearhart is a scamming scum, but these were city officials ripping off their own city. Shameful, disappointing, and infuriating.


danika

And the good people of Atascadero just re-elected some of KG’s closest pals…It will be interesting to see who takes the fall in all of this. It does tend to roll downhill, doesn’t it…


easymoney

” yeah, Gearhart is a scamming scum, but these were city officials ripping off their own city. Shameful, disappointing, and infuriating.”


Very good points citizen…

I too have been in the building business most of my life and never seen the amount of shady stuff going on in the city of Atascadero and county of SLO offices with no consequences. Cutting costs is good business, cutting an inside deal is illegal.

And it is shameful that the same names keep coming up over and over again and nothing has ever been done.


PaulJones

“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.”

With the city officials, a bank and a title company in his pocket, it’s no wonder he was able to pull off the biggest fraud to ever hit this county. No doubt Warner was on target when she said he was paying people off. Question now is, how many will actually spend time in jail and how many will forfeit their dirty assets and bank accounts to the bilked investors? How good is the FBI sitting over there in Santa Maria because we know that our DA and current AG aren’t worth the toilet paper they wipe with.


BeenThereDoneThat

Yea interesting point ot the line of credit. I don’t understand how you get a line of credit that is four times the houses value!?


I had a line of credit on our house (before last refi) in the early 2000’s. You could only do (value) the equity in the house. Even if this house is paid it still is four times the equity.


Interesting also in that when this all started on CCN a couple years ago, there was a properity mentioned on Traffic way where one of his workers lives or lived across from the feed and grain. It also had numerous financing reaching above a million on a house only worth a few hundred grand. Sounds like a pattern here to me.


I figure the feds have taken SOOOO long in this, in that not only is it Kelly and gang going down, it will also probably be the city of Atas. and quite a few local banks. I.e. San Luis Bank, Heritage Oaks. Feds have their hands full in our little s**thole here in the north county.


TacomaRose

Back in the day of Judge Roy Bean he would have yelled “somebody get us a rope.”


Nowdays the question is how much rope?


By all accounts we would need about 400 yards to deal with all the rotten crooks involved in this ongoing story of fraud and corruption.


Say Co Supervisor Frank Meacham: What say you about your planning commissioner?

Are you cut from the same cloth too?


easymoney

Turn over another rock and look what crawls out…

The connections to the many highly placed and powerful city officials just keeps getting longer. Hopefully the FBI will connect the dots and there will be a reckoning with heads rolling and jail time served…


SLOBIRD

Who wants to defend these jerks now, certainly not poor Rita!


SLOBIRD

What a scum bag. And Warren Frace should be fired unless of course he had orders from higher ups. Why do people have to do these things unless of course they were being paid under the table. These public officials are suppose to work for the taxpayers, provide policy and laws that we are all suppose to follow and be impartial. This is so wrong on so many levels. Has our great Attorney General (soon to be ex ) ever been notified about all of this? This is like a little mafia here… Who would have thought!


Cindy

“And Warren Frace should be fired unless of course he had orders from higher ups.”

SLOBIRD, I don’t care where he got his orders from. Your sentence structure needed to end before the word unless. IMO ;)


Nancimeek

Letters have been written to the Attorney Generals office and unfortumately the response to Gearhart and grigger jones has been that these matters are “being handled” in the courts in other states (the ohio bankruptcy and our case in Hawaii) Not what I had expected as a response but I am not giving up. They know If that answers your questions. So does the FBI but how long it will take remains to be seen,


Cindy

This is some rather serious stuff, particularly the fraud with the low income housing. The LI housing was a federal requirement to continued certain federal funding. The LI was also allowed to be used as mitigation for high density housing and one of the things it mitigated was the added burden to public resources that it created as property taxes do not cover the added expense to service new residents. Now we find that it was all bogus simply to garner more money in the Kelly’s pocket and to those that took the envelope, all at a cost to the public they served. The FBI isn’t going to be happy about this, that is if they don’t already know about it and if they do, no doubt they’ll be giving Mr Gearhart a few deals to sing them songs. Our wonderful city leaders also created unfair competition to all the other developers. What a mess and we will probably be fined by the feds if not also sued by local competitors who played by the rules.

As for purchasing a deed restricted home that was never disclosed by the title company, here come some more law suits for the title company and then it will bounce back to the city of A-Town which is us citizens. Way to go assholes.


JordanJ

It doesn’t make sense that low income housing on a high density project would mitigate the high density. How does that work, doesn’t it add a burden?


Cindy

Yes that is an interesting dichotomy because it always adds a burden. Big Gov wants what they call affordable housing. So they allow what they call mitigation for breaking the standard rules of responsible development. Big gov also sanctions cities that don’t comply with meeting the goals of providing some affordable housing by withholding certain types of federal funding so of course the city works with developers to build affordable housing. This is accomplished by allowing developers to build higher density projects on otherwise low density parcels. They (the developers) get to build extra houses in exchange for adding one low income property to the project and it’s a big incentive for the developer to add a LI unit that they might only break even on. Obviously when they cheat, it is at a hugh expense to the general public as they have not only added a considerable burden to public services but the low income people still have not been served. The windfall ends up in the pocket of the developer and the officials that turned a blind eye for “some reason”.


R.Hodin

There’s definitely a burden on the ability of the developer to maximize the profit. But there is no implied right of a developer to be able to maximize profit on a project. For the burden of providing low-cost units, the developer is “gifted” the ability to put in more units with a zoning exemption granted by the city or the county.


The thinking is that it’s one of those indirect trade-offs, where high-density projects either close to town (employment & shopping) or close to public transportation have less of an impact on city services, air quality, etc. than the same number of units spread out on large individual parcels. The city also is mandated to provide housing by the state, and has an affordable and low-income housing target by the Feds, in order to get funding to partially offset the increased population.


Al

Thank you once again Karen for shedding continued light on this “man of the year”. Without you and CCN, Gearhart and Miller would still be swindling the elderly here on the Central Coast. You have done all the work, I suspect the DA is just saving your articles until you find enough evidence. BTW Kelly looks like the “girlie man” he really is in the private jet photo.


lordhelpus

Can’t wait to see if a connection has yet been made with Harry Ovitt. Those of us in unincorporated NoCo have had our suspicions about his relationship with Gearhart for quite some time. He tried to help push two awful projects through the BOS, both high-density with low-income component. Hope Ovitt will be exposed.


R.Hodin

methinks the DA is more concerned about saving his posterior than clipping articles for posterity


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