Company touted by mayor is near bankruptcy

by J.D. Shutt

When San Francisco’s top officials gathered for the annual State of the City address on the morning of Jan. 17, 2014, instead of the elegant environs of City Hall, they descended on a construction site at the Hunters Point Shipyard.

The colossal redevelopment of the former Navy base into a new neighborhood symbolized, Mayor Ed Lee told the audience, proof of recovery from the Great Recession, a timely response to the housing affordability crisis and dedication to the people of Bayview Hunters Point.

“While the tech sector is growing, it’s just a piece of our diverse economy,” Lee said. “And that’s why we’ll keep investing in people … from the Bayview who work right here at the Shipyard. And behind me, Astron Development Corp. is building the framing for new housing, maintaining a 65 percent local hire rate.”

Despite the rosy picture painted by the mayor, some of the people working at the Shipyard were on their way to losing everything. The program meant to help small local construction companies benefit from the development was instead driving some against the wall.

Astron Development was under serious strain when the mayor made his speech. Rejected invoices and long “float” periods between payments had driven the company into financial dependency on the general contractor. Within a few months, it would be removed from the project entirely.

Today, the company has $500,000 in outstanding debt from working on the Shipyard, Astron owner Clyde Miller said. Though hired under a program meant to boost local businesses, after their contract failed, Astron has not been able to take on any other projects and is near bankruptcy.

Despite the rosy picture painted by the mayor, some of the people working at the Shipyard were on their way to losing everything.

A survey of the Shipyard’s local contractors and a review of public documents reveal systemic issues with the local builders program. Many contractors struggled with work delays, slow payments, and limited access to capital to the point that their businesses shrank or even collapsed.

Like Astron, the owners of Hercules Builders, Three Brothers Electrical and Precision Drywall reported taking a financial hit on the project. Al Norman Mechanical and Presidio Builders did not respond to interview requests but have complained about slow payments to the Office of Community Investment and Infrastructure. The companies’ Shipyard contracts ranged from $815,000 to $4,000,000, among the largest assigned to local contractors. All of the owners are African-American.

In researching this article, I contacted all 27 local contractors who have worked on the Shipyard and Candlestick Point, from a spreadsheet provided by OCII contract compliance officer Raymond Lee. Most did not respond, but at least two local contractors – Priority Architectural Graphics, a sign maker, and Minerva Construction, working at Candlestick – have had good experiences and said the program was being run well.

Access to capital

The former Navy base once offered thousands of jobs that attracted a large African-American community from the beginning of World War II through the mid-1970s. When the Shipyard shut down in 1974, many of the jobs in the Bayview disappeared, but serious contamination from industrial use and the Navy’s radiological laboratory remained.

Cleaning the Shipyard and redeveloping it into housing, offices and parks had the potential to boost small minority-owned construction businesses like Astron Development, which planned to move their offices from South Beach to the Bayview to be closer to the project where they had signed the largest contract in their company’s history.

Cleaning the Shipyard and redeveloping it into housing, offices and parks had the potential to boost small minority-owned construction businesses.

For the builders whose contracts backfired, the consequences could be severe. Miller said that his marriage fell apart and that he was currently living in a friend’s garage.

“For the last two years I’ve been financially ruined,” Miller said. “In every way – personally, business and anything else you can think of.”

Marcus Tartt is the Bayview director of the nonprofit Renaissance Entrepreneurship Center, which works with local contractors. He has not worked with Miller but recalled seeing him at a pre-construction meeting discussing access to capital.

“Clyde was the one guy who raised his hand and spoke like he had already received the working capital,” Tartt said.

Working capital is crucial in the construction business, but it’s harder to come by for Black contractors. Banks no longer openly talk about denying loans to African-Americans through “redlining,” but recent studies have shown that a strong unspoken bias against minority businesses still exists.

“We haven’t figured out the capital piece yet,” Tartt said. “It’s a major problem for our contractors in terms of their working capital. Often times they have to float payroll for three to four months. For some of these guys floating payroll for two months, for two weeks could be a challenge.”

Architect Myles Stevens, owner of design firm Stevens + Associates, wrote that he had worked with Shipyard developer Lennar for 15 years and that on the whole Lennar had treated them well and paid them on time, but his most prompt clients were Bay Area public transit agencies.

“The reason for this is that they have prompt payment procedures,” Stevens wrote. “They look out for their minority vendors. And I usually cultivate an ‘inside angel’ in these agencies to push our invoices through faster. Without this inside help – it can be six months to get paid.”

Working capital is crucial in the construction business, but it’s harder to come by for Black contractors.

Construction consultant Tony Jones, who worked with Astron and Hercules, told OCII and general contractor Roberts-Obayashi in August 2016 that there had been a missed opportunity to provide the necessary outreach and support to small companies at the beginning of the Shipyard project.

“We’ve got to get better if we’re going to let small contractors play, other than just providing the labor,” Jones said.

Fire drill

Astron was part of an early effort by the Mayor’s Office and OCII to bring in local and minority-owned small businesses to work on the Shipyard. At an OCII commission meeting in November 2013, former OCII executive director Tiffany Bohee presented a memo on local contracting that included Astron’s $1.6 million contract.

Emails show that Lennar executives and government officials coordinated closely on messaging ahead of that meeting in a thread titled “Fire drill” started by mayor’s aide Wells Lawson, who had traveled to Asia earlier that year to help promote investment in the Shipyard through a firm tied to former Mayor Willie Brown.

Astron was part of an early effort by the Mayor’s Office and OCII to bring in local and minority-owned small businesses to work on the Shipyard.

Lawson and OCII were particularly eager to show higher local and minority participation after Supervisor Malia Cohen called a meeting in her office to push for more local contracting. Cohen declined to comment on local contracting issues.

Astron was excited to win an early contract at the Shipyard and recognized that they would need financial backing to survive long “float” periods between the time they did the work and the time they would get paid, so they obtained a $200,000 loan from the Bank of China.

“We knew we had to go six to eight weeks before we can get our first check from these guys,” Miller said.

At the Shipyard, however, float periods of 90 days or more became common, pressuring cash-strapped small businesses. Alex Jones, owner of Three Brothers Mechanical, said that he did not blame general contractor Roberts-Obayashi for the slow payments.

“My issue is 100 percent with Lennar,” Jones said. “When they hold back on payments for 90 days, 60 days, it does nothing but push me further in the hole. The contractor is asked to carry the burden of insurance, payroll and everything else, until they decide to pay.”

Jones said he would not get paid by Roberts-Obayashi until Roberts-Obayashi was paid by the developer.

“Oftentimes Lennar will not approve that billing in a reasonable amount of time,” Jones said. “They won’t get their approval done until the 10th or the 15th of the next month, and they’ll want to send you around the world to get all the approvals.”

OCII official Raymond Lee wrote that the developer has taken steps to speed up the payment process after complaints from multiple contractors.

At the Shipyard, however, float periods of 90 days or more became common, pressuring cash-strapped small businesses. “My issue is 100 percent with Lennar,” Jones said.

Almost immediately after Astron arrived at the Shipyard in October 2013, their work was delayed because of design changes. On top of that, Astron’s first invoice was for a tiny amount, and their second invoice was rejected by Roberts-Obayashi, which said Astron was front-loading their billing.

Starved of cash early on, Astron was hit hard by the slow payment process. By December 2013, their Bank of China loan had been exhausted and Roberts-Obayashi had taken over direct payments to their workers and suppliers. Astron’s financial situation continued to worsen through 2014.

In July 2014, Roberts-Obayashi president Scott Smith declared Astron in default on their contract in an email to Miller, with officials from Lennar and OCII copied on the thread.

Smith said that Astron’s work had been deficient, and that Roberts-Obayashi would need to spend millions of dollars to fix their mistakes. Astron acknowledged mistakes made on the project, but said that they were due to design changes that were not communicated to them and inaccurate documents provided by Roberts-Obayashi.

Scott Smith said that it would be unfair to blame Roberts-Obayashi for slow payments and that subcontractors should have anticipated the costs of changes in their original bids.

“In every construction project there is the possibility that things don’t go as planned and the estimate for the cost is exceeded,” Smith wrote to us. “It seems that in the cases you’ve mentioned this has happened across the board and Roberts-Obayashi will lose several million dollars for trying to do the right thing and give these subs a chance even though they probably should not have taken on the project with their financial capacity.”

Lennar spokesperson David Satterfield pushed back at the suggestion that the developer may be responsible for late payments.

“Lennar’s argument is that we would be surprised and a little unsettled that people are complaining about the late payments,” Satterfield said. “We’ve been trying to help these businesses grow and provide them both resources and some capital to help them do it.”

Mayor’s Office spokesperson Ellen Canale said that questions about the current state of local contracting would best be answered by OCII, which is responsible for the program.

Miller has met multiple times with officials from OCII, who said that OCII is not a party to disputes between contractors because once the Shipyard land is conveyed to the developer it becomes a private project.

“I get a lot of lip service [from OCII],” Alex Jones said. “I haven’t seen any effort to correct it, mainly because everyone I talk to says they don’t really have authority to enforce.”

Unmet promises

Several local contractors who worked on the Shipyard said they were promised financial and administrative support during bidding, but that support came too little, too late. Hercules Builders owner Willie McGary said he had been promised a significant loan in pre-bid meetings.

“We come to find out later that … when we applied for it we would only get $50,000,” McGary said. “So by the time I applied for it, my job was already over with. I had already suffered all the damages.”

Alex Jones said he had been told that he would receive a loan worth 10 percent of his contract value. The loan Jones ultimately received was only $50,000, and it arrived a year after he had started work.

“I was ushered into a job under false pretenses, and when I didn’t have the money, I had to rely on Obayashi,” Jones said.

Jones said the shrinking loan and expanding costs hobbled his company’s growth.

“The whole [local business] thing is just smoke and mirrors,” Jones said. “Now we owe EDD, we owe the carpenters, we owe worker’s comp. We owe everybody. We haven’t been able to do a sizable project in the last year and a half.”

In April 2016, the manager of the revolving loan fund for local contractors told the committee in charge of community benefits that three recipients “are having issues repaying the loan at no fault to the borrower” due to delayed payments from the general contractor.

Astron started work too early to even receive a loan from the fund. Miller said that the way the city and developer touted the Shipyard contract that sank his company was a “false advertisement.”

“They used me for percentages,” Miller said. “I have been hurt so bad here.”

John Shutt is an independent investigative journalist based in San Francisco and co-founder of BayLeaks. He can be reached at jds@riseup.net. This story first appeared on Medium.