Anatomy of a Sweetheart Deal

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Wilma Johnson, a 60-year-old mother of six and grandmother of 15, has never met President Clinton, but she has something in common with him. They both have done multimillion dollar deals with Gerald Schuster and his billion-dollar family business, Continental Wingate.

Schuster and his wife Elaine have long been key fundraisers for President Clinton and the Democratic National Committee. Recent press reports note the pair were among the first to be invited to the now infamous coffee klatches held in the White House. The Schusters attended one such gathering on January 12, 1995. Three weeks later they were sitting next to the President at a fundraising dinner held in Boston’s Park Plaza Hotel. That event alone raised $1.5 million for the DNC.

Wilma Johnson has never met Gerald Schuster, but she is familiar with his work. At about the same time the Schusters were clinking glasses with the Clintons, she was setting into motion a series of events that would ultimately force Schuster to agree to sign over the $27 million mortgage on the low-income housing project where Johnson lives, the Jose de Diego Beekman Houses.

Beekman’s 38 buildings, many of which Continental Wingate allowed to deteriorate and fall into the hands of the vicious drug gangs that terrorized this impoverished South Bronx neighborhood, are not worth much on the open market. But they are home to 1,238 families, most of whom cannot afford New York City market rent.

The plan to turn over the mortgage to new owners, largely shaped by Johnson and other members of the Beekman residents group, Tenants United for Better Living, aims for a permanent fix. Several of the housing professionals involved consider it a model strategy, one the federal Department of Housing and Urban Development (HUD) could use to save some of the 450 privately owned, federally subsidized housing projects around the nation that landlords have allowed to fall into disrepair.

Under the deal–originally slated to take effect later this month–Continental Wingate agreed to hand over control of the development, gratis, to a management team consisting of two general partners: a tenant-controlled nonprofit and a for-profit team of landlords hand-picked by the tenants.

HUD, in turn, agreed to invest an estimated $13 million in repairs to bring the buildings into compliance with federal housing quality standards. And the city’s own housing finance agency has agreed to take over the project’s mortgage and rehab debts, in an effort to help preserve the development’s affordable rents.

Continental Wingate had a good reason to cooperate. The deal allows the company to walk away from what will ultimately be about $40 million in debt. And under its terms, HUD would never foreclose on Beekman, meaning neither Continental Wingate nor the project’s many wealthy investors–including Preston Robert Tisch, the New York billionaire and co-owner of the entertainment giant Loews Corp.–would be forced to face costly tax liabilities or litigation.

In the eyes of some observers, this looks like a real sweetheart deal for the Schusters. Over the last 25 years, state investigators from Massachusetts and New York have joined tenants and other critics in blasting Continental Wingate’s poor management of government-backed housing. And, indeed, because of mismanagement of the Beekman project, taxpayers will take a $40 million hit.

But the Beekman tenant leadership would just as soon let the failures of the past be papered over if it means securing control of their homes. “This doesn’t have much, if any, precedent. It’s a creative solution,” explains Peter Richardson, president of Housing Strategies Inc., HUD’s consultant in the negotiations. “And this is quite an expensive way to try to deal with this. But,” he adds pointedly, “I would argue that it’s not as expensive as the alternative–to lose the Beekmans altogether.”

At press time, HUD was still dragging its feet on finalizing the deal, but that hasn’t stopped landlord attorneys all over the country from taking notice. According to one executive who works with HUD on developments in several states, the South Bronx bailout is so exciting it has become a verb. “I’ve had a lot of lawyers call me up and say, ‘Hey, we want to Beekman our deal,'” he says.

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Like many of the worst debacles in recent South Bronx memory, Beekman Houses began as a volatile mixture of good intentions and government-subsidized greed. Twenty-eight years ago, under a late-1960s experiment to woo private investors and landlords to low-income housing, Continental Wingate agreed to rehabilitate three dozen low-rises scattered around a 12-block area in Mott Haven near East 141st Street and Cypress Avenue. The company won federal guarantees for its mortgage loans as well as long-term rent subsidies–but to complete the package, it sold shares in a limited partnership to help finance the work.

Throughout the 1970s and early 1980s, tax laws permitted individuals to shelter millions of dollars in income from taxes by investing in low-income housing (see Sweet Victory, October 1997). Members of the Tisch family were among thousands of wealthy people who routinely took advantage of these shelters, assuming they could safely avoid taxes until the properties could be sold for a hefty profit–or until they could sell their shares to others looking for tax deductions.

According to Michael Rooney, a partner in a real estate company working on the current deal, the Tisch family invested heavily in Beekman Houses back in the early 1970s, buying as much as an 80 percent stake in the first three phases of the eight-phase development.

Some of the Beekman buildings stood alone, alongside other privately owned properties. Others ran in long lines down the avenues. To secure and run the apartments as efficiently as possible, Wingate physically attached many of the buildings, connecting the hallways through dark tunnels and outdoor causeways.

On the outside, the management company sealed off dozens of building entrances, demolishing the tall brownstone steps where people used to hang out. These were replaced with concrete stairs descending into the buildings’ basement floors.

The overall effect was to make many of the buildings appear featureless and institutional. To this day, their bleak facades dominate the streets where they stand.

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Yet the Beekmans are home to hundreds of families, many who have lived here for two decades or more. Delfina Cruz moved into her newly refurbished apartment 23 years ago, soon after arriving from Puerto Rico with her parents. It has been the center of her life ever since. Her brothers and sisters were born and raised in the complex. Same for her 10 daughters. Her parents died here. “It was always a Beekman,” she says.

Three-quarters of the families who live in her six-story building moved in at the same time she and her parents did, and the building is tight, she says. “I love my community.”

Arline Parks, who moved in as a little girl, remembers her childhood fondly. Continental Wingate instituted a vigilant tenant screening process and required all families to take classes on how to maintain the apartments and be considerate to their neighbors. “This was a great place to live,” she says.

“Then,” she adds, “the drugs came swooping down.”

It was around 1979, as tenants recall, that the trouble really started. Many of the neighborhood’s middle class families had fled, jobs were increasingly scarce and the South Bronx was becoming a national symbol of urban decay. The management ceased its intensive screening. And as the quality of Beekman tenants declined, so did the state of the buildings. Tenants and drug dealers in the neighborhood began to vandalize the property, breaking doors and locks as quickly as they could be fixed.

Parks says she has some sympathy for what Wingate’s managers faced daily. “You lose it little by little,” she says. “You find yourself repairing the same broken door so many times, it just stays open.”

The open doors eventually admitted one of the most violent, territorial drug gangs in New York City’s history. Beginning in the late-1980s, having built an industry in Washington Heights on crack cocaine, the Dominican-dominated Wild Cowboys moved in, taking advantage of the neighborhood’s convenient location a half-dozen blocks from the ramps of the Major Deegan and Bruckner expressways.

Armed with submachine guns and a casual attitude toward homicide, they turned the neighborhood into “a one-factory town,” in the words of a New York Times reporter. Police estimate the Cowboys and rival gangs populating this area took in receipts as high as $100,000 a day and were responsible for hundreds of murders and assaults. Their bloodiest day was December 16, 1991, when gang members executed three rivals and an addict on the streets around Diego Beekman.

“I would have to go to the store and before I could get back to my building–my building’s right near the corner–I would have to bow down and stick behind the stoop to keep bullets from hitting me,” Wilma Johnson recalls.

“They’d kill off one group, they’d go to jail and another little group would come on,” she adds. “It looked like when they were ten years old, they’d start recruiting them. They would get younger and younger, you know.”

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Despite living in a fire zone, some tenants worked hard to improve conditions. Wilma Johnson doggedly pushed Continental Wingate’s maintenance men to keep the locks on her building on East 141st Street. As long as she asked, maintenance kept fixing the doors, although other tenants would simply break the locks again or give copies of the new keys to the dealers.

Johnson was one of the first people tenant organizer Aida Serrano met in the spring of 1994 when she arrived at Beekman Houses. Serrano’s bosses at the New York State Tenant and Neighborhood Information Service (NYSTNIS) had followed the Beekmans over the years and sensed there might be an opportunity to make inroads there. They had read about a tenant protest against Continental Wingate that followed the tragic death of a young teenager who had fallen down an elevator shaft. Residents believed the elevator had been improperly maintained.

Serrano and her colleagues began knocking on doors, eventually galvanizing about a dozen women who agreed it was time to take Continental Wingate to task.

They, in turn, started speaking with and surveying their neighbors. While crime was an overwhelming problem, the buildings themselves had also suffered from more than a decade of lax management. Despite more than $12 million a year in rent, federal housing subsidies and management fees, Wingate’s maintenance subsidiary, Unidos Management Inc., had failed to address even the most basic problems.

Overtaxed boilers produced little heat, raw sewage backed up on the ground floors, rats crawled out of open cupboards and fell through holes in the ceilings. Piles of garbage and drug paraphernalia collected in the hallways and around the buildings. And repairs, when they were done at all, were done on the cheap. Many tenants to this day still have drafty plastic window panes, left over from a period when Unidos had given up replacing the glass.

At some point, Serrano recalls, Unidos officials simply began refusing to meet with the tenants at all.

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That’s when Serrano, working closely with tough tenant leader Wilma Johnson, realized she needed to petition a higher authority.

She knew Continental Wingate was seeking an increase in its federal Section 8 rent subsidy payments. Johnson asked HUD officials to come tour the buildings and decide for themselves if the company even deserved the millions it was already receiving each year.

HUD arrived, led by Helen Dunlap, at the time deputy assistant secretary for multifamily housing. She and others with her team emerged shocked, angry and determined to act.

Dunlap, tenants say, promised them they would not be forgotten, by HUD. In July 1995, she notified Continental Wingate it would not be getting an increase in its rent subsidy. And, she added darkly, the company’s fate might be far worse.

To this day, top officials at Continental Wingate say Dunlap’s evaluation and subsequent actions were unfair. Robert Najarian, president of Continental Wingate Co., insists that Dunlap wrongly drew conclusions about Unidos’ attention to the Beekmans from a tour of three buildings along East 141st Street, which were among the worst in the area.

Najarian volunteers that he offered to raze them, proposing to replace the vacant lots with “pocket parks.” And indeed conditions were so bad at the time, that HUD reportedly considered doing just that.

“This is a case where the owner and all the limited partners took advantage of the system, and the system didn’t pay attention for years,” says a housing official who toured the projects at that time. “In any other situation, I would have walked in, given two thousand tenants [rent subsidy] vouchers, torn the little fart down and started from scratch.”

But this was New York City, where taking down any low-income housing would be a devastating loss and, in all likelihood, politically impossible. Moreover, Johnson says demolition was the last thing the residents wanted.

Finally, several months later, in the waning months of 1995, Dunlap contacted the owners, telling them that HUD was considering pushing the doomsday button on their investment: foreclosure.

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Shortly after that, Preston Robert Tisch learned his family’s tax shelter investment was in danger.

He and the other limited partners weren’t simply being asked to give up their investment in the Beekmans–they were being told that they might not have any choice. The consequences would be severe. If the property went into foreclosure, the limited partners would have to pay taxes on all of the millions of dollars they had sheltered on their returns over the years.

Looking at the project’s finances, Michael Rooney estimates that various members of the Tisch family own between $8.5 million and $9 million of the project’s mortgage. If they were suddenly “relieved” of this debt through foreclosure, the Tischs could be responsible for as much as $4 million in taxes.

Tisch started to ask questions. He contacted Kathryn Wylde, then president of the New York City Housing Partnership. According to her, he wanted a reading on what exactly Continental Wingate was doing. He was “pissed off” that the company wasn’t, apparently, protecting the limited partners’ investment.

“He asked us if we understood what was going on there, and at the time I didn’t,” Wylde says.

Wylde asserts that Tisch, alone worth an estimated $2.4 billion, was not worried about the money. “Frankly, the amount of exposure [the family] had was chump change to them,” she says. Rather, “when [Tisch] found out that a project he had invested in 25 years ago was in danger of foreclosure, he was upset. He didn’t want to be associated with such a thing.”

Fortunately for Tisch, the tenants recognized an opportunity. They didn’t want to land in court and spend years fighting Continental Wingate and the limited partners in foreclosure proceedings. But more importantly, the Beekman tenants feared HUD would opt to break up the Beekman Houses, auctioning off the property to smaller landlords who could prove far worse than the current owners. A committee of about two dozen residents, aided by NYSTNIS, began talking about a bailout for the landlord.

The idea of releasing the mega-rich from the tax liability incurred by their own mismanagement may sound unpalatable, says Stephen Wallace, counsel for the Institute for Responsible Housing Preservation, a trade group for HUD housing developers. But it’s also the only way to get these people out of the picture quickly so the tenants can take over. “If you could get the limited partners out, you would see a lot more property transfers,” he says. “And I think a lot more nonprofits and resident councils would step up and take over.”

Wylde, looking to accomplish just that, met with Johnson and other tenants who told her they wanted to get rid of Continental Wingate and, somehow, keep control of the development.

The tenant leaders knew most of the residents didn’t want to manage and own their own buildings–at one point, a group of tenants even mounted pickets outside a meeting where the idea of tenant cooperatives was being discussed. Instead, the resident leaders wanted some kind of hybrid, where residents would have power but not much day-to-day responsibility. The idea appealed to Wylde.

“She was quick talkin’,” Johnson says of Wylde today. But, she adds, Wylde promised her group she could produce a set of landlords that they could work with. She was good to her word, Johnson says.

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Victor Solomon knows how to deal with chaos and angst. For years, he taught junior high school, first here in Mott Haven and then later in Harlem. But, he says with a laugh, that was nothing compared to what he has gone through doing this deal with HUD.

Solomon, president of his family’s small real estate business, was among six landlords Wylde recommended to the tenants, based on their work with the partnership through the Neighborhood Entrepreneurs Program, which transfers ownership of city-owned, tax-foreclosed properties to private landlords. A committee of Beekman tenants interviewed them, toured their properties and, after rejecting one contender, agreed to fight for them.

The other landlords who made the cut included Rooney, a consultant who specializes in structuring finance deals for low-income cooperatives; Jackie Krygar, a well-regarded Harlem landlord; Nicola DeAcetis, an architect; and Hector Nova, a contractor.

At first, the Housing Partnership’s staff proposed that the five landlords split up the Beekman Houses, each running the buildings from their existing businesses. But the tenants vehemently rejected the idea, reminding the partnership that this was exactly what they wanted to avoid. So in June 1996, the landlords formed a new company, Diversified Management.

Over the next year, a team consisting of the tenant leaders, the Diversified partners, Wingate’s Najarian and consultants hashed out financing, governance and building rehab issues. All along, HUD’s New York City staff was kept apprised of the work.

Last December, HUD took possession of Continental Wingate’s mortgage, a move that often signals the first step toward foreclosure. However, HUD staffers had assured the tenants and Diversified that the agency would instead transfer the property to them–as long as they could come up with a stable workout plan. The team, by then, was confident it could do so.

In the meantime, the tenants saw the Beekmans go through a remarkable change under HUD’s new management. While police and prosecutors had long ago broken the grip of the Wild Cowboys, the gangs that replaced them remained a menace. To deal with this, HUD coordinated a massive bust, sending some 600 city, state and federal officers into the Beekmans’ immediate neighborhood. Authorities arrested more than 60 people, reportedly dismantling 12 known drug gangs.

ARCO Management, which has an exclusive contract to manage properties in HUD’s possession across the eastern United States, followed up by hiring a massive security force. At the beginning of this year, ARCO was spending more than $800,000 a month in HUD mortgage insurance money to deploy some 300 guards a day. ARCO reduced the number of troops after tenant leaders complained the sheer number of guards was scary and oppressive–and that the money would be better spent on permanent security features like intercoms, locks for the lobbies and closed circuit TV cameras. ARCO, which many tenants criticize for being autocratic and unresponsive to their concerns, has yet to complete this work, but says it is scheduled to be done during the winter.

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Now, the South Bronx dealmakers are waiting for the go-ahead from Washington to begin, in the words of other landlords’ attorneys, Beekman-ing Beekman. HUD had planned to turn over the Beekman Houses mortgage to the new ownership team on November 30. Yet as City Limits went to press, there was no indication of how the feds intended to move forward.

There were rumors that some HUD officials were worried, that the deal had been stalled in the upper reaches of the agency. However a senior HUD official said the agency was still moving forward.

“You’ve got some very legitimate partners. And you’ve got a lot of broad, philosophical programmatic agreement on where to go,” he said. “But this is a very complex deal and there are some issues that are being looked at.

“The bottom line is that we believe a lot of good is going to come from this. But I can’t say that we’re on the immediate verge of agreement on all matters.”

There is still some patience in the Cypress Avenue offices of Tenants United for Better Living. But not an endless supply. Not after the tenants had been burned by HUD’s lax oversight of their landlord for so long.

For 15 years, Johnson says, HUD allowed Gerald Schuster and the limited investors like Preston Robert Tisch make millions of dollars off the property here. It was HUD too, who allowed the Wild Cowboys in with their crack vials and Glocks.

“I think they’ve done robbed us. I think we got the worst end of the deal–and HUD let it happen,” Johnson says. “They need not walk away from here free and easy.

“They should take some responsibility for what happened in here, and put some more money in,” she says. “They got an investment in here. They should care about how people are living in here.”