Reversal of Fortune

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The future of one of New York City’s most embattled housing developments now lies in doubt after federal housing officials abruptly abandoned a plan to turn the project over to a team of tenant leaders and hand-picked local landlords.

Until a few weeks ago, officials of the U.S. Department of Housing and Urban Development (HUD) had led tenants at the Jose de Diego Beekman Houses in the South Bronx to believe the government would soon approve their plan to turn control of the 38-building, 1,238-unit complex over to a tenant-controlled nonprofit and a new for-profit management corporation. It was not a naive assumption, given that members of New York’s HUD staff helped lead negotiations on the deal. HUD’s Washington staff had also overseen and approved funding for the various consultants who developed the plan.

Nonetheless, HUD Secretary Andrew Cuomo iced the agreement just one month before a December 1 approval deadline. His actions followed the October 10 release of a HUD Inspector General’s report sharply criticizing a draft version of the proposal, which had been hammered together over the course of 18 months by a group of tenants, consultants, management executives, HUD officials and investors. The IG’s office concluded the deal was too expensive and “rewards a landlord who may bear responsibility for the deplorable conditions of the projects.”

That landlord is Gerald Schuster, owner of Continental Wingate, a billion dollar real estate company that has owned the development for nearly three decades. As City Limits noted in an analysis of the Beekman deal (Anatomy of a Sweetheart Deal, November 1997), Schuster and his wife, Elaine, are key fundraisers for the Democratic National Committee and are among those who have bent the ear of President Clinton at White House coffees and fundraising dinners. Other investors in the Beekman Houses include billionaire media-moguls Laurence and Preston Robert Tisch.

The way the agreement was originally drafted, Continental Wingate and its investors would have taken a back seat–and the negotiators believed they had included tax disincentives that would have phased the Schusters, Tisches and others out of ownership over several years. But the IG’s report highlighted possible flaws in the plan, indicating that Continental Wingate could in fact earn a profit down the road.

Given the powerful connections of these principals, Cuomo–a man known to have higher political aspirations–could be forgiven for worrying about how an overly favorable deal might look in the national press. A senior HUD official, however, insists Cuomo’s primary concern is his public campaign to find and punish HUD’s slum profiteers.

“The people right around [Secretary Cuomo] are coming to understand this issue, and they are appalled. And the secretary is deeply concerned,” the official says. “They feel they have sent a very clear message as to where the agency needs to go. And they are not sure this deal reflects that.”

The landlords who planned to take control of the Beekmans–a consortium known as Diversified Management–say they are dumbfounded by HUD’s turn-about. “They’ve had the plan since early this year,” notes Michael Rooney, Diversified Management’s treasurer. “They should have looked at the merits of it, made comments, and if they wanted Schuster out, they should have insisted on it instead of just playing around with everybody.”

Now, there’s no telling what will become of the Beekmans, says Wilma Johnson, president of Tenants United for Better Living, the project’s resident council. “They could sell this property piece by piece. And we will have no protection,” she says.

“We’ve spent a year and a half at this, and I want to see some action,” Johnson adds emphatically. “I want to settle down and get on with my life and let the property run proper, like it’s supposed to.”

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Not long ago, the staff in New York’s HUD office thought they had developed a model solution to the deterioration and deep poverty that long ago overtook the Jose de Diego Beekman Houses.

During 28 years under Continental Wingate’s control, many of the apartment buildings–scattered around a dozen blocks in an especially impoverished section of Mott Haven–had fallen into severe disrepair. Some of them were ruled by vicious drug gangs. The buildings needed major rehabilitation to bring them back into compliance with federal housing standards.

Because of the troubled status of the project, HUD could have foreclosed on the property, sent Continental Wingate and its investors–including the Tisch family–packing, and demanded they repay the IRS for any personal income tax deductions investors had taken based on the depreciation of the Beekman property since 1969. But officials at HUD and the tenant leadership believed it would be faster to avoid litigation and devise a plan where Continental Wingate merely gave up control of the property.

The deal, worked out over dozens of morning meetings, would take the project’s $27 million mortgage off of HUD’s books and transfer it, free of charge, to the city’s Housing Development Corporation. HUD also arranged to spend at least $15 million from a federal housing insurance fund to rehabilitate the project. When the work was complete, this debt too would have been transferred to the city.

The city had agreed to take on all of it, essentially forgiving more than $40 million in HUD debt. Moreover, the city reportedly agreed to throw in $750,000 in rehab loans and $7.5 million in tax abatements.

The new ownership team would then inherit a rehabilitated, debt-free property. Extra cash from the project’s $12 million annual rent roll would be used for capital improvements, parks, tenant leadership programs and social services. They hoped the improved apartments would attract working class tenants who could pay market rents. And the team aimed to have enough money left over each year to build up a $40 million reserve fund over 15 years to support the poorest residents should Congress eventually cut off rent subsidy payments.

The HUD Inspector General’s office saw the numbers very differently, concluding this was “a poor deal for HUD and the taxpayers” and an extremely expensive way to bring the Beekmans back to health.

Particularly disturbing, noted IG auditor David Niemiec, was the fact that Continental Wingate and its partners would be allowed to remain as investors in the development. “At the end of 15 years,” Niemiec wrote, “these owners will have mortgage-free, rehabilitated properties; millions of dollars of tax benefits; and a windfall of surplus cash amounting to $43 million should the contingency fund [for the Beekmans’ poorest residents] not be needed.”

The Beekman negotiating team responded on November 18 with a nine-page memo to Assistant Secretary Nicholas Retsinas taking issue with the IG’s interpretation of the plan, arguing that the deal is still the best chance that residents–and taxpayers–have to permanently preserve this low-income housing.

Connie Hackett, director of special projects at the New York City Housing Partnership and a key architect of the plan, adds that no one at the Beekmans was looking to protect Continental Wingate. If HUD could somehow force Wingate out without facing protracted litigation, she says, “that would probably be ideal.”

HUD Inspector General Susan Gaffney admits she did not know where the plan had originated. “We didn’t really focus on the residents and the consultants. I just wasn’t aware,” she says. Nor, she adds, does she have a plan of her own. “I do not have a recommendation. But I would hope that HUD would be working feverishly on another course of action.”

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What that action will be is anyone’s guess. As City Limits went to press in mid-November, HUD officials would make no predictions. One former HUD official says Andrew Cuomo might simply do nothing, allowing Continental Wingate and HUD’s current interim manager, ARCO Management, to continue to run–and profit off–the Beekmans.

Such inertia would clearly benefit ARCO Management, a national firm with exclusive rights in 19 states as well as Puerto Rico and the District of Columbia to manage the properties in HUD’s portfolio. ARCO is owned by Jeffrey Goldstein, the son of Sheldon Goldstein, who was a former business partner of Cuomo. Cuomo and the elder Goldstein’s questionable activities in real estate and finance were documented extensively by the Village Voice in the late 1980s.

ARCO already has the contract, estimated to be worth at least $15 million, to bring the Beekmans up to code. The company would collect an additional $800,000 a year in management fees if allowed to stay on indefinitely.

But observers say Cuomo can’t let the situation linger. Rick Wagner, a Legal Services lawyer who has made a career of hounding bad landlords out of HUD-financed properties (see Sweet Victory, October 1997), argues it might make more sense to foreclose on the Beekmans. The buildings could be rehabilitated and sold off individually to local owners or nonprofits. In buildings where there is strong tenant leadership, the residents could work with HUD to set up some form of tenant ownership.

While the tenant leaders have been vehemently opposed to splitting up the buildings, Wagner argues this could well improve the level of tenant participation.

“The sheer size and scattered nature of these buildings is destructive of any coherent action,” he maintains.

But organizing 38 buildings would require a massive effort. Moreover, the tenant leaders and Diversified Management aren’t ready to give up on the original plan. Rooney believes Continental Wingate might be willing to walk away altogether, abandoning its ownership stake in order to preserve its reputation for future HUD deals. The owners and limited partners could also be forced to put millions of dollars into the rehab effort. “Tell us what you want,” Rooney asks of HUD. “We’ll give you the plan that fits.”

At HUD, the senior staff is refusing to speculate on what the future might bring for the Beekmans. But it’s quite possible the tenants and Diversified Management will be dealt into some future plan.

“There are some good elements here,” says one official. “Can we accommodate those good elements, at the same time being as stringent as humanly possible on waste, fraud and abuse? I think that’s an open question.”

“Because the new people are not the problem,” he adds, “we may be able to work out some creative solution.”

Wilma Johnson says she’s not exactly trusting HUD to keep its word these days. But at this point, she’ll take what she can get. “This thing is driving everyone crazy.”