Stories with happy endings are a rarity at the Department of Housing and Urban Development these days. Struggling with recent budget and staff cuts and the remains of eight years of Reagan-era corruption, the federal housing agency isn’t exactly brimming with good news. But there’s one project HUD’s people are eager to talk about: the Elva McZeal Apartments in East New York.
Two years ago, the 143 families of this squat, two-building development managed to wrest ownership of their homes from the William & Georgia Corporation, a partnership of local investors headed up by the father-and-son team of Milton and Howard J. Kestenberg. For more than a decade, the company collected $1 million a year in rent and HUD subsidies, but provided desperately inadequate service and maintenance.
At their worst point, the buildings had neither lobby doors nor locks, hallway lights or mailboxes. The boilers barely functioned, the roofs needed replacement and leaky plumbing caused water damage so severe that many kitchens and bathrooms were unfit for use. There were exposed wires, families of rats and, in a few apartments, walls that had begun cracking apart from the ceiling. “It used to be so bad,” recalls tenant Ella Cooper, “you didn’t even want to come home.”
That was before tenants filed a lawsuit in federal court and convinced a judge in April 1994 to place their building in receivership. William & Georgia fought the move initially, but less than a year later the partners agreed to settle, handing over the deed of the property to the tenant leadership. Today, Elva McZeal is proof of how much work can be done when managers properly handle rental income. With tenants in charge, the building has gotten new roofs, boilers and windows. The lobbies are secure, the halls are brightly lit and the apartments are well maintained.
Says Bill deBlasio, HUD Secretary Andrew Cuomo’s representative for the region: “The dramatic turn around of Elva McZeal represents one of Secretary Cuomo’s highest priorities–getting rid of bad landlords and empowering tenants to take control of their own lives.”
Unfortunately for the tenants of Elva McZeal, the end of this HUD story has not yet been written. While the residents have proven that federally subsidized housing can be well run, the actions of federal and city housing officials have left the financial future of the project in doubt.
First, the project is deeply dependent on its Section 8 housing subsidy contract, which is set to expire next year. After that, as is HUD’s new policy, Washington will only extend the contract on a year-by-year basis, leaving tenants to deal with credit problems that beset buildings that have no long-term financial security.
Second, the city has thus far refused to forgive the more than $450,000 in property taxes William & Georgia failed to pay during its tenure. The tenants, arguing they should not be responsible for this debt–and that they should be eligible for a long-term tax abatement–haven’t paid taxes since. Today, the Elva McZeal Tenant Association Housing Development Fund Corporation (HDFC) owes the city more than $1 million. And the tenants don’t know what will happen if the city ever tries to collect this money.
Resident leaders are worried that they could eventually lose the project to its financial troubles. “It would be devastating to the tenants,” says Dorothy Jones, the association’s current president. “Think of it, after all the work that people did.”
For Jones, the work began five years ago when the Kestenbergs’ management company, Kenton Associates Ltd., filed suit in Housing Court to evict her and her three children from her mother’s apartment. Jones had been taking care of her mother, who was ill, and had been hounding the management company about the building’s heat problems. At court that day, Jones met five of her neighbors, also facing eviction, and they started talking about the buildings’ poor condition. “We said that something’s got to be done about the landlord,” she recalls.
The tenants complained to a number of local politicians, one of whom referred them to Brooklyn Legal Services Corporation A. There they met Rick Wagner, the director of litigation. Wagner investigated HUD’s records and came up with the idea of using the federal Racketeer Influenced and Corrupt Organizations (RICO) Act to take on William & Georgia in federal court. Wagner’s racketeering charge was based on simple evidence of alleged mail fraud: Month after month, in exchange for Section 8 payments, William & Georgia had sent the government statements falsely certifying that the Elva McZeal buildings were “decent, safe and sanitary.”
The legal gambit forced the landlord and the courts to take notice–and Wagner has since used RICO lawsuits to good effect at Noble Drew Ali Houses in Brownsville and Medgar Evers and Gates Avenue Houses in Bedford-Stuyvesant (see “Sweet Victory,” October 1997).
The lawsuit went even better than the tenants had hoped. Residents produced a series of videotapes showing the extent of the damage in their apartments. Wagner, arguing that tenants shouldn’t be forced to live in such squalid conditions, asked the judge to take the property out of the Kestenbergs’ hands. The judge agreed and, at Wagner’s request, appointed ARCO Management to take over as receiver. William & Georgia’s principal investors eventually settled the lawsuit, signing over the deed to the tenants in February 1995.
In the three years since, the tenants working with ARCO have completed about $2 million worth of rehabilitation work, correcting more than 500 building code violations which the Kestenbergs had allowed to accumulate. The project has a 17-member tenant board, which sponsors annual elections. Elva McZeal is now home to a number of new programs for the residents, including a HUD-sponsored computer learning center and a homegrown youth program, East New York Kids Power.
Because the buildings are still under ARCO’s receivership, the tenants do not yet have full control. While tenant leaders work closely with ARCO on management issues, they have little oversight of the budget and concentrate mainly on improving the buildings’ atmosphere and social life. Slowly, however, residents are taking more of an interest in running the project, says Cooper, who is on the tenant board. “I think 85 to 90 percent [of the residents] want to be involved. They just have their doubts,” she says. “Now that they see things getting done, they’re gradually coming to more meetings.”
But all of this will amount to nothing if the tenants cannot manage to put the property on solid financial footing. To accomplish this, they need to take care of the tax debt left over from the previous owner. More problematically, they also must find a way to assure the banking community that the project will be able to pay its bills over the long haul. Only then will the residents be able to afford big-ticket capital improvements like apartment rehabilitation work.
For the moment, the tax bill is Dorothy Jones’ most pressing concern. Working with Hillary Exter, another lawyer in Wagner’s office, Jones has lobbied the city’s Department of Housing Preservation and Development (HPD) to forgive the back taxes and agree to future tax abatements for the project. Exter maintains that Section 606 of the state’s private housing finance law explicitly allows this because Elva McZeal is an HDFC a special class of low income housing. She notes that the law was used by HPD in 1985 to forgive the taxes of an HDFC on East Houston Street. HPD, however, has been unwilling to give any HDFC this break in recent years, despite broad support among advocates of tenant ownership. Officials there would not comment except to say the matter is under review.
All of which enrages Rick Wagner. For years, HUD and city building inspectors looked the other way as William & Georgia allowed Elva McZeal to deteriorate. Then the tenants took the initiative and used rent money that could have gone toward paying the taxes to instead do desperately needed repair work. If either HUD or the city had been forced to take ownership of the property, he says, the buildings would have been eligible for millions in rehabilitation funds and the taxes would have been automatically forgiven–all at far greater cost to the taxpayers than the current arrangement.
The debt has left the property–and the tenants–sitting in limbo. For the moment, the city cannot force the tenant-owners to fork over the tax debt, because the City Council has forbidden HPD from including HDFC properties in the city’s sale of tax liens to private corporations. Yet as long as it is on the books, no one will loan the building a dime.
The project’s tax problems, however, may ultimately be overshadowed by the uncertainty of its rental income. Currently, the project’s low-income tenants pay 30 percent of their income in rent. Under Elva McZeal’s project-based Section 8 contract, HUD supplements this with subsidies bringing each apartment up to fair market rent.
However, HUD recently announced it will no longer offer long-term Section 8 contracts. Instead, building owners like McZeal’s tenant association will have to renew their contracts annually, taking it as an article of faith that the government will come through with the money. There is always the possibility–albeit slim–that HUD will not renew Elva McZeal’s project-based contract, instead opting to give the tenants Section 8 vouchers, which they could use to leave the building and rent apartments elsewhere in the city. These two realities leave projects like Elva McZeal all but ineligible for private loans.
“Banks are being asked to make long-term commitments,” says Elliot Hobbs, vice president of Chase Community Development Corp. “But we can readily see that without project-based Section 8–and the HUD contract that goes along with it–there’s an uncertainty about how the building economics are going to function.”
Whatever HUD does, tenant leaders at Elva McZeal accept that it is now their responsibility to deal with the problem. “We’re worried,” Jones admits.
Considering all that HUD is now expecting of the tenants, Jones wonders if the agency also plans to pursue Howard Kestenberg and the former partners of William & Georgia, putting them on the hot seat for exactly how they spent HUD’s Section 8 payments over the years. The HUD Inspector General’s office says its auditors completed an investigation and the file was sent to the Justice Department’s civil division for action. The U.S. Attorney’s office confirms that the case is under investigation–but so far, that’s all they will say.
“HUD has been very, very apologetic,” Jones concedes. But she says they shouldn’t forget that the agency still bears responsibility for what has happened to Elva McZeal. HUD’s inspectors visited her building numerous times as the project fell into disrepair under the Kestenbergs’ control, she says–but nothing was ever done.
“They had their eyes closed,” she says.