Sweet Victory

The history of American tax law is replete with gifts to the moneyed classes couched in the mantle of social kindness. Acres of high-tech windmills dot the southeast California hills, many clearly wrecked and inoperable, relics of a late-1970s tax incentive to encourage investment in alternative power. The value of the investment wasn’t in the potential success of the operation so much as in its decline–year after year, investors claimed massive income tax deductions based on the depreciating value of their windmills. When these wind farms failed, the only victims were the landscape and the birds.

New York City’s windmills are on Gates Avenue in Brooklyn, in the form of huge, federally subsidized apartment blocks. Like the Southern Californian boondoggles, these buildings have provided millions of dollars in tax shelter to the wealthy. But when this operation failed, the victims were flesh and blood.

The Medgar Evers Houses apartment complex has nine buildings and nine front doors wide open to the night and day. The rear doors with their blasted locks hang from hinges onto bleak, block-long concrete yards.

These buildings, built in 1973, are remnants of a misbegotten 1960s Washington fantasy that envisioned adequate housing for everyone in the United States. The private real estate development industry was supposed to provide the means, financed with billions of dollars in construction grants, mortgage subsidies and years of steady, guaranteed income–and backed by investors lured with lucrative tax shelters. By 1992, the original vision had fallen far short, but even so there were 3.1 million units of federally subsidized housing owned and managed by the private sector. And the investors who made much of it possible were slashing billions of dollars a year from their taxes.

On Gates Avenue, the tax shelter worked well for the landlords, at least for a time. The limited partnership that bought the 315-unit property in 1985, headed by Philip and Douglas Rosenberg and Seymour Maslow of the downtown Brooklyn-based BPC Management, has in 11 years distributed tax deductions of $11.5 million to the individual members of its small investment group, according to annual filings with the federal Department of Housing and Urban Development. Depending on the partners’ individual tax brackets, then, the deductions reduced their taxes by a total of $3.5 to $4.5 million or more in taxes–all thanks to this one Bed-Stuy housing development.

But the other kind of shelter BPC Management was supposed to provide–homes for its tenants–did not work nearly so well. In addition to the lost tax revenues, the government has spent about $20 million on rent subsidies here since 1986. Yet for much of that time the tenants have lived in poor housing laced with code violations, rats and backed-up sewage. Drug dealers took over the hallways. Prostitutes worked the roofs and garages. Vandals trashed the public spaces and elevators over and over again. Crackheads smoked pipes and slept on grimy mattresses in the stairwells. On the rooftops, hoods routinely plugged the cinderblock walls full of shells and scattered casings across the tar. Year after year, HUD audits and city inspection reports have documented a costly slum.

“In white-collar crimes, you have to see the victims. Otherwise it’s never understood,” says attorney Richard Wagner, director of litigation for Brooklyn Legal Services Corporation A, which is representing the Medgar Evers Houses Tenants Association in a suit against the Rosenbergs, their firm, BPC Management, and their partners. Thus far, of course, there is only the plaintiffs’ allegation of wrongdoing, much less proof of a crime. But the suit invokes the federal Racketeering and Influence of Corrupt Organizations (RICO) law to charge the owners with defrauding their tenants. Under the statute, if they are victorious, the tenants could win triple damages plus legal fees. And the landlord’s business could be dismantled. “Our clients have been damaged in a very real way,” Wagner says. “They’ve lived miserable lives.”

The owners vehemently contest Legal Services’ lawsuit and blame the substandard housing conditions on HUD’s failure to provide adequate operating income and rehabilitation capital. But this summer, after an intense tenant organizing drive sparked a reassessment by HUD officials, the federal government took possession of Medgar Evers Houses and replaced BPC with a new management company.

For now, the landlords still hold title to the property. But their bill may soon come due. Even if the Rosenbergs, Maslow and their partners can block the suit, HUD is moving toward foreclosure–raising the specter of much more serious financial woes: if the limited partnership loses title to the property, its members will have to pay the IRS all of the millions of dollars in taxes they’ve avoided since 1985.

“Jesus, they’re dead,” says Scott Langan, vice president of ARCO Management, the HUD contractor that has taken over management of Medgar Evers, as he looks over the owners’ financial audit. “I wouldn’t be sleeping at night.”

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Darlene Wortham’s youngest daughter, 18-year-old Lashawna, was mugged last year in the hallway outside their Medgar Evers apartment early one evening. Wortham gestures dismissively toward her door when she recalls the incident, just one more in a multitude. “We had fires on the staircases, we had people living on the roof, doing drugs in the stairwells. We had people killed in an elevator and in the hallway.”

Life without security in a dangerous neighborhood is essentially a life of unneighborly distrust, says Charlotte Rodgers, who along with scores of others has raised a family here and persisted well into her third decade on the block. Lately she has emerged as a leader of the Medgar Evers tenants. Like many other tenants, she says that for years, management has responded to tenant complaints with promises of repairs that were rarely fulfilled. “With the buildings looking in the condition they look, people feel they can do anything here,” she says.

By all accounts there are thousands of competently-run housing projects around the country where the tax shelter has proven useful for financing low-income housing. Medgar Evers Houses is one of 585 New York City housing developments–with some 260,000 tenants–participating in the federal project-based Section 8 rent subsidy program, and many of them include tax shelter provisions. Tenants in these buildings pay a percentage of their income in rent, and the federal government pays the rest, usually giving the landlord at least the fair market value of the apartment.

Still, in New York City alone there are 38 developments containing 5,811 apartments that are on a list for possible termination from the program because their Section 8 contracts expire this year and, according to HUD, their owners have failed to comply with housing quality standards.

Just this year, HUD has taken legal possession of 13 developments in New York City and is nearing foreclosure on three of them. Last month the agency took title to a 160-unit project in Bedford-Stuyvesant. It’s part of a new crusade by HUD Secretary Andrew Cuomo to clean up contracting practices. By comparison, in all of last year the agency took such action against only 30 projects nationwide.

What happens on Gates Avenue is important to tenants all over the country. It could prove to be a model for the removal of failing owners and the transfer of properties to new ones–nonprofit community groups, for instance, or tenants themselves.

In one sense, Medgar Evers has already established itself as a model project: tenants, organizers and public interest lawyers have taken on the slumlords–and beaten them into the ropes.

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Kali Muhammadu-Ndoye is a tenant organizer with the Community Service Society, a century-old nonprofit advocacy and social service organization based in Manhattan. She lives in Bedford-Stuyvesant. Like her, many residents of the low-slung blocks of brick rowhouses and brownstones that dominate the neighborhood have known for years about Gates Avenue, its slumlords, gunslingers and drug hoods. Gates was “The Canyon,” with its six-story behemoth tenements and gaping concrete plazas. Others called it “the Gates of Hell.” Everyone knew it was not a happy place to live.

One day last fall, Muhammadu-Ndoye and her CSS colleagues, Brent Sharman and Hazel Young-Lao, along with a crew of volunteers from local Bed-Stuy groups, walked onto the avenue and started banging on people’s apartment doors. To make their task of organizing a tenants association less daunting, they chose to begin at the smaller development across the street from Medgar Evers, the 160-unit Gates Avenue Houses. This project is not owned or managed by the Rosenbergs and BPC, but like Medgar Evers it was in bad condition. Gates Avenue Houses was run by a national company, RPS Management, owned by the California-based speculator Allan S. Bird, who runs a massive operation with nearly 100 federally supported projects around the country.

“We started cold with no information about the people or the owners,” says Muhammadu-Ndoye. “We just started knocking on doors and asking people, ‘Do you want change?'”

Before long, scores of tenants were turning out for meetings every other week around the corner at the New Bed Stuy Boxing Center, home to a generation of young fighters including former heavyweight champ and Olympic silver medalist Riddick Bowe. “Bed Stuy Do or Die,” the sign reads above the door. “We Do, We Don’t Die.” Inside the gym, beside the roped-in ring and the heavy bags, dozens of tenants and their children gathered. During the early meetings the tenants were distrustful, but they turned out in force nonetheless to trade stories and listen to the organizers outline their plan.

“We told everyone, you have a voice here. No one else is more important than you,” recalls Muhammadu-Ndoye. “Whatever the future of this development is, the tenants are going to have a say.” Every building was assigned an organizer. Every floor would choose two floor captains, and the captains would elect an executive committee for the tenants association. And every tenant would document conditions in their homes.

Setting up such a structure, the organizers explained, would help the tenants take advantage of an opportunity near at hand: Brooklyn Legal Services, with its proven track record against negligent federally subsidized landlords and managers, was ready to step in and help. If the tenants could prove they had a case, the attorneys would take it to Federal District Court and demand the landlord’s ouster.

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“Rick Wagner is a lunatic!” growls Gilbert Wallach, one of the investor-owners of Medgar Evers Houses, at the first mention of his legal nemesis. Most who know Wagner, the bespectacled gray-bearded director of litigation for East Brooklyn Legal Services Corporation A, would concede the point. Wagner is an emphatic and non-stop speaker, never short of expletives, whose universal insult is to call someone a goniff, Yiddish for “thief.” He’s a hardball tenant rights attorney, yet he joyfully cuts down “lily-white liberals” who argue against summary eviction for those tenants who break house rules.

Wagner worked at William Kunstler’s radical legal redoubt, the Center for Constitutional Rights, through the early 1970s, and then became a founding partner of Stolar, Alterman, Wagner & Boop, where he worked from 1975 through the early 1980s. “We were going to be a progressive legal collective, but our political standards lowered as our fees increased,” he recalls with a smile and a slap at the top of his desk. “It’s hard to say no to a heroin dealer who drops seventy-five grand on your desk.” He left to join Legal Services in 1985. Today his headquarters is an abandoned bank president’s office on the edge of East New York, furnished with hand-me-downs. A tattered couch is stacked high with case files; his New York Law School diploma adorns one wall and a portrait of George Washington another. “The first revolutionary,” Wagner explains. He salvaged the picture, it turns out, from a pile of garbage left behind by the departed bankers.

Wagner and his colleague, Jim Provost–wiry, long-haired and decidedly more subdued–first conceived of using the RICO law in 1994, when they discovered they could charge the owners of one especially bedraggled East New York development with a long-term pattern of mail fraud. Every month for several years, the owners, in accordance with their contract, had certified to HUD that each unit for which they were requesting federal rent payment was in safe, decent and sanitary condition. Wagner and Provost argued that these certifications were clearly fraudulent, considering the outrageously dilapidated state of the housing development. Because the owners sent the certification letters more than once–indeed, dozens of times–and plowed the resulting revenues back into their business, the lawsuit charged that they fit the federal definition of racketeers. That meant they could be sued for triple damages, as well as the dismantling of their organization, under the civil section of the 1970 RICO statute.

Legal Services won a knockout in the first round. The East New York owners, stunned by the potential criminal implications of Wagner’s legal volley, immediately collapsed. They settled with their tenants in early 1995 by turning over the deed to the property at no charge. In exchange, Wagner and the tenants withdrew the lawsuit.

A year later, Wagner and a group of tenants filed a RICO suit against the landlord of one of the most crime-ridden federally-subsidized housing projects in Brownsville. By summer, that owner, too, was reeling. The company turned over the property’s title to HUD and paid Brooklyn Legal Services $150,000 in plaintiffs’ legal fees. The tenants dropped the suit. Wagner was 2 and 0.

Last February, with the organizers and tenants in high gear at Gates Avenue Houses, Wagner and Provost filed suit against Allan S. Bird, RPS Management, and their limited partnership. In April, Federal District Judge David G. Trager granted a motion by the Gates Avenue tenants to appoint a receiver. HUD quickly installed new management and began its own legal maneuvers to take possession–and ultimately ownership–away from Bird. Last month, HUD took title to the property. But this time, there has been no settlement. The multimillionaire Bird is fighting back. In July, his attorneys sought to dismiss the lawsuit against their client, arguing that the Gates Avenue rental assistance contract was with HUD, not the tenants, so the tenants have no standing in court. To Wagner’s delight, the judge disagreed, ruling that the rent subsidies are intended to benefit individual tenants; therefore, they have every right to sue.

“I never anticipate what a judge will think,” Wagner says. “There’s something about the fumes given off by black polyester that does something to a person’s reasoning and conscience.” But the courts continue moving in his direction. The Bird case is headed for trial, and the tenants hope to win damages to create a rehab reserve fund–as much as $2 million.

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Last spring, with HUD in possession of Gates Avenue Houses, federal insurance money poured in. The receiver, ARCO Management, hired armed security guards for round-the-clock patrols and put up floor-to-ceiling cast iron fences inside the lobbies with buzzers and intercoms–the first the tenants had seen in years. The drug dealers moved out fast. Then ARCO began repairing code violations throughout the apartments. Graffiti disappeared and lights stayed on in the hallways. Exterminators went after the rodents. Maintenance has kept the chronically battered elevators functioning–and clean of the stench of urine.

Meanwhile, Muhammadu-Ndoye’s crew of tenant organizers grew to 13. They began passing out flyers across the street in the much larger, nine-building Medgar Evers complex.

“Muhammadu came through the building knocking on every door. She said ‘Are you tired of living like this?’ and told us about their organizing across the street,” recalls Darlene Wortham. People were ready to listen. “Out of 315 apartments, I’d say we had 150, 160 people meeting at the boxing arena with seats all the way to the door.”

Like at Gates, distrust was in the air at the first meetings, she adds, explaining that previous efforts to organize the tenants led only to broken promises from management. “We were tired of people coming here and saying we’re going to do this and do that, and then nothing changed,” she says.

This time, though, tenants could see the changes across the street and they wanted the same kind of security force. The leaders invited Wagner to a meeting one Thursday evening, and by early May, 181 of the tenants had signed on to a new RICO lawsuit–this one against the Rosenbergs, BPC Management and their limited partners.

Wagner also filed a motion asking Judge John Gleeson to appoint a receiver at Medgar Evers, citing the 1,595 housing code violations listed on city inspection records. The landlords and their investors backed off immediately. In exchange for a three-month delay of court proceedings and “no admission of fault or liability, no negative inference of any sort,” they agreed to have ARCO take over management of their property. Wallach, one of the limited partners but also the Rosenbergs’ attorney, signed the project over to HUD’s control in August, and the federal government officially took possession last month.

Maintenance men arrived only to find themselves confronted with a shotgun shoved in their faces as they walked across one of the yards, recalls ARCO’s Scott Langan. The gunman said they were definitely in the wrong place–and the crew took his word for it. It turned out that drug dealers, ousted from Gates Avenue Houses and newly installed at Medgar Evers, were not eager to move again. Within weeks, however, ARCO deployed a security force of 63 men to patrol round the clock. The major dealers moved out, though tenants say some minor ones are still operating from their apartments.

Because there are no functioning doors or intercoms at Medgar Evers, HUD is using its mortgage insurance fund to cover more than $330,000 a month on security. By the end of October, ARCO plans to have all the doors secured, video cameras in place and cast iron entryways like those across the street. At that point they plan to cut the security bill to a slightly more modest $84,000 a month.

Meanwhile, foreclosure proceedings are pending, but HUD refuses to comment on the case. “Our legal staff has said that all issues under litigation should not be discussed,” says agency Spokesman Adam Glantz.

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BPC’s Douglas Rosenberg also refuses to comment, but Wallach insists the huge amount of money HUD is now pouring into the development is proof the problems at Medgar Evers were never really the owners’ fault.

“Give me that amount of money and I can make any terrible project look like Park Avenue,” he argues. “If you don’t give me the money, I can’t do the work…. We applied for increases each year since 1992, and never received a single one.”

Langan, whose firm contracts with HUD to manage troubled properties in 22 states, draws a different lesson. “There certainly is not enough money in the rent roll for the kind of security we need,” he agrees. “But we would not have needed that security if tenant relations had been good…. Along the way these owners forgot the single most important thing: run the building as a building. Don’t run it as a tax shelter.”

As for the rampant vandalism, Muhammadu-Ndoye says experienced landlords know that when they let a building fall apart, families who live there often fall apart as well–especially the younger tenants. “A fish in a toilet bowl too long may forget he’s a fish and think he’s waste,” she says. “The conditions have been so debilitating. People rise to their surroundings.”

Indeed, it has been a long slow slide into the mire for Medgar Evers. Ten years after the project was built, the first owner, a now-defunct nonprofit corporation, was $4 million overdue on interest payments against a $9.5 million mortgage. HUD was prepared to foreclose.

Congress had just signed off on the 1981 tax reform with its lucrative new tax shelter that made it more profitable than ever before for private investors to buy into low-income housing. And Fred Brown, leader of the black Republicans in New York City, was using his connections in the Reagan administration to match investors with troubled HUD housing projects–earning finders’ fees from private sector dealmakers.

Brown hooked up with Brooklyn real estate broker Philip Rosenberg, who agreed to sell shares to investors to purchase the defaulted property. The investors would finance repairs, and Rosenberg would get a middleman’s fee to oversee the operation. But it took a couple of years to move the plan through HUD and by 1985, Congress was ready to change the tax laws again–and possibly eliminate the tax shelter that made the deal so attractive.

“Phil Rosenberg had retained a firm of accountants who were going to sell out this project for four, or four and a half million,” Wallach recalls. “Unfortunately, because of the time lapse…we were compelled to close in November 1985. Nobody knew what the new tax law was going to be, and therefore nobody was prepared to make investments.”

Instead of backing out, Rosenberg, Wallach and a few others decided to put their own money to work, gambling the tax shelter would still pan out. They bought shares totaling $1.1 million, and borrowed an additional $900,000 to cinch the agreement with HUD. The partnership assumed responsibility for the previous owner’s defaulted mortgage, Wallach says–with the proviso that HUD would forgive the $4 million in delinquent interest payments.

Congress was kind: the limited partnership was grandfathered in under the old tax law and received the tax break. But by the early 1990s their money had run out, Wallach says; the $3.9 million rent roll–$2.4 million of it in federal subsidies, as of 1993–didn’t cover operations, he argues. Then, Wallach says, the roof came down–at least in a figurative sense. They believed they had an explicit agreement with HUD to reinvest a portion of their mortgage payment in a rehab reserve fund. But HUD used the money to pay off the first owner’s delinquent interest debt–instead of using it for repairs. “How could it not be a wreck?” he says today. “Millions were in effect taken out of the budget.”

HUD officials disagree on the terms of the agreement, but refuse to comment further. The dispute is now in the Washington courts, held up pending the RICO lawsuit Wagner and the tenants filed in Eastern District Court in Brooklyn.

Yet while the owners claim they have no responsibility for paying off the old owner’s defaulted interest debt, they still count the full value of that debt on their balance sheet, using it to their benefit at tax time by increasing the amount of income they can shelter from the IRS.

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Businessmen are, after all, in low-income housing to make money. “It was HUD’s responsibility to have regular monitoring of the sites where they provide landlords millions of dollars in subsidy,” says Angela Hope Weusi, one of the volunteer organizers working the Gates Avenue strip and founder of Long Life Information Service, a Bedford-Stuyvesant group that places developmentally disabled young adults in jobs. “They failed to make sure the landlords were not exploiting the people who live there.”

The proof is in lengthy HUD inspection reports from each year of the 1990s, which detail extensive repair problems in the massive Medgar Evers complex. For years, the agency put off intervention, prodding the landlords for improvements, criticizing their management–and approving their rent subsidies month after month.

But now there are signs of a clean-government revolution underway at HUD, thanks to the demands of the Republican-controlled Congress–and HUD Secretary Andrew Cuomo’s shape-up or ship-out agenda. Success may be a step toward higher office for Cuomo: he is a top prospect to be Al Gore’s running mate in the year 2000.

Cuomo has established a new HUD enforcement office in collaboration with the Justice Department, based in New York and headed by a top FBI official. The office is reportedly ferreting out abuse by Section 8 landlords. At the same time, Congress has tightly restricted rental assistance programs in a year when thousands of rent subsidy contracts signed in the 1970s and ’80s are expiring.

Every expert in the field has a different opinion about what this means in terms of tenant empowerment. Will management companies with platinum reputations–like ARCO–become HUD’s owners of choice in the future? Or will nonprofits and tenants be given the resources to collaborate with one another and build true local power–with no profits sucked out of the rent rolls?

Medgar Evers tenants are hopeful they will gain permanent power. The organizers are providing them with leadership training. “I always envisioned this as co-ops,” says Darlene Wortham. But she and many of her fellow tenants say they have their doubts, given the huge size of the troubled project. Mostly, they hope HUD will pay for necessary repairs. And they want to win some money in the lawsuit to set aside for the future.

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“Hopefully HUD won’t get into the same trouble they did before, allowing managers to get away with bureaucratic excuses,” says Weusi. “When the people get self-determination, that’s when things will change.”

But for the one thousand or more tenants who turned out for an all-day festival on September 13, the change is already worth ebullient sweet celebration. A children’s chorus performed gospel songs in the street. A dozen barbecues piled up the chicken, hot dogs and burgers. Political raps set the crowd alight.

The change in people’s lives is elemental. “I like the feeling of walking down the stairs in the morning,” says Charlotte Rodgers, a Medgar Evers tenant leader who works in city government. “I like coming home in the evening, not having to step all over people in the hallways hanging out. When I go to the store, it feels like people are a little more alive.

“It wasn’t like that when we started. They did not believe anything could happen. They did not believe we could get rid of BPC.”