"A Tale of Contrasts: Two Apartment Buildings Illustrate How Public Housing Slid into Such a Mess." The Wall Street Journal (February 28, 1995) By John J. Fialka (Staff Reporter) WASHINGTON--Edgewood Terrace I and Edgewood Terrace II are nearly identical apartment buildings a mile-and-a-half northeast of the U.S. Capitol. They were built in the early 1970s by the same man under the same rules and are fed by the same subsidies from the Department of Housing and Urban Development. But Edgewood Terrace I has crumbled into a slum endangering the whole area. Edgewood Terrace II is doing fine. Why? The tale of the Edgewood twins is a study in contrast. It is about how government policies allow one landlord to perpetuate a slum while another runs a showcase of low-income housing. It is about the misery of tenants, locked in a struggle to find dignity while seeking help from a government paralyzed by ever-shifting rules. It is, in a nutshell, about how HUD-subsidized properties have come to pockmark the nation's urban landscape. A Rescue Attempt Rogerline Nicholson, a 69-year-old retired government cook, has done everything she can to save Edgewood I, her home for 22 years. "You've got to fight to get something and then you've got to fight to keep it," she says. A formidable-looking woman who runs a tenants' association, she has brought in a stream of community leaders, members of Congress and HUD officials to show them the rats, the bombed-out-looking vacant apartments, the overflowing toilets, the leaky roof, the collapsed garage, the crumbling walls, the dark hideouts used by drug dealers. The visitors always shake their heads and go away. Nobody knows how to put Edgewood I, like Humpty Dumpty, back together again. The 302-unit Edgewood I--whose value government auditors now put at a negative $10 million--is a mere blip on HUD's balance sheet but also a reason the agency is fighting for its life. There may be as much as $11 billion of similar blips, "distressed properties" that HUD owns or is about to own because it insures the mortgages HUD bureaucrats quietly refer to these relics of a generation of failed housing policies as, collectively, "the Museum." Congress can ax HUD, but the Museum will haunt cities for years. Mention Mrs. Nicholson to James Aldridge, the District of Columbia's chief enforcement officer for housing, and he rolls his eyes. His inspectors have spent man-years prowling Edgewood I's dim brick lined corridors and have issued 202 code-violation tickets that remain unanswered. "She thinks I have divine powers," he says. "She fails to understand that the cost to bring that place up to code is so prohibitive that we simply don't have those kind of resources." A soft-spoken man with a walrus mustache, Mr. Aldridge is frustrated because in his mind's eye he can still see Edgewood I as it was when it opened in 1973, with its manicured lawns and a swimming pool. "It was beautiful, a showplace, a real plus to the neighborhood." It also was designed to be beautiful to accountants. The Kennedy-era programs that spawned it used tax incentives to attract private investors to finance low-income housing. Eugene F. Ford, 65, the Bethesda, MD., developer who built both Edgewoods, is an old-fashioned landlord, a fussbudget who looks for trouble before it arises. In Edgewood I, found it in his maintenance reserves, the money landlords should set aside to fix big things such as elevators and roofs. During the late 1970s, double-digit inflation gobbled them up while HUD rules kept rents static. In 1982, the Reagan Administration allowed faster tax depreciation of low- income rental property, making apartments still more attractive to investors. Mr. Ford solved his problem by selling Edgewood I to get enough money to properly maintain Edgewood II. The sale led in a profound change in management styles. While Mr. Ford had spent a lifetime marketing and caring for buildings, Edgewood I's buyer, Security Properties Inc., of Seattle, was controlled by Paul H. Pfleger, who had made his mark selling tax shelters to nationwide syndicates of affluent investors. Mr. Ford remembers pointing out the maintenance-reserves problem to SPI managers. "They were pretty arrogant," he says. "They took the attitude of telling me, who am I to be telling them?" Through brokers, SPI sold 98% of Edgewood I to a partnership of 117 people, many of whom are doctors and dentists in the West who have never even seen Edgewood I. While Mr. Pfleger became a general partner, responsible for managing the property, the others became limited partners with very limited powers. Both Mr. Ford and Mr. Pfleger have been major players in owning and operating blocs of low income apartments, but, viewed through the prism of the two Edgewoods, the resemblance ends there. Mr. Ford's Mid-City Financial Corp. has built 48 apartment complexes and manages another 25. Nearly all are in the Washington area and are partly funded by low-income housing programs. He pours over weekly occupancy reports and visits each building eight or nine times a year. He tries to keep his buildings full by offering free services, such as vans to take people shopping, and invites in-home tutoring projects and sports clubs. Such moves aren't entirely altruistic. "His earliest idea was if you keep the kids occupied, they won't tear the place up," says Leslie Steen, a co-worker. Mr. Ford also carefully screens his tenants. "You take your hands off of a building like this for three months and you might as well throw it away," Mr. Ford says. In contrast, Mr. Pfleger is one of a new breed of landlords that entered the low-income apartment business in the early 1980s. A former tax and insurance consultant, he responded to questions from this newspaper only through his lawyers. Asked Mr. Pfleger's age, they said he is "in his 50s." In his written answers, he high lighted his overall philosophy: "Please note that investing in affordable housing projects is primarily tax-motivated." Legal Tactics While Mr. Ford used his carpenters, plumbers and accountants to satisfy HUD maintenance requirements at Edgewood II, Mr. Pfleger relied heavily on his lawyers, who continually appealed HUD's findings of mismanagement at Edgewood I to higher HUD officials. Their requests for delays, reviews and more subsidies make a file almost four inches thick. (HUD officials say several other Pfleger controlled buildings have received similar treatment and, like Edgewood I, are in default on mortgage payments.) Edgewood I, the building, has never made a profit, but Edgewood I, the tax shelter, performed financial miracles for Mr. Pfleger and his investors. As is usual in syndications, many of their profits came up front, as brokerage and management fees. Over the years, moreover, they could write off as much as $8.7 million in depreciation and losses against their taxes. In the history of Edgewood I, however, this was but a brief, shining moment. In 1986, Congress passed the Tax Reform Act, which phased out the tax shelters. The change had little effect on Edgewood II, where Mr. Ford kept plodding along with his maintenance schedules. But Edgewood I continued its inexorable slide. Some Edgewood I owners concede being troubled by that today. "I'm glad this is coming out now. There were some things done back in the 1980s that were greedy," says C. Joseph Tyree, a pediatric dentist in Munster, IN. Another limited partner John E. Hall, a specialist in emergency medicine in Anchorage, AK, says: "I don't believe in renters living in dumps. If the government knows this place is a crack house, they ought to get somebody in there and do something about it." According to HUD records, the government knew bad things were beginning to happen at Edgewood I in 1985, when an open-air crack market was operating on the plaza outside the building. Some of the dealers and users were using vacant Edgewood I apartments as hideouts: a few had become tenants. HUD inspectors noted that the building's managers were exercising "poor tenant selection." A Disastrous Slide By 1987, the swimming pool, shared by the two buildings, was closed; Edgewood I couldn't pay its share of the maintenance. The cement parking lot behind Edgewood I collapsed. Two years later, the plumbing, mended in various haphazard ways, took on a life of its own, sprouting leaks and flushing toilets spontaneously In the middle of the night. Heat, air conditioning and hot water became sporadic. By 1989, 45 of its units were vacant. Tenants who had portable rent vouchers from HUD moved out, but most of those remaining--a mixture of single-parent families and elderly on slim or nonexistent pensions--were stuck. Their subsidies tied them to the building. In 1989, Mrs. Nicholson revived the building's long-dormant tenants' association, which began to complain to HUD. Writing in a shaking hand, one elderly woman noted her peeling paint, water leaks and the elevator that could no longer stop at her floor. "Please, someone keep the building going," she pleaded. "This is my home, and I live here. Please don't ask human beings to live like this." In 1989 and in 1990, HUD rated the building's management "unsatisfactory." In 1991, when HUD's regional office found "strong indications of mismanagement," SPl's regional vice president responded that the building was managed "at a level the owner feels to be outstanding based on a property with a need for a several million dollar rehab, located in a high crime area." Continuing Problems To be sure, there were sporadic attempts to repair things. HUD called in an architect, Edward M. Johnson, to estimate the cost of fixing up 20 apartments. He noted that many of them were in a section that had roof leaks and moldy goo seeping out of airconditioning vents. Such repairs "didn't make any sense," he recalls. Nevertheless, they were done. Jack Kemp, then secretary of HUD, had become outraged over conditions at another HUD-subsidized building in Washington, and consequently some of its tenants were being moved, temporarily, to the refurbished units at Edgewood I. Cassandra Burnett, a retired nurse, moved into one on the second floor and discovered water leaking in from the roof, four floors above. The sink, her husband, Thomas, says, spewed water "like a geyser, like Yellowstone National Park." "The bottom line," she says, "is we don't use our sink." At nearby Shaed Elementary School, children from Edgewood I started showing up dirty. Unable to bathe at home because of a lack of hot water, they were allowed to take showers at school, says the principal Brenda Richards. The school also began holding parent discussion groups, where frustrations over Edgewood I's conditions often come out. "The office staff and I were joking the other day. They said this isn't a school, it's more like a social-work annex," Ms. Richards says. In 1993, President Clinton ordered the federal government to do something about Washington's high crime areas. That brought Park Police to Edgewood I, although it is several blocks from the nearest park. "It was the most rewarding thing I've ever done," recalls Lt. Robert Kass, head of the unit. While the District's police were being run ragged in the neighborhood going from call to call, Lt. Kass's 36 officers moved in on the drug business, making more than 1,500 arrests. The Park Police became neighborhood heroes. Nine months later, though, their money, scrounged from other Park Police programs, ran out. "What was kind of odd at the end was the word got around [among the crack-sellers] that we were leaving. They told our officers, 'Five more days, and you guys are gone. ' They were looking forward to it," Lt. Kass recalls. When the police left, the drug dealers came back. Seen from a distance, the buildings still look a lot alike, but Edgewood II has eight vacancies and Edgewood I has 131. Thomas Bender, 69, head of the Edgewood II tenants' association says he has no complaints about maintenance in his building. What he dreads are the long, lonely walks past the boarded-up windows of the complex next door, which includes a few garden apartments. "We were informed last year that HUD was supposed to start working on those places and renovate them," he says. "All they're being used for now is a shooting gallery." Mr. Bender will need patience. HUD's dealings with owners of decaying buildings is a slow, elaborate dance. Having decreed Edgewood l's management "unsatisfactory" starting in 1989, HUD followed in January 1992 with an order banning SPI from engaging in any new HUD sponsored projects for one year. That seemed to have little effect on Mr. Pfleger who has shifted his attention to selling wholesale long-distance telephone time. In March 1992, Edgewood l's owners defaulted on their mortgage. That May, HUD demanded that Mr. Pfleger find a better on-site manager. In October, G. Richard Dunnells, one of Mr. Pfleger's lawyers, warned HUD that if it didn't offer more rental subsidies or subsidize the sale of Edgewood I to a nonprofit group, the owners would turn the rotting hulk back to HUD, which holds the mortgage. That threw the problem into the lap of Helen M. Dunlap, HUD's current deputy assistant secretary for multifamily housing. Visiting Edgewood I in the summer of 1993, she was "appalled," she says. But HUD was hamstrung by its own rules, which required it not only to repair the building but also to give the tenants 15 years of subsidized rent if they had to move. She didn't have the money. This year, the rules eased, but then HUD's overall policy changed as the Clinton Administration's program to downsize the department took hold. Ms. Dunlap is studying HUD's latest policy, which is to move tenants, tear down dilapidated buildings and sell the land. The General Accounting Office says that that is the only cost-effective solution for Edgewood I. But cost-effectiveness is never the only criteria when it comes to low income property. Mr. Ford, as the builder, feels obligated to try to save Edgewood I. The buildings "are kind of like my babies" explains Mr. Ford, who feels guilty about selling Edgewood I in the first place and would like to prevent the continued decline of the neighborhood. He has formed a nonprofit corporation that will attempt to raise $6 million and mobilize neighborhood groups to help rehabilitate it. If he delivers, Ms. Dunlap says HUD will throw in a $13 million grant. "We have made a lot of commitments on this property over the years," she says. The deal will be negotiated over the next 60 days. As for Mr. Pneger, he and his lawyers and investors are looking at a procedure that the IRS calls "recapture." When and if they decide to sell Edgewood I, federal income taxes on the $8.7 million they have sheltered by using the dilapidated building as a deduction will come due. The blow would fall largely on the limited partners. Asked about Edgewood I's decline, Mr. Pfleger blamed HUD's stinginess and "tenant vandalism," an "unbelievable increase in gang violence and drug activity, and declining occupancy due to lack of interested market rate tenants." Explaining the radically different history of Edgewood II, the building next door, he wrote: "They are two distinct and different kinds of developments, with their own special problems and needs." Indeed they are, now. Edgewood I tenants feel a strong need to pretend things are getting better. When Mrs. Nicholson comes back from church on Sundays, she steels herself, then breezes through the crack dealers as if they weren't there. Marie Porter, 69, a proud, fragile woman who suffers from asthma and a bad back, often pretends that she doesn't live at Edgewood at all: "A lot of my friends don't know where I live. I have a postal box number and an unlisted telephone."