Mayor Richard Daley charged Thursday that the city`s Housing Department was so riddled with favoritism and influence-peddling that just three well-connected businessmen received 59 percent of all federal tax credits authorized by the city over the last three years.
In one example, Daley said that Ron Gatton, former regional director for the U.S. Department of Housing and Urban Development, was set to invest only $100 in order to swing a $2 million subsidized housing deal that would have netted him a $582,000 developer`s fee.
”I call that an obscene return on a $100 investment,” said Daley, adding that he has halted the processing of Gatton`s application.
Gatton was Midwest regional director of HUD from 1977 to 1981. Two of his top lieutenants there, Brenda Gaines and Bess Donaldson, were later chosen by the late Mayor Harold Washington to run the city`s Housing Department. Gaines was commissioner from 1983 to 1985; Donaldson from 1985 until this spring, when Daley replaced her with his own appointee: Michael Schubert.
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Gatton, Donaldson and Gaines all disputed Daley`s claims Thursday, saying the charges showed a lack of understanding about the way the subsidy programs work.
City Hall insiders also pointed out that it is to Daley`s political advantage to sound an alarm about questionable practices early in his administration. Besides positioning himself as a reformer, Daley is placing himself in a position to say ”I told you so” if and when the ongoing federal probe of HUD`s Washington headquarters works its way to Chicago.
Indeed, the irregularities alleged by Daley mirror some of those under investigation in the nation`s capital.
In Chicago`s case, Daley implied that Gatton received the lucrative housing deals because of his close relationship with Donaldson and Gaines.
Two other ”favored” developers cited by the mayor were Fred Benton, whose Tennessee-based mortgage company lists Gatton as a consultant; and Robert King, owner of Carroll Properties and a close personal friend of Gaines.
”I am shocked and alarmed at what I have discovered about the way this system has been run,” Daley said. ”It`s a story that goes beyond
mismanagement, raising serious questions about possible influence-peddling and favoritism.”
But those named by Daley, including the previous housing commissioners and the developers, were furious at any implication they engaged in wrongdoing and said the real scandal was Daley attempting to blame them.
”This makes no sense,” said King. ”All I know is that I do good projects and I encourage people to go out and look at those projects before they besmirch my reputation.”
Gaines, who left the Housing Department in 1985 to become Mayor Washington`s deputy chief of staff, said that she approved only one project proposed by King and that was before their relationship began. After that only one other project of King`s came before her and she rejected it. She disputed Daley`s charge that none of the loans went through proper procedure, but were awarded unilaterally by her.
”By the time it gets to the commissioner there are recommendations by the deputy of rehabilitation,” Gaines said. ”To say only the commissioner makes it is a fallacy. I can`t remember anytime I went against my staff`s recommendation.
”Furthermore,” Gaines said, ”the City Council approved everything I did and the City Council at that time wasn`t even friendly to the
administration.”
Daley said he is not sure that there was any criminal wrongdoing in the Housing Department`s activities, but said he discussed the matter with U.S. Atty. Anton Valukas.
Valukas confirmed that Daley called him Thursday to report that he ”had found abuses” in the city`s Housing Department and would turn over the evidence.
Valukas said that he will determine whether an investigation is warranted after he reviews the material.
Among the charges Daley made at the press conference were:
– Of the $69 million in loans in the department`s portfolio, more than $28 million have been delinquent for more than four months. Delinquent loan holders also owe the city at least $250,000 in fees and taxes. Daley said the department has no system to make sure loans are repaid on time.
– There was an unauthorized bank account opened at Citibank by the Jane Byrne administration. Daley said the account, which was voice activated and never went through normal city procedures, now contains $2.3 million. Gaines, now a vice president at Citicorp Savings, said the account was created by her predecessor, Gilbert Cataldo, and that the money was not used for anything improper. She said the bank account was audited by HUD and the agency found no wrongdoing.
– Unlike other major cities, Chicago did not use a loan review committee to distribute its funds, nor did it use objective standards to determine who got loans.
Gaines said that the same developers received most of the loans because they were the only ones willing to provide low-income housing.
”The question I would ask is: Did anybody apply to the Department of Housing who felt they were unjustly turned down. The answer is no,” Gaines said.
Gatton and King both told The Tribune that very few private developers are willing to build housing on the South and West Sides, and that they are proud of their work. Both said the city`s biggest problem with tax credits was finding developers willing to use them.
”All my loans are current with the Department of Housing,” King said.
”I`d think the mayor would want to be better informed,” said Gatton of Daley`s allegation that he claimed a half-million-dollar fee after investing only $100 toward rehabbing the 28-unit walkup at 444 E. 46th St.
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Gatton said $100 is a standard contribution for a ”general partner” who recruits a roster of ”limited partners” to invest in a project . . . and share in the tax credits. He recalled that his investors were going to ante up $188,000 on the 46th Street deal, and that his fee would have been ”no more than $400,000,” nearly half of which was to be paid by his partners in return for the credits.
Whichever version is correct, Daley may have stretched his point when he compared Gatton`s deal to a ”standard” rehab performed by the not-for-profit Neighborhood Housing Services, or NHS, on the 26-unit building at 701 N. Central Ave.
A sheet distributed at the press conference contrasted the $494,410 in tax credits authorized for Gatton`s deal to zero credits authorized for the NHS project. But those familiar with the NHS rehab say its financing was arranged before the credits were made available by Congress as part of the 1986 Tax Reform Act.
William Higginson, president of the Chicago Equity Fund, a not-for-profit corporation that helped finance the Central Avenue rehab, said the benefits syndicated from that project were of the ”passive loss” variety since eliminated by Congress.
Higginson also pointed out that his Equity Fund, through which numerous Chicago corporations invest in low-income housing in return for tax breaks, has never been turned away for lack of credits available to the city.
Low-income housing tax credits allow investors to subtract up to 9 percent of their investment from their federal income tax liability every year for a period of 10 years. Cities are limited, however, in the amount of tax credits they can authorize. Chicago is allowed about $3.75 million in credits a year, but only in recent months have applications begun to outstrip the supply.
Daley said he is assigning an investigative team to work with Housing Commissioner Schubert to root out any irregularities in the city`s loan program and tax credit program.
Heading the team will be Charles Sklarsky, a former federal prosecutor and partner with the law firm of Jenner & Block. Others on the team will be Arthur Hill Jr., a partner with the law firm of Haggerty, Koenig & Hill; Laura Gerard Hassan, a partner with Rudnick & Wolfe; Craig McNab, a lending officer with St. Paul Federal Bank; Barbara Bowles, president of the Kenwood Group investment advisory firm; and Gregory Kobus, senior vice president of the Exchange National Bank.