COLORADO SPRINGS, Colo.—The Department of Housing and Urban Development provided a $9.4-million loan guarantee to renovate an apartment complex here eight months after the owner convinced the county to value the complex at just $3.8 million, a Watchdog.org investigation found.
The loan for Apollo Village Apartments defaulted, and the property was foreclosed on in 2012, with HUD losing as much as $4.5 million on the deal, public trustee records show.
Pete Sepp, president of the National Union of Taxpayers, said these government programs put a substantial amount of taxpayer money at risk and should be eliminated.
“Unfortunately, many government loan programs to individual business people aren’t necessarily dictated by the best interests of taxpayers or the laws of the marketplace,” he said after reviewing information Watchdog.org provided him on the loan. “It’s a classic dilemma we see with the federal subsidies programs.”
After the owner defaulted, HUD officials apparently did not do everything they could to recover as much money as possible, a fact Sepp called “unbelievable.”
Instead of foreclosing, HUD sold the note to a private company for $5 million, and the company foreclosed on the property six months later, selling the Apollo complex for $6.2 million—netting a $1.2-million profit the government could have realized to offset part of the loss, foreclosure and HUD records show.
Christine Baumann, spokeswoman for the regional HUD office in Denver, said it was HUD policy to sell the defaulted loans through the Multifamily Assets Loan Sales instead of foreclosing.
She said the Federal Housing Authority is funded by fees and not taxpayers, but, when pressed and shown news reports, she conceded that taxpayers provided $1.7 billion in 2013 to shore up the FHA’s reserves.
Baumann defended the loan guarantee, saying the federal government had to step in after the housing crisis to help businesses with projects like the Apollo Village complex. She said the tax money was needed because of the foreclosure crisis, most from single-family defaults.
“Back when the crisis was happening and even today, there are a lot of lenders who don’t want to loan money to people who don’t have perfect credit,” she said. “We get a packet from lenders and we evaluate them and assess the risk and whether it’s a good bet to provide access to credit for people who have been overlooked.”
But the details of the Apollo deal raise questions about whether it was a good gamble and how much due diligence HUD officials did on the project.
First, the project wasn’t even intended for affordable housing. The loan guarantee was to repair the 216 market-rate units built in 1973, according to HUD, the owner who defaulted, and a representative of the current owner.
“On its face, it doesn’t seem to comport with the goals of HUD in providing affordable housing,” Sepp said.
Then the loan guarantee was completed eight months after the owner successfully convinced the county to slash the value of the apartment project because the complex was in such bad shape.
“Apollo Village #101-11128 was insured by HUD through a 223f loan in the amount of $9,401,500.00 on March 23, 2009,” according to an email from Baumann.
The owner, represented by a Denver appraisal firm, filed a property tax appeal on May 27, 2008, and the County Board of Equalization reduced the value of the property from $7.199 million to $3.810 million on July 24, 2008, according to county records and the assessor’s office.
The money went to repair the building, which had serious foundation and other problems, said Robert Abbasi, managing member of Apollo Apartments, LLC, which received the HUD-backed loan.
County records showed that 36 units were condemned in 2008, and building permits for siding, roof, and structural repairs were issued between 2009 and 2014.
Abbasi said his company lost a lot of its own money on the project because the bottom dropped out of the rental market, and overseas deployments of military reduced housing demand in Colorado Springs.
“They [HUD] didn’t do anything wrong, and we didn’t do anything wrong,” he said in a phone interview. “We just got hammered by the market.”
But Sepp said it’s HUD’s job to know the condition of the property, not to automatically guarantee the project when the collateral was worth less than half of the loan.
“It’s hard to imagine this kind of [property tax] adjustment simply flying by in a private-sector loan,” Sepp said. “These are the kinds of important details that can make a difference between a sound loan and one that leaves taxpayers on the hook.”
Abbasi said the loan was based on an appraised value of the apartment complex after all repairs were completed. He estimated the project’s current worth at about $12 million.
HUD rules for market-rate apartments allow the agency to guarantee only 83.3 percent of the project’s value after the repairs are completed, which means HUD estimated the value of the repaired project to be about $11.3 million. Federal HUD officials said they did not have any appraisal information for the project, and the local office was looking to see if any documents were available.
But the county and recent sales never valued the complex anywhere near the $11.3 million figure despite a lot money poured into the development.
In addition to the $9.4 million that taxpayers guaranteed, owners who acquired the property after the foreclosure put in as much as $3.5 million more, according to Aaron Chan, director of asset management at Fowler Property Acquisitions, who helped acquire the building. The property sold in 2013 for about $8.99 million, county records show.
Assessment records show the market value for the project, now called the Stratus Apartment Homes with a mailing address of 4255 Airport Road, at about $8.4 million.
HUD seems to have left a considerable amount of money on the table, allowing private companies to profit.
Baumann wrote that HUD sold the note on Jan. 11, 2012, through the Multifamily Asset Loan Sale for $5 million. On July 9, 2012, foreclosure records show that a company that invests in distressed property closed on the Apollo property for $6.2 million. The company then sold the complex to the current owners for $8.99 million on October 31, 2013, property and foreclosure records show.
County assessments are often lower than market value, but even with the recent boom in rental and property prices, the project is clearly worth less than the nearly $12 million that HUD and private investors put into it.
A $9.4-million loss was just a small part of HUD’s 223 loan guarantee program, which insured 32,048 units totaling $1.9 billion, according to the HUD website. Default rates for the program were not available.
Abbasi said the HUD loan was attractive despite a lot of red tape and paperwork because it was a non-recourse loan, meaning the bank and HUD couldn’t go after the owner’s other assets if there was a default.
He and HUD maintain they did their due diligence, and taxpayers lost out because of uncontrollable market forces.
“I am concerned and very sad to see this thing go this way,” he said. “We just couldn’t get the two ends of the rope to meet. I am a taxpayer, and I get very upset when I see stuff like that.”
U.S. Rep. Doug Lamborn, R-Colo., the federal representative whose district includes the property, declined to comment on HUD’s actions.
Sepp questioned how much work federal officials put in to evaluating the project and whether taxpayers or the federal government should be backing loans for deals that appear to have no benefit to the general public.
“Here, again, is a major warning against Uncle Sam getting too deeply involved in real estate transactions,” he said.
Originally published in Watchdog.org.
