Saturday, October 13, 2007

Project Homestead: The Inside Story You Haven't Heard

If you asked an average Joe Greensboro about Project Homestead, I think you’d get a story that goes something like this:

Project Homestead was a nonprofit homebuilder in Greensboro that received millions of dollars in handouts from the city to build low-income housing. But Project Homestead’s late leader, the Rev. Michael King, squandered a lot of that money on cruises, personal expenses, and illicit land deals for his family and cronies. Even worse, Project Homestead’s houses were shoddily built. All this happened because city staff wasn’t paying close enough attention to the non-profit’s activities. After Project Homestead went bankrupt and Rev. King took his own life, the local DA investigated the mess, chose not to prosecute anyone, and then refused to release his report.
Unfortunately, some of that narrative is true, and the more sensational parts of it were well-covered in the N&R. Oddly, the normally muckraking Rhino Times left the story alone. (Correction: according to an e-mail Rhino editor John Hammer sent me, the RT ran many Project Homestead stories. Unfortunately, none of them are available at the RT website, whose archives don't go back past 2005.)

I got curious about how Project Homestead actually worked with the city. How much money did Project Homestead receive from the city, and on what terms? How much was squandered, and how much actually helped low-income people get into decent housing? How much money went to homeowners? What was the quality of the housing, and is anyone looking after it now? I suppose these questions are too boring to get much newspaper coverage, but I think they’re important for evaluating the whole Project Homestead affair.

I asked Andy Scott, head of the city’s housing and community development (HCD) department how much the city spent on Project Homestead, and he was kind enough to put together a report and to meet with me to explain it. Here’s what I found out.

Total funds to Project Homestead from the city between 1990-2003 were $17,600,734. About $16 million of that went directly to property owners in the form of lots donated by the city, second mortgages to homeowners, and loans to Project Homestead in partnership with other developers who specialized in building and managing low- to moderate-income apartments.

None of the mortgages were in the sub-prime category that is currently scaring the pants off the U.S. real estate industry. Project Homestead vetted its mortgagees carefully enough that the default rate on their mortgages is about 2-3%, while the default rate for adjustable rate sub-prime mortgages lately runs between 7 and 14.5%. According to Andy, the loans produce $500,000 to $750,000 a year in income to the city.

You can do the numbers yourself: over the life of those loans, the city will eventually get back its $16 million investment and more.

What about the allegedly shoddy units? When complaints started popping up in the newspaper, HCD worked closely with the city inspections department to address the problems. The city eventually identified 57 out of 625 single- and multi-family Project Homestead units that needed some repairs. Andy described the majority of the problems as either cosmetic or due to normal wear and tear or deferred maintenance.

Five houses had serious problems related to their foundations. The houses’ insurer, Nationwide, refused to repair any of them. (Nationwide wasn't on their side.) The city eventually paid about $200,000 to fix all problems for all 57 units. I guess you can look at that expenditure either as a waste of taxpayer money or as the city protecting its investment in the houses, depending on how demagogic you’re feeling.

Here’s a photo of one of the houses that needed minor repairs:

From the street, it looks like a pretty good house. I picked it at random off the list Andy gave me.

All told, fewer than 10% of Project Homestead units had minor problems, and fewer than 1% had serious problems. I don’t know the industry standard for this kind of thing, but Project Homestead’s complaint rate seems better than what people are saying about houses built by K. Hovnanian Homes, one of the country’s biggest for-profit homebuiliders.

What about that lax staff oversight? If you read the N&R’s coverage carefully, you find that staff raised concerns quite early about the way Project Homestead was doing some things. In particular, Project Homestead didn’t seem to be giving as much “instant equity” to homeowners from the donated lots as other low-income homebuilders were. HCD produced a report and a plan to address the problem, and gave it to city council in early 1997. Council took no action. Staff members who raised red flags to the council include Andy Scott, then-city manager Ed Kitchen, and assistant city manager Ben Brown.

HCD staff have always done regular on-site inspections and audits of the multifamily properties that were built and managed by Project Homestead and its partners. Andy provided me with a stack of recent audit memos that address occupancy rates, renter qualifications, monthly rents, and the physical condition of the buildings and grounds (which are also covered under the city’s minimum housing ordinance). The memos are boring to read, but they paint a clear picture: city staff holds property managers to a very high standard as a condition of receiving city loans.

Here's a photo of the L. Richardson Hospital in East Greensboro -- an historic building which Project Homestead and its partners recycled as an apartment building:

And here's another aparatment building that Project Homestead built:

Over the years, the city also contracted with Project Homestead to provide homeownership counseling, homeowner preparation, and project planning. The city paid to rehab the Project Homestead headquarters on MLK Drive (which the city now owns, I think) and provided some other rehab loan funds. All of these expenditures were audited, and totaled about $730,000.

Unusual grants to Project Homestead were for the Cumberland Shopping Center, a Job Training Center, and the Dudley-Lee Center upfit, all together totaling about $831,000. If I recall correctly, these grants were requested by Rev. King outside of normal channels, were not recommended by staff, but were generally approved by city council, with councilwoman Sandy Carmany often the only dissenting vote.

The primary responsibility for keeping track of Project Homestead’s finances lay with the Project Homestead board of directors, and it’s no exaggeration to say that the board failed miserably in its duty to keep an eye on what Rev. King was doing. However, since the Project Homestead meltdown, the city has begun requiring mandatory, annual training for all non-profit boards that do business with the city – no exceptions allowed. Two board members, one of them an officer, have to participate.

This kind of board failure is actually pretty common, unfortunately. Maybe you remember what happened a while back with the United Way, and more recently with the Smithsonian Institution. When people are in constantly in control of a lot of other people's money, it's hard for them not to take some of it.

You can draw your own moral from this story. My view is that Project Homestead did a tremendous amount of good for the city, building better houses for low-income homeowners than the market would have provided, bringing a lot of economically marginalized people into the financial mainstream, strengthening the fabric of many neighborhoods, and just giving thousands of people decent places to live.

In a worst-case scenario – say Project Homestead squandered $500,000 of city money – we paid a 3% toll to human sin and folly. More than we’d like to pay, for sure, but hardly more than one would expect in this world.


Don Moore said...

Great work...

"Squandered" is still a problem; but as you point out, this is being handled nationally and hopefully locally. If a person serves on a board or signs off on a report, they van and should be held responsible.

We should not have to rely on private citizens to produce this type of report.

Anonymous said...

It IS a great post, David. Thanks for doing it.

Don, you know as well as I that if the city had produced a similar accounting, it would be dismissed as part of some conspiracy to cover someone's *ss.


David Arneke said...

As someone who was familiar with Homestead's work, thanks for saying something that needs to be said. You're right about the excellent work that the organization and Rev. King did for our community. I managed AT&T's corporate philanthropy in the Carolinas in the 90s, and, along with several of our major corporate customers in the Triad, we provided both volunteers and financial support to Homestead. In the course of our work, I had an opportunity to get to know Rev. King. He was an amazing character -- bright, quick witted and a very effective leader. He and his organization put a lot of low-income families into their own, solidly built homes. Thanks to the rigorous home-ownership course that was required to get a mortgage from Homestead, the default rate, as you noted, is low. He was a true visionary, and his work was changing the status quo in Greensboro.

Like many visionary leaders, though, he wasn't a great operational manager. When it came to accounting and compliance with governmental rules and regulations, I have no doubt that Rev. King was in way over his head. He didn't get the support he needed from his board, and there was apparently no one on his staff who could keep the books and provide strong direction to both Rev. King and the board about what they could and couldn't do with the money. Ultimately, it was Rev. King's responsibility to provide that kind of leadership or to find someone who could. No argument there. But neither he nor the good work of his organization deserve the kind of one-sided treatment they've received.

Anonymous said...

David, I understand there was good mixed in with the bad.

But there are a couple of other things to remember. First, the city was not the only source of PH's funding. It also received monies from the state and federal governments, respectively, and those monies could have been stolen from the poor in addition to the city monies stolen from the poor.

Second, we are told that funds were commingled, and the records are poor to non-existent. Can we really know how much was stolen?

Third, there were quite a number of other improprieties other than the actual stealing of money intended for the poor.

Fourth, in addition to board members being negligent, there were also accountants involved. And those accountants certainly should have seen what was going on, and erected mechanisms to prevent it.

Joe Guarino

David Wharton said...

No argument with anything you wrote, Joe.

Some of PH's partners, like Beacon Management, are outstanding organizations.

The point of my post, however, was to show that HCD ran -- and runs -- a pretty tight ship regarding the spending of city money on low-income housing.

Angie Smits said...

Excellent work A++. I like your new masthead also.

Anonymous said...

I worked for PH during this time and was very disheartened by the comingling of funds I witnessed. However, I felt that the core/origination of the company was a great one and no one has even come close to contributing to the community on this level. Your article was great and well-deserved.