Stacked Deck

Giving penny-ante politicians a say over lucrative affordable-housing developments seemed like a good idea--until the FBI came calling

They may have worked at one of the most prolific real estate development companies in Texas, but they behaved more like awkward teenagers jilted by the object of their affection. Twice a week for months, employees at Southwest Housing had been asking Ruth Steward to lunch. Each time, the Oak Cliff woman politely declined, preferring to stay at home and watch her soaps.

So why did a powerful, prominent company want to court a middle-aged woman who worked a part-time customer service job at a department store? In 2002, Southwest and its founder Brian Potashnik were looking to build neighborhood support for their plan to build 256 apartments in a blighted neighborhood in East Oak Cliff. To finance the construction, the company wanted an obscure board called the Dallas Housing Finance Corporation to approve $15 million in tax-free bonds. The company also needed the board's approval to win lucrative tax credits from the state. Steward not only sat on the board, but she had been asking a lot of questions about the company in particular and southern Dallas in general, which she felt was deluged with cheap, drug-infested apartments.

In 2001, city council member James Fantroy appointed Steward to the housing finance board. At the time, Steward was rather deferential toward Mr. Fantroy, as she still refers to him, although she had some misgivings about Southwest.

Burning down the house: Brian Potashnik is a hero in one East Dallas neighborhood for pledging to spend millions renovating seedy apartment complexes such as this one.
Burning down the house: Brian Potashnik is a hero in one East Dallas neighborhood for pledging to spend millions renovating seedy apartment complexes such as this one.

"Before Mr. Potashnik built his apartments, we had a lot of vacancies," she says. "There are no jobs here. People are moving to Duncanville and Cedar Hill. We don't have any movie theaters here. We don't have anything for children. So why do we need more apartments when we're not doing anything to cause people to want to move to this side of town?"

Steward says that after she started asking questions like that, Southwest officials began inviting her to lunch. Besides not wanting to miss her daily dose of afternoon drama, Steward worried about becoming involved in a real-life soap opera of her own. What if the company tried to influence her in some untoward way? She had once run for city council against scandal-plagued incumbent Al Lipscomb and was wary of businesses that might try to corrupt a public official.

So she called Fantroy for advice. "He didn't see any reason why we shouldn't go to lunch," Steward says. "But I didn't see a need; I had already received their proposals during our meetings. What are you going to say to me during lunch?"

Later that summer, however, a young man whom she thought worked for Southwest called and asked if she would come to a meeting in his office, and she agreed. At the end of an otherwise ordinary discussion, the man told her that he had a "healthy respect" for her. She asked why, and he said because she didn't ask for any money.

"I asked, 'What was I supposed to ask for?'" she recalls. "'Hypothetically speaking, how much are we talking about?'" He told her he had been authorized to give her $25,000.

"I said, 'All I have to do is get ugly at a board meeting, and I get paid?'" she says. "Yes," he replied.

Today, Potashnik and Southwest Housing are at the center of an FBI investigation into allegations of corruption at City Hall. Federal agents raided Potashnik's Central Expressway offices in June, and a steady stream of news reports have examined his cozy relationships with the elected and appointed officials whose votes could sink or float his developments. Many of his projects have been put on hold as state and local authorities have grown reluctant to enter into long-term deals with someone who could be indicted.

As one of the most successful affordable- housing developers in Texas, Potashnik handily illustrates the virtues and vices of the state's Housing Tax Credit Program, which awards developers federal tax credits they can flip to investors for millions of dollars in instant cash. His fine-looking properties, which have won national acclaim for their design and overall quality, batter the stereotype that affordable housing is a catalyst for urban blight. At the same time, his dealings with public officials have left lingering doubts about how he wins friends and influences people.

"Brian could sometimes be a little arrogant, a little bratty," says Randall Parker, who serves as chief financial officer of Dallas Housing Finance Corp., which has helped fund many of Potashnik's developments. "I guess because he had so many people behind him, including the mayor and the city council, he could get a little big-headed."

No one outside the U.S. Justice Department really knows how an outwardly successful developer became the face of a federal investigation. The chatter around political and legal circles is that Potashnik was too smart to outright break the law, but he operated very successfully in a program that inadvertently encourages developers to push the envelope in their endless dealings with local government. Long before the FBI took an interest in Potashnik, his company etched a reputation.

"My sense is that Southwest is an aggressive developer," says Walter Moreau, the executive director of the nonprofit real estate company Foundation Communities. "They want to build lots of projects every year, and they are going to fight to win approval for those projects."

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