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Dallas to HUD: Stuff It!

Right after the U.S. Department of Housing and Urban Development accused Dallas last month of massive racial segregation and housing fraud, Mayor Mike Rawlings was all for making nice. That lasted all of two weeks. Now he and the city attorney are telling HUD to go screw itself.

Last month, days after HUD issued a scathing 29-page report on 21st Century racial segregation Dallas -- the result of a four-year federal investigation -- Rawlings told The Dallas Morning News he had already spoken to HUD Secretary Shaun Donovan and that everything would soon be sweetness between the city and the feds.

A story in the News said, "Despite the city's disagreement with HUD on some of the findings, Rawlings said the goal is to do what the agency requires and come into compliance. 'We've got to get this behind us and that's what he and I spoke about,' Rawlings said."

But late last week KERA reporter Shelley Kofler broke a story that Dallas City Attorney Warren M.S. Ernst had sent HUD an even more scathing 59-page letter of retort accusing the agency of cooking the books on Dallas by ignoring exculpatory evidence. The Dallas letter takes a tough confrontational tone, even taunting the agency by accusing it of doing a lousy job enforcing its own rules nationwide.

A day after Kofler's story, Roy Appleton at the News reported that Rawlings had sent his own memo to HUD, apparently accompanying Ernst's letter, taking a very different line from the "get this behind us" theme of just two weeks prior. Appleton quoted the Rawlings missive as warning HUD that its own letter of accusation had included "several incorrect statements and characterizations" and used "selective data to bolster incorrect assumptions."

Echoing what may be the dominant theme in Ernst's letter to HUD, Rawlings told the agency that its accusations "conflict with your department's past endorsements of our actions. In short, we thought we were doing the right thing because HUD told us so."

The city's letter is below. Obviously each of its responses deserves to be taken seriously. I don't think this is a bargaining posture. The two themes that tell me city officials are no longer interested in bargaining or making nice are the city's accusation that HUD does a lousy job nationally enforcing the fair housing law and the accusation that HUD has unclean hands here because its own officials approved many of the practices in Dallas that produced what HUD says is a pattern of deliberate racial segregation. You don't really say stuff like that to somebody you're pitching a deal to.

There's no law that says Dallas has to make nice or that it can't go hardball. As far as winning strategies go, however, this one has issues. For one thing, Dallas has already made all of these arguments to HUD over the course of a four-year investigation, and HUD has already been notably unpersuaded.

The argument that HUD officials in the regional offices in Fort Worth signed off on waivers that allowed Dallas to shortchange its fair housing obligations is especially wobbly, and no one should know that better than Dallas City Hall. I have written about instances where real estate developers in Dallas were assured up one side and down the other by city officials that what they were doing was copacetic, only to learn later they had spoken with the wrong city officials. No government official can let you out of obeying the law.

Federal regional officials are infamous for viewing local governments as clients to whom they have to sell their programs. And it's true that HUD has a lousy history of enforcing fair housing law. So what? The law says if you take HUD money, you have to "affirmatively further fair housing," even with your own money. HUD says we didn't do it. If some dude-Bob in the Fort Worth HUD office said not to worry, we shouldn't have believed him.

The city argues in its response that HUD is using old information and ignoring several notable steps Dallas has taken more recently to desegregate downtown. But the HUD report actually does address some of those more recent efforts and finds fault with them, accusing the city of doing a hurry-up and jam-it-in routine whereby it tried to crowd all its affordable housing into a couple projects -- not at all the idea behind HUD's doctrine of dispersal.

And anyway, all of that was done after the city realized the HUD inquiry was serious. If you embezzle money, and later you know you're about to get caught, you can't get out of it by sneaking back in at night and putting the money back. That's actually an effort to buy off justice.

I see another element in the city's response that I think is just weird. A huge amount of effort goes into an ad hominem attack on Curtis Lockey and Craig MacKenzie, the two developers who went to HUD four years ago and presented findings of their own privately funded 15-month investigation of racial segregation in Dallas. The city seeks in its response to HUD to portray Lockey and MacKenzie as disgruntled cranks, pissed off at City Hall because their own development deal at 1600 Pacific Avenue went south when the city withdrew its approvals and commitments.

Again and again in the response, the city hammers a theme by which Lockey and MacKenzie were a couple of fly-by-nights with no money who deserved to have their deal shot down by the city. Again, this is an argument the city has already made to HUD during the HUD investigation, and HUD has already found the argument to be unpersuasive, in fact a cover story.

But the city letter to HUD goes into it with a vengeance anyway, saying at least a couple of things about the developers that are manifestly untrue. And the city knows they are untrue. The city paints Lockey and MacKenzie as having no history as developers, but in fact the city knows from its own documentation that Lockey and MacKenzie have been involved in 36 percent of all of the multifamily residential redevelopment done in Dallas in the last decade; their development team for 1600 Pacific included an architect who had participated in 43 percent of all downtown housing deals in the decade; their general contractor had been involved in 64 percent of downtown multi-family deals.

The city letter paints Lockey and MacKanzie as bringing absolutely no equity to the deal and trying to finance their entire venture on the back of government subsidies. But city officials know that is not true.

On May 27, 2009, Dallas Economic Development Director Karl Zavitkovsky emailed Assistant City Attorney Chris Bowers and told him, "Project has $11.5 million of first mortgage bank debt which is maturing and $9 million of investor equity which is unhappy."

Let me translate that for you. This is in a period of time after Lockey and MacKenzie had informed city officials they intended to include more affordable housing units in their project than Dallas officials wanted to see. It's also when Lockey and MacKenzie say Zavitkovsky and Dallas Housing Director Jerry Killingsworth started playing games with them, offering help here, taking it away there, sending them back and forth as a stall.

Why would they stall? Maybe the May 2009 email offers an answer or at least a big fat hint. In it, Zavitkovsky is telling Bowers that Lockey and MacKenzie have a commitment from a bank for $11.5 million that is about to expire and also that the private equity investors who have pledged $9 million to the project are "unhappy."

In the email, Zavitkovsky is assuming the deal will die. He is also telling the lawyer that Lockey can be expected to sue. And he says for how much. "The claimant will likely seek $30 M+ in damages," Zavitkovsky says.

He was right about the suing. He was way low on the how much.

Again, the city has already argued the merits of the Lockey/MacKenzie deal with HUD. By painting Lockey and MacKenzie as deadbeats, city officials ignore the fact that when the pair first showed up with a deal to redo 1600 Pacific, HUD had already granted them a $52 million hard commitment to help finance their project. So HUD had scoped them out, gone over their financials with a fine-toothed comb, run the kind of credit check only the federal government can do and decided these were two guys who could be trusted with $52 million in Uncle Sam's money. You can believe there was serious due diligence before a deal like that got inked.

And then there is this. It's all irrelevant. In the time period HUD looked at, basically from 2000 to 2010, even the city's own documentation and briefings to the council showed that City Hall was telling a tale of two cities, one the so-called "Southern Sector" and the other one, well, that one never quite gets its own name, does it? But it's the white sector. The city staff's own briefings to the city council showed that in a 10-year period 80 percent of all new subsidized affordable housing built in Dallas was built in the un-white sector.

That's the problem. The rest of it is all nitpicking around the edges. The reality is on the ground, and it cannot be argued off the ground. The HUD complaint is based on a finding that Dallas officials, whatever their reasons may be, think in terms of two cities divided by race and deliberately prosecute policies that reinforce that division.

We are by far the biggest city HUD has ever launched this kind of accusation against. This case will be a major national test for HUD. If Dallas can back HUD off this easy, then nobody else in the country should ever have to worry again about a HUD enforcement action.

But I don't think Dallas is trying to bluff anybody. That's not the tone of this letter, nor is it the mayor's tone. I think the mayor and the city attorney's office and maybe most of the City Council want this fight and are willing to take it to the Supreme Court. If so, this will be a battle in the national spotlight, not that that should be a deciding factor.

Me, I'm stocking up on popcorn and dusting off my folding chair. This is starting to look like a good one. Real good.

198501699 Letter From City of Dallas to HUD by Schutze


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