Dallas Fudges Numbers to Put HUD Money in Favored Pockets

From this rag and that bit of bone, a picture emerges of what Dallas has really been doing with hundreds of millions of dollars in federal housing money all these years. It's not a portrait of theft or castles in Spain, but it's not a pretty picture.

Instead what we see emerging from mists of secrecy is an entrenched system of political patronage in which the city bends rules and maybe even fakes things up a bit in order to channel federal money into favored hands. The city argues it isn't doing anything wrong or bad. The U.S. Department of Housing and Urban Development says it's plenty wrong, and it wants its money back.

You may or may not remember some stories Eric Nicholson and I were doing last winter on a housing project called "Patriot's Crossing" across Lancaster Road from the Dallas VA Medical Center. We told you how the city, acting as lender, wrote checks to developer Yigal Lelah to finance his purchase of lots in two city blocks across from the hospital. The consistent theme was that the city loaned him amounts twice what he really paid for the lots.

In 2009 the city loaned Lelah between $4 million and $5 million to buy two entire city blocks, paying an average of $13 a square foot for land that county appraisals said was worth $1 a square foot or less. But that didn't mean Lelah was putting the excess in his pocket. Not exactly, anyway.

Lelah paid $120,000 for one property, for example, that should have gone for $50,000 or less. On closer examination, however, federal loan documents showed that the seller got way less than $120,000 from Lelah. Tacked onto the sale price — and fully financed by HUD — were add-ons including $3,612 to an unnamed person for an unnamed purpose, payments of $6,500 and $22,050 to an architectural firm and a payment of $24,768 to another person for an unnamed purpose for a total of $56,930 in selling expenses not including closing costs or title insurance. All this for a lot that would be bulldozed and is a weed-clotted patch of dirt today, five years later.

At the time Nicholson and I were doing our reporting, the city either grudgingly conceded our numbers were accurate or declined to talk about it at all, but they never gave an explanation for the overall phenomenon, leaving unanswered the question typically represented on social media as WTF.

In the last few weeks, another City Hall story has unfolded to provide a window on the WTF question. A month ago an anonymous commenter on our news blog, clearly a City Hall insider, commented that the HUD Office of Inspector General was in the house at City Hall and that Dallas already had been forced to pay back hundreds of thousands of dollars in federal assistance to HUD. Dallas City Council member Philip Kingston saw the comment and went to work papering city management with questions about whether it was true and, if so, why.

After a process Kingston described as extremely frustrating, the city manager finally released to him a series of communications between HUD and City Hall regarding more than $800,000 the city has paid back to HUD in a roughly one-year period.

The correspondence covers five different program areas in which HUD said Dallas had misspent federal money. All are intriguing, but one is especially interesting because of the light it may shed on WTF.

HUD inspectors have been in the house at City Hall because of the Curtis Lockey segregation complaint against the city. Lockey is an apartment tower developer who accused the city five years ago of misusing federal funds and engaging in an under-the-table policy of deliberate racial segregation.

HUD conducted a four-year investigation of Dallas' housing policies and concluded that Lockey was telling the truth and the city was lying. Since then the HUD inspector general has been auditing all of the city's programs that use HUD money.

People close to the HUD investigation tell me that the paybacks revealed by our anonymous commenter — a secret not disclosed to the City Council until Kingston insisted on answers — probably are a scant down payment on what this scandal will cost Dallas before it's done. Dallas spent hundreds of millions of dollars in HUD money in the period investigated by HUD, and any settlement will involve paying back a significant chunk of whatever HUD decides was misspent.

A relatively small item among the five problem areas revealed in the documents provided to Kingston was for $67,811. HUD said the city had misspent it on a redevelopment project in South Dallas carried out by former Dallas City Council member Diane Ragsdale through her nonprofit housing agency, Innercity Community Development Corp. or ICDC. The city used HUD money seven years ago to fund Ragsdale as developer of 11 city lots on the site of the old Frazier Courts Public Housing Development, demolished a decade ago.

Ragsdale told City Hall she was going to pay an average of $26,500 each for the 11 lots — their value as appraised by the county appraisal district for property tax purposes. The city provided her $291,500 to cover all 11.

According to HUD and to people I have spoken with in the nonprofit housing field in Dallas, normal practice would have been for HUD to send the check or checks covering the $291,500 to the title company handling the property closings. But City Hall sent the check to Ragsdale.

When HUD asked the city why it had sent the check to Ragsdale instead of to the title company, the city responded that it knew of no law requiring it to send the check to a title company. But HUD had a reason for asking.

When HUD IG investigators audited the property transactions, they found that Ragsdale's ICDC had indeed cashed the check for $291,500 but had only paid $223,688 for the property. The money City Hall had to pay back was the delta between what the city gave ICDC as a loan to buy the properties and what ICDC actually paid.

The other developer at Frazier Courts, Dallas Area Habitat for Humanity, developed 40 lots with new single-family homes. Habitat CEO Bill Hall told me that their check from the city for $1,060,000 went straight to the title company.

"Any time we buy land through the city and city is funding that land through their money," Hall said, "it always goes to the title company."

Hall indicated Habitat wouldn't want to have the money handled any other way. Later in a 20-minute conversation, he said, "We were kind of shocked to find out she got a $70,000 or $80,000 payment. Not that we were upset with it. We just didn't know that that was happening, because it didn't happen with ours."

Ragsdale provided me with a detailed list of design and lobbying services that ICDC performed for the project that were compensated by the $67,000 ICDC paid itself out of the city's check. The city has vigorously defended the payment to Ragsdale, arguing that she earned the money and that the sellers were satisfied with the payment they received.

HUD, on the other hand, said the city told HUD it was using HUD's money to buy land, not to pay for consulting services. HUD insisted the city pay back any money that wasn't used to purchase land, and the city wrote a check for it.

Another nonprofit housing developer who would speak to me only on a not-for-attribution basis explained that this is all about getting people into the property development business who aren't in the property development business. The fees charged by Ragsdale were at the very high end of fees most developers would charge, he said, but not outside the bounds of reasonable costs. The difference, he said, is that most for-profit and not-for-profit developers get half or all of those fees only at the back-end of a development process when the developed property sells. Ragsdale got hers upfront, as did Lelah at Patriot's Crossing and who knows how many more.

My source said the pattern the Observer spotted at Patriot's Crossing and again in the Ragsdale Frazier Courts venture was an indication the city was trying to find creative ways to bankroll people who didn't have the cash-flow or the credit to do a development on their own and wait until the end for their fees.

He mentioned several dangers in burying the development fees in the land costs, the most obvious one being Patriot's Crossing, where the developer has already collected huge fees but years later not a stick has been turned toward actually doing the development. The good news about Frazier Courts and ICDC is that ICDC did the work, got its 11 houses built and all are now occupied.

The mischief, my source said, is in fudging land costs and fudging the credit-worthiness of would-be developers, and the question is why. Why do it? Hall told me Habitat typically waits for developer fees until a project has sold, and they often finance their own projects without any city money at all.

My question (not Hall's) would be this: If Habitat was standing right there at Frazier Courts with an ability to do 40 houses with no upfront fees, why bring in someone else who needs all kinds of bending-over-backward fudging-the-HUD-docs help just to get started?

Would the city do that for you?