Review of Certain Matters Concerning the Newtowne Nineteen Project in Annapolis, Maryland

Published by the Government Accountability Office on 1971-12-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              ousing and Urban

                             COMPTROLLER     GENERAL        OF Y-HE   UNITED    STATES
                                           MfASl-IINGTON,    DC.   20548


              In accordance       with your request             of July 6, 1971, and
       subsequent    discussions       with your office,            we have examined
       into certain     matters      concerning       the A- Newtowne      Nineteen
                                                                     --,-- Is*F_..-,.     rental-
       housing le_roject,      located     in Annapolis,.-, -...  Maryland,       which     re-
       ceivedTedera1       financial       assistance.           The project        contains
       two sections:       section      I, consisting           of ninety-three         2-l/2-
       story    town houses and section            II, consisting           of 66 apartment

               Our examination     was directed     toward determining        (1) who
       owned the project,        (2) the relationship        and agreement     be-
    ‘B tween Newtowne Nineteen,          Inc.,  the project     mortgagor,     and the.?. ,- _ ’
    2. Boise Cascade Urban Development            Corporation,    an investor      in Y:      I.
       the project,       (3) the monies spent by Boise and Newtowne to
       improve    the project,      and (4) the officials       of the Department
       of Housing and Urban Development            (HUD) responsible       for ap-
       proving    construction      plans and construction       work and for
       granting     permission    to occupy the project.

                   Our review    was made principally        at HUD’s Baltimore      Area.~                 ’
    -’> Office       and included      an examination     of HUD records    and of the
         accounting       records    and financial     statements    of the project
         maintained       by a certified      public   accountant.     We interviewed
         officials       of HUD and Boise and a spokesman for each of the two
       , project      mortgagees --the     Life Insurance      Company of Virginia
         and the Federal         National    Mortgage Association.        In addition,
         we interviewed         Messrs.   Boris    S. Lang and A. John Briscuso,
         stockholders        of Newtowne.


               Newtowne was incorporated         under the laws of the State of
       Maryland      in 1964 to provide      housing    for low- and moderate-
       income families.         The corporation      stock was acquired           by
       Messrs.      Lang and Briscuso      in 1967, at which time the housing
       project     was in the planning       stage.     HUD approved Newtowne’s                     ;;:!I
       applications        for mortgage-loan     insurance    under the below-
       market-interest-rate         program authorized      by section         221 (d)
                                                                      !f ,,I/!

                                     50 TH ANNIVERSARY                1921-    1971

  of the National     Housing Act, as amended (12 U.S.C.        17151) in
  August 1967 for section       I and in June 1968 for section       TI.
  Sections  I and II subsequently       were converted    to the newer
  section  236 program      (12 U.S.C.  1715 z-l)   in January   and May
  1970, respectively.

           Under the section    236 program,    HUD provides   financial
   assistance     by making monthly    payments   to the mortgagee       to re-
   duce to 1 percent      the rate of interest      paid by the mortgagor
   on the mortgage     loan.    The payments by HUD make possible          lower
   rents    to the occupants    of the project.

        Construction       of section      I was completed         in November 1968,
  and construction        of section     II was completed          in November 1969.
  HUD insured      the mortgage      loans for sections          I and II in the
  amounts of $983,600 and $967,300,                respectively.       The firm of
, Annapolis     Brokerage    Associates,        Inc.,   managed the project
  until   October     1970 when Boise,        in an effort       to protect    a
  $125,000    investment     it had made in the project              in January
  1970, assumed responsibility             for management of the project.

         The results     of our    examination     are   summarized     below.


           The legal     owner of the project         was Newtowne,    the project
  mortgagor,      until     September     30, 1971, at which time title         to
  the project      was conveyed to HUD as a result               of Newtowne’s    de-
  fault     on the mortgage        loans.    Although      Newtowne was the legal
  owner of the project,            a controversy      existed    as to who had
  controlling       interest     in Newtowne.       In our opinion,      this con-
  troversy     would have to be resolved            by a court of law.


        The relationship     between Newtowne and Boise was a matter
  of controversy     between Boise and Messrs.     Lang and Briscuso.
  Boise and Messrs.      Lang and Briscuso  claimed    that they did
  not own stock in Newtowne.


        In January       1970 Newtowne and Boise entered                 into two sep-
arate agreements,           one for each section,             which provided       that
Newtowne and Boise form a limited                    partnership      (each party was
to have a 50-percent             interest       in the project)      immediately        fol-
lowing     HUD’s final       approval        of the completed       project    for
mortgage-loan         insurance.         The agreements        were entered      into
for the purposes           of acquiring         ownership     of the project       and
eventually      selling      each of the project            units   as a condominium
with mortgage         loans to be insured            by HUD. As part of the
agreement,      Boise was to pay Newtowne $125,000,                    an amount
needed to pay certain              obligations       of the project.         HUD would
not approve the proposed                selling    price    of the project       units,
and the parties          to the agreements           told us that the limited
partnership      never was formed.

        The agreements     provided    also that (1) Boise have the
right    to designate     a majority    membership     in the board of di-
rectors     of Newtowne,     (2) in the event that 80 percent         of the
condominium      units  were not sold within         1 year or 100 percent
within     18 months,   all the outstanding       capital    stock of
Newtowne be transferred          to Boise,    and (3) to aid in such a
transfer    , all the outstanding       capital    stock of Newtowne be
assigned     to Boise as collateral.

       The attorney     for Boise advised        us that the agreements
were security      agreements    and that under such agreements            Mary-
land law required       the disposal      of the collateral       (in this case
the stock)     through    sale or other means before          the transfer     of
ownership    would be legal      and binding.        Furthermore     the fact
that Boise had taken physical            control   of the stock certifi-
cates,    had designated      a majority     of the directors       of Newtowne,
and had assumed responsibility            for management of the project
did not, in the attorney’s          opinion,     constitute     ownership.

       Messrs.    Lang and Briscuso      informed  us that they consid-
ered Boise the owner of Newtowne because of the provision                in
the agreements      calling    for the stock to be transferred       to
Boise if the project         was not sold as condominiums     within    spec-
if ied periods.       Furthermore    they informed   us that a time ex-
tension   to this provision        of the agreement   had been requested
by letter     dated February      9, 1971, and that,    since Boise had



     not replied,      they    had concluded        that   Boise   had assumed      owner-
     ship of the      stock.


            The financ>al      records    maintained     for Newtowne by a certi-
     fied public     accounting      firm during     the 2-year period             ended May
     1971, showed that about $71,000 had been spent on repairs                            and
     maintenance;      however,    a further     breakdown      showing what part
     of this amount had been expended for improving                      the units      was
     not available.        In addition     to the $125,000         initially        provided
     pursuant     to the agreement,       Boise had provided           Newtowne with
     about $40,500 to meet the project’s               operating       deficits;       how-
     ever, we could not determine            from the accounting             records
     whether   any part of the $40,500 had been used for improvements
     to the project,

            Messrs.   Lang and Briscuso  informed              us that they      had not
     invested    funds for making improvements               to the project.


             HUD records    showed that approvals       of project     site prep-
     aration     and soil   stability       had been made by officials      of HUD’s
     Philadelphia      Regional      Office   and HUD’s Baltimore     Area Office.

             Pursuant    to an agreement         with Newtowne,      the project       ar-
     chitect     had primary      responsibility        for inspection       of construc-
     tion,      The architect       was required      to make weekly inspections
     and to certify        monthly    that the materials         and work met the
     plans and specifications.               The architect’s      inspection       reports
     required     approval     by HUD’s Baltimore          Area Office.        In addi-
     tion,    the Baltimore       Area Office       made periodic      inspections       of
     the project      during    its construction.

           A list    of HUD officials      who approved    the various    phases
     of construction     and occupancy      of the project    units    and the
     dates of these approvals         is included   as the appendix.



           The persons   involved in the matters  discussed                in this
    report   have not been given an opportunity     to review                and com-
    ment on it,    and therefore  this  should be considered                 in any
    use made of the report.

           We plan to make no further       distribution    of this report
    unless     copies are specifically    requested,     and then we shall
    make-distribution       only after  your agreement     has been obtained
    or public      announcement   has been made by you concerning      the
    contents     of the report.

                                            Sincerely    yours,

                                            of   the United       States

    The Honorable  Parren J.     Mitchell
    House of Representatives
                                                                                   APPENDIX I



          HUD officials                Date of approval              Phase approved

    John B. Purinton,      Jr.           Mar.       9, 1965   Final development          plans
    Site Engineer                                             and specifications
    Philadelphia     Regional
       Office    (PRO)                   Apr.      28, 1965   Site   engineering

    Edward Flickinger                    June 17, 1965        Site   development       plans
    Zone Site Planning
      Advisor,    PRO

    Charles Hager                        Nov.      11, 1965   Final working drawings
    Chief Architect                                           and specifications
    Baltimore   Area Office
    Allen T. Clapp                       Unknown              Same as above
    Director, BAO

    Norman Cooper                        Nov.      29, 1965   Same as above
    Chief Underwriter,      BAO

    I. John Previtera                    Mar.      19, 1969   Stability     of foundation
    Structural  Engineer,                                     for buildings      1 and 3

.   F. Porter   Keen                     Various              Weekly project  inspec-
    Architect   Analyst,    BAO                               tion record (section    II)
.   F. Porter Keen                       Various              Monthly    project      inspec-
    Architect   Analyst;                                      tion report       (sections      I
    Charles Hager                                             and II) (included          final
    Chief Architect;                                          inspection      reports)
    Norman Cooper and
       Thomas Farrell
    Chief Underwriters;          BAO

    Messrs.    Clapp, Cooper,            Various              Permission      to occupy
      Farrell,    Hager, and
      Keen, BAO