ousing and Urban Development L COMPTROLLER GENERAL OF Y-HE UNITED STATES MfASl-IINGTON, DC. 20548 B-167637 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 units. 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. BACKGROUND 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 I applications for mortgage-loan insurance under the below- market-interest-rate program authorized by section 221 (d) *- ‘$p. !f ,,I/! 50 TH ANNIVERSARY 1921- 1971 B-167637 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. OWNERSHIP OF THE PROJECT 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. RELATIONSHIP BETWEEN NEWTOWNE AND BOISE 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. 2 B-167637 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 3 ‘e B-167637 not replied, they had concluded that Boise had assumed owner- ship of the stock. IMPROVEMENTS MADE TO DWELLING UNITS 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 APPROVAL OF VARIOUS STAGES OF 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. 4 l B-167637 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 WHOAPPROVED VARIOUS PHASES OF CONSTRUCTION AND OCCUPANCY OF PROJECT UNITS 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 CBA01 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 PRO . 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
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)