Developers Create Shadowy Stores

Tuesday, September 29, 2015

Developers Create Shadowy Stores Trying to Win Millions

By John Dorschner

    Well before they were charged with criminal activities, the leaders of two South Florida affordable housing companies were caught creating shadowy grocery stores and even an ersatz library in attempts to get millions in complex tax credits.
    The actions of leaders of Biscayne Housing Group and Carlisle Development Group reveal how complex and competitive are the efforts to get money from the Florida Housing Finance Corp., the state agency that administers the federal low-income housing tax credits for affordable housing -- a crucial issue in Miami-Dade where about 495,000 households are in desperate need for affordable housing, according to the University of Florida.

A developer labeled a door on the second floor "Grocery Store". Source: Google

    In the recent criminal cases, Matt Greer of Carlisle and Gonzalo DeRamon and Michael Cox of Biscayne Housing pleaded guilty earlier this month to charges that they schemed to inflate the construction costs of affordable housing and then profit from secret kickbacks.
    In order for such schemes to work, developers first had to win awards from the FHFC to get tax credits -- and there's huge competition for such awards, which can run $20-million plus for an affordable housing project. 
    Applicants boost their chances for credits by scoring well on the lengthy list of FHFC measurements, gaining points for how close the proposed development is to transit stops, grocery stores, drug stores, clinics and libraries under the assumption that the poor might not have cars to drive to these places.

                             Years of Whac-A-Mole

    The requirements have gotten increasingly complex over time because the FHFC keeps struggling to close loopholes.  "Every single word has blood on it," says Hugh Brown, FHFC's general counsel.

    He says the agency has been playing "years of Whac-A-Mole" with developers who keep devising ways around existing regulations. 
    In 2011, developers "were pulling grocery store shenanigans all over the place," Brown says. "We were seeing a lot of squirrelly stores."
Hugh Brown

    At the time, FHFC defined a grocery store as "a retail establishment, open to the public ... consisting of 4,500 square feet or more of contiguous air conditioned space available to the public," selling "foodstuffs, fresh and packaged meats, produce and dairy products, which are intended for consumption off-premises."
    Brown says Biscayne Housing pulled out a particularly elaborate plan, to create a grocery store on the second floor of 100 S. Miami Ave.  
    Cox of Biscayne Housing rented a dingy space above an Italian restaurant. Biscayne Housing called it Downtown Miami Grocery on its 2011 application to bring affordable housing to downtown Miami.
    Competitors for the tax credits often examine each other's applications carefully, and at least one suspected that something was wrong with this alleged grocery store. 
Door leads to stairs to alleged  grocery store

    Documents started flowing to FHFC. Downtown Miami Grocery had obtained a "Certificate of Use" as a "Grocery -- Retail" but did not obtain a food license as required or a resale tax certificate -- both of which were required for the store to sell food, according to an administrative complaint later filed by FHFC against Biscayne Housing.
    Cox's lease was for six months. Photographs of the grocery -- apparently provided by competitors' investigators -- "reveal an almost empty space, containing three upright coolers, a few boxes of produce, a shelf limit containing a few loaves of bread and a meat cooler with prepackaged meat bearing Publix Supermarket pricing labels, with Downtown Miami Grocery labels stuck on the packages," according to the FHFC complaint.
    The complaint stated that two employees of Govinda's Garden restaurant on the first floor said that the "food market" was apparently open only for a few weeks in January 2012, and when they tried to purchase milk there in January 2012, "they were told that the store was closed, and that two women would stand in the door and tell anyone who attempted to enter that it was not open for business.     "The restaurant employees stated they never saw regular traffic at the 'food market,' and described the interior as big, with empty shelves and little to no merchandise," according to the FHFC complaint
    By March 2012, the space had been vacated.
500 W. Flagler Grocery Store
A similar scenario unfolded at 500 W. Flagler, to benefit another Biscayne Housing proposal: Cox signed a six-month lease on the space. "Residents and workers in the neighborhood confirm that the Flagler Street 'food market' was open only for a brief period in January 2012, but that they were told by two women at the site that the store was closed and not selling anything." 
    Photographs taken on March 5, 2012, "reveal an almost completely bare building, with two bare plywood bins similar to those used to hold small amounts of produce. ... Large pieces of air conditioning duct work are in the middle of the floor."
      The case of the invented library was less elaborate, says Brown, the general counsel. 
    Carlisle Development called a store front a library. Brown recalls that its contents consisted of one of the Carlisle principals collection of old Architectural Digests.
       "We flunked that deal," Brown says, after rivals' investigators sent the agency photos and details of the library. 
    In the Carlisle case, the company abandoned that application,  Brown says, but Biscayne Housing fought strenuously and in 2012, FHFC filed an administrative complaint against it, charging each grocery store was a "sham" and that Biscayne Housing had "committed fraud and/or material misrepresentation."

                                    Regulations Changed

    Biscayne Housing responded that it was playing by FHFC's own rules and the stores had been open at the time of the application, which is all that mattered.
    The developer showed that it had obtained all necessary licenses and permits to sell groceries.
    FHFC decided it didn't have a case. "We couldn't prove fraud," Brown says, because the agency's rules weren't specific enough. 
    FHFC dropped its administrative complaint with a consent decree, conceding "there is no wrongdoing committed by any party or employee of any party in the matters addressed in this action."

    The state agency, whose board is appointed by the governor, then  changed its rules so that places like nearby grocery stores that were not part of major chains had to be open for at least six months before the application was submitted.
    None of these three deals with Biscayne Housing or Carlisle received the coveted tax credits, but the two developers kept filing applications and winning awards for other projects, gaining tens of millions of dollars. 

           $30 Million Alleged in Hidden Kickbacks
    Earlier this summer, federal prosecutors charged the firms' leaders with conspiracy to commit theft of government money -- about $30 million in hidden kickbacks siphoned off of 10 low-incoming housing projects. Several principals in the developer companies and the construction companies pleaded guilty. Lloyd Boggio, a Carlisle principal, is awaiting trial.
    Doug Mayer, an affordable housing developer who works with nonprofits, called the criminal scheme “Robin Hood in reverse” – stealing money intended to help the poor and giving it to rich developers and contractors. 

    Mayer noted that $30 million apparently lost in the scheme could have built two affordable housing apartment buildings in Dade.
    Matthew Rieger, chief executive of Housing Trust Group, a Coconut Grove developer that does much affordable housing, says the scandal "has a negative impact" on the affordable housing industry in general, bringing "an extra scrutiny and extra skepticism" to a process that is already complex.
    Earlier this month, when Greer pleaded guilty, the U.S. Attorney's Office in Miami issued a press release saying $9 million had been seized from Greer and he promised to give back another $7 million prior to sentencing in November.
    A Miami Herald story on the guilty pleas noted that the recovered millions had been sent back to the U.S. Treasury, not to FHFC, where they could have been redistributed for housing for the poor. 
    The U.S. Attorney's Office in Miami didn't respond to a request for an explanation on why the recovered funds weren't dedicated to lower-income housing.

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