An article in yesterday's Business section incorrectly included William Boucher III and Neil J. Ruther as investors in the Strathdale Manor apartment complex. Mr. Boucher and Mr. Ruther informed The Sun yesterday that they did not invest in the project and that they were not part of the development group.
The Sun regrets the error.
For the third time in 15 years, the Strathdale Manor apartment complex in East Baltimore is slipping toward financial failure, its owners unable to save the low-income housing project from foreclosure.
The scene has been played before, as owners, faced with escalating crime and vandalism and high vacancy rates, were unable to support Strathdale, the largest and weakest rental project in an otherwise stable East Baltimore community.
But this time is different. This time, the pending foreclosure of the 670-unit apartment complex represents the costliest failure of public housing in Maryland history.
Although estimates vary, the state will likely lose every dollar it sank into Strathdale -- more than $16 million -- and by all accounts, it has only itself to blame.
"This thing is the biggest goof-up that the state has ever done," said Baltimore developer Otis Warren, whose company has managed Strathdale for a court-appointed receiver since 1992.
Baltimore City and Maryland National Bank (now NationsBank) stand to join the list of losing investors.
The housing debacle has drawn in more than $25 million in the past six years from public and private sources, with nothing to show: The project is in worse shape and has even fewer tenants than in 1988, when the Strathdale deal was consummated.
More importantly, the expected losses on Strathdale -- combined with several previous housing failures -- could erode the Department of Housing and Community Development's ability to pursue its mission: to foster the construction, rehabilitation, ownership and occupancy of housing for low- and moderate-income people.
"We lost our shirts -- plus -- on this one, and the reason we are foreclosing is we have no interest in further financial investments," said Jacqueline S. Rogers, secretary of the housing department since 1987.
Critics of the Strathdale arrangement say there were plenty of warning signs.
Even before the deal was approved in 1988, housing officials found that the politically connected development group seeking the loan might have had less construction management experience than it claimed.
Further, the size, complexity and novelty of the deal should have suggested caution before committing to a $14.3 million loan, among the largest the state housing department ever made. But housing officials ignored their own policies for completing background checks on the group, and neglected to obtain adequate guarantees before approving the deal in August 1988.
Ms. Rogers, who will leave office at the end of Gov. William Donald Schaefer's term, acknowledged the problems. "I think we probably performed inadequately, and the record testifies to that," she said.
"If you're looking for wickedness, you're not going to find any," she added. "You're going to find lots and lots of ineptitude. But you're not going to find any wickedness."
Built in 1963, the 50 two-story buildings that make up the former East Ridge Apartments have had more than their share of troubles. They have changed hands numerous times, fallen into bankruptcy twice, been the subject of hundreds of housing violations and suffered a sharp rise in vandalism and crime.
Even so, the complex, which sits in a strong rental housing community called Cedonia, was still regarded as an important asset in the city's low-income housing market. So, after the former owners abandoned the project and declared bankruptcy in 1986, city officials urged the state to look closely into helping salvage it.
What resulted was a novel and complex arrangement.
Despite its rocky history, poor condition and a state tax appraisal at the time of only $2.1 million, a group led by Andrew H. Kaufman, a New York residential and retail developer newly moved to Baltimore, stepped up to buy the project.
The group -- which included William Boucher III, former head of the Greater Baltimore Committee; Baltimore attorney Neil J. Ruther; and the late state Sen. Harry J. McGuirk -- paid almost $8 million to the bank for the development, which was renamed Strathdale Manor Apartments.
To close the deal, Mr. Kaufman asked for $14.3 million in state financing to pay off his acquisition debt and help renovate the project. Mr. Kaufman planned to lease the apartments at market rates ranging from $275 to $410 a month, relying heavily on federal Section 8 rental assistance grants to individual tenants.
The plan was attractive to the housing agency, which saw it as a chance to cure a "blighting influence" on an otherwise stable community, according to a 1988 housing department memo explaining the project.
To provide the enormous amount of money needed, the housing department turned to two of its agencies: the Community Development Administration, which provides financing, often in the form of tax-exempt state bonds; and the Maryland Housing Fund, which provides loan guarantees for projects sponsored by the CDA and others.
The Community Development Administration (CDA) had built a reputation by the mid-1980s as one of the nation's most active low-income housing finance agencies.
But the Strathdale financing proposal was unusual by any standards. It called for public investments totaling more than $15 million, including $1 million from a federal housing grant provided through Baltimore City, and the $14.3 million loan from the CDA.
Mr. Kaufman's group added some of its own money to the pot: about $285,000 in cash, and $2 million in letters of credit from Alvin Sherman, a retired developer living in Florida who was part of the group.
(Mr. Boucher and Mr. McGuirk dropped out of the Strathdale project soon after it was launched. Mr. Ruther also dropped out, but remained counsel to the partnership. The trio that ultimately carried out the project were Mr. Kaufman, Mr. Sherman and John Chase, another partner.)
The proposed CDA loan, which was to be financed by the sale of a unique form of tax-exempt bonds, broke new ground in several ways. It was the third-largest deal the CDA had ever completed. And it would have exceeded the department's own loan-guarantee limit, which is intended to protect the Maryland Housing Fund from a single large claim.
To accommodate the limit, the housing fund guaranteed $10.7 million of the CDA loan, and Maryland National Bank agreed to guarantee the remaining $3.6 million. But Maryland National insisted on being the first paid in case of foreclosure, which ended up leaving the state with very little collateral should the project ultimately collapse.
"That was the first time we'd ever done shared insurance," Ms. Rogers said. "Of course, we did it dumb. It was our first time, and instead of ending up with a financing where we pro-rated the risk, we took the top risk and [Maryland National] took the bottom risk."
But "the staff were really excited about doing that" unique financing package, she explained. "I mean, if you're a technician and you have your fingers around some exotic new structure, it turns the finance wizards on."
Criticism over the way the deal was handled began surfacing almost immediately:
The housing department's files show that as early as six months before the loan was settled, the department's "personnel believed that the proposed agent may not have had adequate managerial experience," state auditors said in their 1992 report.
In fact, the audit chided the CDA for failing to obtain such standard items as:
* All of the required financial statements from Mr. Kaufman's group.
* Adequate personal guarantees from the borrowers to ensure that the construction work would be completed.
* Complete project plans and specifications before the loan was approved.
* The names of the subcontractors slated to perform 80 percent of the work.
It took less than three months for serious problems to develop. An internal housing department memo shows that by December 1988, the state had begun to question Mr. Kaufman's ability to complete the project.
After a review of the site, Maryland Housing Fund officials wrote to then-CDA Director Trudy P. McFall that "the developer appears generally absent from, and disinterested in, the project. The construction manager seems confused about what it will take to complete the project."
The memo went on to urge the CDA to replace the management team and institute strict controls over Strathdale's renovation.
Despite those memos, Ms. Rogers said she doesn't recall
hearing strong arguments from her staff to remove the developers.
But another reason for dragging it on so long, she acknowledged, was the fear that it would be "a huge embarrassment -- as it's become -- when the moment comes when you have to admit that you've got to pay an $11 million insurance claim, and the money's gone. That's painful."
Besides, Ms. Rogers said, her role as secretary was to manage the overall department, leaving the details to her staff.
Ms. McFall, who declined to speak about specific details of Strathdale, disputed that characterization. Ms. Rogers "was virtually directly involved in all the different phases of this project," she said.
Indeed, Ms. McFall said, during her 13 years as director of the financing agency, "no project that CDA ever financed had the kind of direct involvement by the DHCD secretary, and the general counsel, and the staff " as Strathdale.
It took another year and a half for the department to force the project into receivership. By then, according to court documents, Mr. Kaufman's group had:
* Spent all its construction money, but was nowhere near completing the renovations.
* Failed to make the required interest payments, hadn't fully paid its subcontractors and suppliers, and couldn't account for how it was spending the rental income.
* Neglected to provide security guards, which led to almost $200,000 worth of vandalism and theft.
Mr. Kaufman did not respond to a letter and repeated calls seeking comment.
The court took the project out of Mr. Kaufman's hands in July 1990, and appointed a receiver.
Over the next four years, the state and the city pumped $7.9 million more into the project, while collecting on the Sherman letters of credit.
Finally, in May, the housing department declared the loan officially in default, leading the CDA to collect its loan guarantees from the housing fund and NationsBank.
Then, two months ago, the court authorized the foreclosure of Strathdale, which would allow a possible sale to another party, and a new lease on life for the East Baltimore project and its tenants. The housing department says it is negotiating with the two bidders, and wants to avoid a "sale on the courthouse steps," as Ms. Rogers put it.
The department has little hope of recouping anything from Strathdale. The city is first in line for repayment, with more than $1 million in tax liens, and NationsBank has the next claim on its $3.6 million loan guarantee. No one expects the state to receive much of the more than $16 million that it has spent altogether on the project.
But the state's housing losses this year don't end with Strathdale. The failure of the Renaissance Plaza apartments in Reservoir Hill cost the housing fund $7 million this year. And a third failed project near Hollins Market in Southwest Baltimore is expected to cost the department almost $2 million.
Together, the losses have hurt the housing department's ability to finance and insure large low-income projects. In fact, the Maryland Housing Fund insured only $16 million this year in new multi-family loans, down from $74 million last year and $68 million the year before.
Strathdale "is a project that is depleting the Maryland Housing Fund of needed resources," said Del. Howard "Pete" Rawlings, a Baltimore Democrat and a member of the Maryland Housing Policy Commission, an advisory board to the department. "And it is because of that problem that the Maryland Housing Fund is perceived as not being in its strongest financial condition."
Ms. Rogers said she plans to ask the General Assembly for money to replenish the Maryland Housing Fund's reserves for the first time since she took office seven years ago.
But, she said, the department has vastly improved its underwriting and management capabilities in the past few years.
Given the number of housing projects the state does each year, and their inherent risks, some argue that a few large failures are an acceptable cost of business.
"The fact that we stepped up to the plate in Maryland to pick up some of the shortfalls left by the Reagan and Bush administrations is a tribute to Maryland," said J. Joseph Clarke, chairman of the housing policy commission, and husband of Mary Pat Clarke, president of the Baltimore City Council. "If the price of that is two [failed] projects, I'll take it," he said.
For residents of Strathdale, however, the protracted slide downward has been more difficult to accept.
"It's livable, but it isn't like we want it to be," said Marvin Singletary, vice president of the Strathdale Community Association.
"We're working to keep the drug dealers out," Mr. Singletary said, standing outside his second floor unit, one of the few in the entire complex whose balcony is lushly decorated with house plants and flowers. "They renovate the place," he added, "and as fast they renovate it, it looks like some people try to destroy it."
Mr. Warren, the current property manager, tried but was unable to buy the place last year in partnership with a division of the National Association for the Advancement of Colored People. He and another developer are now bidding for the chance to take over the property.
But to recoup its losses, the state must find someone willing to pay more than $20 million for a mostly vacant and still rundown set of buildings worth somewhere between $2.5 million and $7 million, according to various appraisals.
"I think most people in this department believe that we will get very little back," Ms. Rogers said.