St. Aidan’s Shell Game.
By Jim Conley • Dec 17th, 2007 • Email This Post to a Friend •
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The more I learn about the St. Aidan’s housing project, the more it looks to me like a scam.
It’s not clear to me that meaningful affordable housing will result from the public investment of $6 million [see previous post]. And now there’s another development that doesn’t pass the smell test.
In an October 19th memo [read memo here] on “The St. Aidan’s Legal Structure”, a lawyer (Stephen Nolan of DLA Piper) for the Boston Archdiocese lays out a convoluted ownership scheme for the improved properties (should they ever be constructed) at the shuttered church site.
In the memo, there is reference to an ownership entity called “Rental LLC”, a legal shell with the Archdiocese’s development arm as owner…until an unnamed investor purchases it. Now, up-for-sale to investors will be 16 rental units (qualifying for the low-income housing tax credit) in so-called “Building D” of the project. Even though initial plans called for that building to consist of 36 home ownership units, somewhere along the line the project morphed (in part) into a low-income rental project (most likely to lure investors to the cash-strapped boondoggle).
In the legal structure memo we find this passage:
The sole member of the Rental LLC during the development phase will be St. Aidan’s, Inc. (the “Manager”), a wholly-owned subsidiary of Planning Office of Urban Affairs, Inc. (”POUA). At the time the rental units are placed in service, an affiliate of MMA Financial will be admitted as investor member pursuant to an amended and restated operating agreement the form of which will be negotiated prior to the construction closing. The Manager will then convert to a 0.01% managing member of the Rental LLC.
Who will benefit from the public funds thrown at the project? We may never know, given the lack of transparency in real estate ownership in Massachusetts. But we do know that a corporate entity will be profiting from the project (in the form of tax credits and operating income) thanks to $6 million in public funds under the control of the Brookline Selectmen.
An aside: I’m not sure the project was permitted to operate rental units under the comprehensive permit issued by the ZBA. But more on that later.
The St. Aidan’s project was initially sold as a means to bring home ownership opportunities to families who were priced out of the Brookline real estate market (with selectmen promoting the project as police and firefighter housing). Now St. Aidan’s is a housing project with phantom corporate investors creating shell legal entities to collect low income housing tax credits.
And if you think that you’re going to sell million dollar condos in the church building under this scenario (as the selectmen and Archdiocese think they are), you’re just plain nuts.
Update: I asked the town’s planning director and the church’s developer Lisa Alberghini for more clarification on the Rental LLC and the identity of the corporate investors who will assume ownership units. As typical, no response was made.
Jim Conley is publisher of On Brookline.
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I read with care the “St. Aidan’s Legal Structure” memorandum prepared by Stephen M. Nolan, Esquire, of the international DLA Piper law firm. Unfortunately it does not disclose the interests of the Town with respect to its $6 million investment once the project is complete, raising a number of questions and issues:
1. Is the Town’s $6 million investment, or some portion thereof, to be repaid? If so, how much, when and from sources, as well as with any return on this investment and security therefor?
2. If only a portion of the Town’s $6 million investment is to be repaid, will the balance be a subsidy, contribution or gift, and if so, who would be the beneficiaries: the developer; qualified first time buyers of affordable units; the tenants of affordable rental units; the corporate investors (via MMA Financial*) that will acquire the rental units qualifying for low-income housing tax credits; others?
Presumably the contractor will get its full price as it is not in the business of subsidizing the construction of affordable units (whether rental or for sale). The developer will be subject to certain profit limitations under the regulations governing Chapter 40B with respect to the affordable units. Corporate investors will be competing price-wise to invest in the rental units because of the valuable tax credits available. (Tax credits can be much more valuable than tax deductions.) To what extent will subsidization be required, whether by the State, our Town or others so that the project may be completed?
I understand that the legal documentation for the project with the proposed legal structure may stack up close to two feet high, creating plenty of legal work for DLA Piper to bill “around the clock” as suggested in its full page ad in the Dec. 1-7, 2007 issue of “The Economist” which boldly states: “THE SUN NEVER SETS ON THE LAWYERS AT DLA PIPER,” all 3600 of them in 25 countries. To what extent may the Town be subsidizing DLA Piper’s fees? Of course, this could a pro bono assignment for DLA Piper.
With the above background, I wonder if our Selectmen and pertinent Town agencies had from the “git-go” a “roadmap” for the decision to make the Town’s $6 million investment and an idea of what the interests of the Town would be in the project through its completion? If such a “roadmap” existed, it should be made publicly available to measure the financial wisdom of our Selectmen. $6 million is not chump-change. (If it were, there would be no talk of an override for next year.) Was the Town’s investment of $6 million from its affordable housing trust fund wise? Is it secure?
*Google “MMA Financial” for information on that firm’s business.
I couldn’t resist Archie’s challenge to have a closer look at MMA (Municipal Mortgage and Equity; NYSE Ticker: MMA), the project’s equity investor.
I wonder if Planning Director Jeff Levine reviewed the recent financial statements of the project’s equity investor, MMA, prior to determining that the project was financially feasible.
Oh, but he could not have, because MMA has not filed any 10Qs or 10Ks in over a year.
Below is the company’s explanation for its failure to file financial statements (quoted from MMA’s 12/31/06 SEC Notification of Late Filing).
Essentially, what this legal mumbo jumbo says, is that the company’s accounting systems are broken. The last paragraph below reveals that the problem affects in particular the kind of transaction MMA is doing for our Town’s project.
Folks, I must reiterate, I do not oppose this project. I am sure I could have helped out if I was ever asked.
…………………………………………..
“On September 7, 2006 the Audit Committee of the Board of Directors of the registrant concluded, based upon the recommendation of its management, that certain previously filed financial statements covering the fiscal years ended December 31, 2005, 2004 and 2003, and the quarterly periods within those years, and the quarterly period ended March 31, 2006 (the “Affected Financial Statements”) should be restated to reflect adjustments to correct certain errors therein and summarized in the Current Report.
“As a result of the dedication of significant management resources to these restatement efforts, the registrant was unable to file its Annual Report on
Form 10-K for the year ended December 31, 2006 within the prescribed time period.
“Management has previously determined that as of December 31, 2005 the registrant’s internal controls over financial reporting were not effective due to the material weaknesses disclosed within item 9A of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005. In connection with the restatement of the Affected Financial Statements, management has evaluated the impact of these accounting errors on the effectiveness of the registrant’s internal controls over financial reporting as of December 31, 2005 and determined that the misapplications of generally accepted accounting principles noted in the Current Report were further instances of certain of the material weaknesses previously identified as of December 31, 2005.
“In addition to these material weaknesses and the material weakness described in the registrant’s Form 12b-25 with respect to its Quarterly Report on Form
10-Q for the quarter ended September 30, 2006 (related to policies and procedures over the accounting for certain of its employee benefits), since the date of the filing of that Form 12b-25 the registrant has identified additional material weaknesses in its internal control over financial reporting:
“1. The registrant did not maintain effective policies and procedures over the accounting for accrued expenses. Specifically, it did not properly accrue professional services costs in the period in which the services were rendered. In addition, the registrant erroneously accrued costs for legal contingencies for which the risk of loss was not both probable and reasonably estimable;
“2. The registrant did not maintain sufficient preventive internal controls to ensure that it complied with its contractual agreements; and
“3. The registrant did not maintain effective policies and procedures over the identification of entities requiring consolidation. Specifically, we have determined that we are required to consolidate certain entities not previously consolidated. The determination to consolidate these entities, primarily tax credit equity funds of which we are the sponsor, results from our conclusion that we are the primary beneficiary of a variable interest entity, or, we are the general partner of a partnership and we do not overcome the presumption of control of the partnership since the limited partners have neither kick-out rights nor substantive participating rights.
“These control deficiencies resulted in misstatements of our financial statements and more than a remote likelihood that a material misstatement of the registrant’s annual or interim financial statements would not be prevented or detected. Accordingly, management of the registrant has concluded that these control deficiencies constitute material weaknesses.
“In addition, the registrant has identified additional errors in the accounting for the tax credit equity business, which was previously disclosed as a material weakness within item 9A of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005. The registrant did not maintain effective policies and procedures over the accounting for tax credit equity fund start-up costs and costs of acquiring investments in partnerships. Specifically, it:
“* Did not expense start-up costs as incurred as required by AICPA Statement of Position 98-5, Reporting on the Costs of Start-up Activities; and
“* Incorrectly classified costs of acquiring investments in partnerships developing affordable housing projects as required by Statement of Financial Accounting Standards No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects.”
Lux,
Perhaps our Board of Selectmen and TMMs can explain the unaccountability of Representative Town Meeting governance here in Brookline in the same manner as MMA Financial’s explanation. In appreciation I can just hear them say:
“10-Q.”
You’re welcome.