• Finger-Pointing Galore by HUD, Warren Buffett-Linked Firm In $11 Million Boondoggle

    Everybody involved points fingers at somebody else but, regardless of who ruined conversion of an old Coca-Cola syrup plant into a large residential and commercial complex in an economically depressed part of St. Louis, federal taxpayers are still on the hook for $11.3 million.

    Berkadia Commercial Mortgage – a joint venture of Warren Buffett’s Berkshire Hathaway and Leucadia National – used a federally-backed loan to fund the abandoned old plant’s transformation into 77 residential apartments and nine commercial units, according to a report by the Department of Housing and Urban Development’s inspector general.

    Berkadia didn’t do its homework to make sure the project could generate enough income to support mortgage payments, and the developers, Steins Broadway Inc. and Rothschild Development, couldn’t attract nearly enough businesses to lease the commercial space, HUD audits showed.

    When the management agent wasn’t able to fill the space, the agent rented office space to his own business — at less than 5 percent of the appraised price per square foot, or 33 cents per square foot instead of $7.20 per square foot, according to a 2013 HUD IG audit of the same project.

    In 2012, about a year after the Temtor Project opened for business, the developers defaulted on the loan.

    “Although HUD approved the loan, Berkadia was responsible for reviewing the documents to ensure compliance with the requirements and that the loan was economically sound, which it did not,” the IG said.

    Berkadia, Steins and Rothschild, however, largely faulted HUD.

    The 2013 IG audit found the developers used HUD funds for more than $700,000 worth of ineligible expenses, something the developers acknowledged.

    But the developers, which have since gone out of business, told the St. Louis Post-Dispatch in 2013 that many of their financial problems resulted from the direction of HUD’s former St. Louis office director Charles Hester. Hester was convicted of taking bribes in an unrelated project in Mexico and sentenced to 18 months in prison.

    The IG dismissed that claim in the 2013 audit, and didn’t mention Hester in the more recent audit.

    Marta Rivera Metelko, HUD IG director of public affairs, declined to say why the HUD IG failed to mention the convicted HUD official’s involvement in the project in either audit.

    “Anything that they had would have been in their response to our recommendations,” she said.

    Berkadia also claimed HUD was closely involved in the loan underwriting process, and should have detected any concerns.

    As for the IG, Berkadia said the recent IG audit “fails to acknowledge HUD’s significant role in the underwriting and approving the loan. For example, HUD reviewed and approved underwriting-related documentation and certified that the third-party reports (that the IG now criticizes) complied with HUD requirements.”

    Berkadia also said the IG “ignores the conclusions of a loan default review” from an independent third party, which concluded that Berkadia underwrote the loan in accordance with HUD standards.

    Berkadia also blamed the Great Recession of 2008, which lasted longer than expected.

    “If loans like this were risk-free, the HUD insurance program would not be necessary,” Berkadia said.

    Federal housing officials continued working with Berkadia despite the Temtor default. As recently as September 2014, HUD was providing subsidy payments to Berkadia, according to USASpending.gov. The firm has received more than $40 million in loan guarantees since 2008.

    Severing ties with a company takes a long time, a HUD official said, and Berkadia’s relationship with Washington, D.C., isn’t a one-way street.

    Berkadia employees have donated more than $143,000 to federal candidates and committees since 2009, largely to housing-related committees like the National Multi-Housing Council and other housing-related PACs and to individual members of Congress, according to Opensecrets.org data.

    Berkadia didn’t respond to requests for comment, and the former developers couldn’t be reached by phone.

    For now, the IG wants HUD to take a closer look at Berkadia.

    “We recommend that HUD refer Berkadia to the Mortgagee Review Board for the violations that caused a more than $11 million loss to HUD’s FHA insurance fund,” the IG said. “We also recommend that Berkadia modify policies and procedures to ensure that future loans represent an acceptable risk to HUD.”

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