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Grim proving ground for Obama's housing policy

The candidate endorsed subsidies for private entrepreneurs to build low-income units. But, while he garnered support from developers, many projects in his former district have fallen into disrepair.

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By Binyamin Appelbaum
Globe Staff / June 27, 2008

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CHICAGO - The squat brick buildings of Grove Parc Plaza, in a dense neighborhood that Barack Obama represented for eight years as a state senator, hold 504 apartments subsidized by the federal government for people who can't afford to live anywhere else.

But it's not safe to live here.

About 99 of the units are vacant, many rendered uninhabitable by unfixed problems, such as collapsed roofs and fire damage. Mice scamper through the halls. Battered mailboxes hang open. Sewage backs up into kitchen sinks. In 2006, federal inspectors graded the condition of the complex an 11 on a 100-point scale - a score so bad the buildings now face demolition.

Grove Parc has become a symbol for some in Chicago of the broader failures of giving public subsidies to private companies to build and manage affordable housing - an approach strongly backed by Obama as the best replacement for public housing.

As a state senator, the presumptive Democratic presidential nominee coauthored an Illinois law creating a new pool of tax credits for developers. As a US senator, he pressed for increased federal subsidies. And as a presidential candidate, he has campaigned on a promise to create an Affordable Housing Trust Fund that could give developers an estimated $500 million a year.

But a Globe review found that thousands of apartments across Chicago that had been built with local, state, and federal subsidies - including several hundred in Obama's former district - deteriorated so completely that they were no longer habitable.

Grove Parc and several other prominent failures were developed and managed by Obama's close friends and political supporters. Those people profited from the subsidies even as many of Obama's constituents suffered. Tenants lost their homes; surrounding neighborhoods were blighted.

Some of the residents of Grove Parc say they are angry that Obama did not notice their plight. The development straddles the boundary of Obama's state Senate district. Many of the tenants have been his constituents for more than a decade.

"No one should have to live like this, and no one did anything about it," said Cynthia Ashley, who has lived at Grove Parc since 1994.

Obama's campaign, in a written response to Globe questions, affirmed the candidate's support of public-private partnerships as an alternative to public housing, saying that Obama has "consistently fought to make livable, affordable housing in mixed-income neighborhoods available to all."

The campaign did not respond to questions about whether Obama was aware of the problems with buildings in his district during his time as a state senator, nor did it comment on the roles played by people connected to the senator.

Among those tied to Obama politically, personally, or professionally are:

Valerie Jarrett, a senior adviser to Obama's presidential campaign and a member of his finance committee. Jarrett is the chief executive of Habitat Co., which managed Grove Parc Plaza from 2001 until this winter and co-managed an even larger subsidized complex in Chicago that was seized by the federal government in 2006, after city inspectors found widespread problems.

Allison Davis, a major fund-raiser for Obama's US Senate campaign and a former lead partner at Obama's former law firm. Davis, a developer, was involved in the creation of Grove Parc and has used government subsidies to rehabilitate more than 1,500 units in Chicago, including a North Side building cited by city inspectors last year after chronic plumbing failures resulted in raw sewage spilling into several apartments.

Antoin "Tony" Rezko, perhaps the most important fund-raiser for Obama's early political campaigns and a friend who helped the Obamas buy a home in 2005. Rezko's company used subsidies to rehabilitate more than 1,000 apartments, mostly in and around Obama's district, then refused to manage the units, leaving the buildings to decay to the point where many no longer were habitable.

Campaign finance records show that six prominent developers - including Jarrett, Davis, and Rezko - collectively contributed more than $175,000 to Obama's campaigns over the last decade and raised hundreds of thousands more from other donors. Rezko alone raised at least $200,000, by Obama's own accounting.

One of those contributors, Cecil Butler, controlled Lawndale Restoration, the largest subsidized complex in Chicago, which was seized by the government in 2006 after city inspectors found more than 1,800 code violations.

Butler and Davis did not respond to messages. Rezko is in prison; his lawyer did not respond to inquiries.

Jarrett, a powerful figure in the Chicago development community, agreed to be interviewed but declined to answer questions about Grove Parc, citing what she called a continuing duty to Habitat's former business partners. She did, however, defend Obama's position that public-private partnerships are superior to public housing.

"Government is just not as good at owning and managing as the private sector because the incentives are not there," said Jarrett, whose company manages more than 23,000 apartments. "I would argue that someone living in a poor neighborhood that isn't 100 percent public housing is by definition better off."

In the middle of the 20th century, Chicago built some of the nation's largest public housing developments, culminating in Robert Taylor Homes: 4,415 apartments in 28 high-rise buildings stretching for 2 miles along an interstate highway.

By the late 1980s, however, Robert Taylor Homes and the rest of the Chicago developments had become American bywords for urban misery. The roughly 30 developments operated for poor families by the Chicago Housing Authority were plagued by crime and mired in poverty.

In Stateway Gardens, a large complex just north of Robert Taylor, a study of 1990 census data found the per-capita annual income was $1,650. And the projects were falling apart after decades of epic, sometimes criminal, mismanagement.

Similar problems plagued public housing in other cities, leading the federal government to greatly increase funding to address the problems. Many cities, including Boston, mostly used that money to rehabilitate their projects, maintaining public control.

Chicago chose a more dramatic approach. Under Mayor Richard M. Daley, who was elected in 1989, the city launched a massive plan to let private companies tear down the projects and build mixed-income communities on the same land.

The city also hired private companies to manage the remaining public housing. And it subsidized private companies to create and manage new affordable housing, some of which was used to accommodate tenants displaced from public housing.

Chicago's plans drew critics from the start. They asked why the government should pay developers to perform a basic public service - one successfully performed by governments in other cities. And they noted that privately managed projects had a history of deteriorating because guaranteed government rent subsidies left companies with little incentive to spend money on maintenance.

Most of all, they alleged that Chicago was interested primarily in redeveloping projects close to the Loop, the downtown area that was seeing a surge of private development activity, shunting poor families to neighborhoods farther from the city center. Only about one in three residents was able to return to the redeveloped projects.

"They are rapidly displacing poor people, and these companies are profiting from this displacement," said Matt Ginsberg-Jaeckle of Southside Together Organizing for Power, a community group that seeks to help tenants stay in the same neighborhoods.

"The same exact people who ran these places into the ground," the private companies paid to build and manage the city's affordable housing, "now are profiting by redeveloping them."

Barack Obama was among the many Chicago residents who shared Daley's conviction that private companies would make better landlords than the Chicago Housing Authority.

He had seen the failure of the public projects in the mid-1980s as a community organizer at Altgeld Gardens, a large public housing complex on the far South Side.

He once told the Chicago Tribune that he had briefly considered becoming a developer of affordable housing. But after graduating from Harvard Law School in 1991, he turned down a job with Tony Rezko's development company, Rezmar, choosing instead to work at the civil rights law firm Davis, Miner, Barnhill & Galland, then led by Allison Davis.

The firm represented a number of nonprofit companies that were partnering with private developers to build affordable housing with government subsidies.

Obama sometimes worked on their cases. In at least one instance, he represented the nonprofit company that owned Grove Parc, Woodlawn Preservation and Investment Corp., when it was sued by the city for failing to adequately heat one of its apartment complexes.

Shortly after becoming a state senator in 1997, Obama told the Chicago Daily Law Bulletin that his experience working with the development industry had reinforced his belief in subsidizing private developers of affordable housing.

"That's an example of a smart policy," the paper quoted Obama as saying. "The developers were thinking in market terms and operating under the rules of the marketplace; but at the same time, we had government supporting and subsidizing those efforts."

Obama translated that belief into legislative action as a state senator. In 2001, Obama and a Republican colleague, William Peterson, sponsored a successful bill that increased state subsidies for private developers. The law let developers designated by the state raise up to $26 million a year by selling tax credits to Illinois residents. For each $1 in credits purchased, the buyer was allowed to decrease his taxable income by 50 cents.

Obama also cosponsored the original version of a bill creating an annual fund to subsidize rents for extremely low-income tenants, although it did not pass until 2005, after he had left the state Senate.

"He was very passionate about the issues," said Julie Dworkin of the Chicago Coalition for the Homeless, who worked with Obama on affordable housing issues. "He was someone we could go to and count on him to be there."

The developers gave Obama their financial support. Jarrett, Davis, and Rezko all served on Obama's campaign finance committee when he won a seat in the US Senate in 2004.

Obama has continued to support increased subsidies as a presidential candidate, calling for the creation of an Affordable Housing Trust Fund, which could distribute an estimated $500 million a year to developers. The money would be siphoned from the profits of two mortgage companies created and supervised by the federal government, Fannie Mae and Freddie Mac.

"I will restore the federal government's commitment to low-income housing," Obama wrote last September in a letter to the Granite State Organizing Project, an umbrella group for several dozen New Hampshire religious, community, and political organizations. He added, "Our nation's low-income families are facing an affordable housing crisis, and it is our responsibility to ensure this crisis does not get worse by ineffective replacement of existing public-housing units."

One of the earliest public-private partnerships of the type supported by Daley and Obama took place in the Woodlawn neighborhood, a checkerboard of battered apartment buildings and vacant lots just south of the University of Chicago.

Grove Parc Plaza opened there in 1990 as a redevelopment of an older housing complex. The buildings had a new owner and a major renovation funded by the federal government. Even the name Grove Parc Plaza was new.

The owner, a local nonprofit company called Woodlawn Preservation and Investment Corp., was led by two of the neighborhood's most powerful ministers, Arthur Brazier and Leon Finney. Obama had relationships with both men. In 1999, he donated $500 of his campaign funds to another of their community groups, The Woodlawn Organization.

Woodlawn Preservation hired a private management firm, William Moorehead and Associates, to oversee the complex. In 2001, the company lost that contract and a contract to manage several public housing projects for allegedly failing to do its job. The company's head, William Moorehead, was subsequently convicted of embezzling almost $1 million in management fees.

Woodlawn Preservation hired a new property manager, Habitat Co. At the time, the company was headed by its founder, Daniel Levin, also a major contributor to Obama's campaigns. Valerie Jarrett was executive vice president.

Residents say the complex deteriorated under Moorehead's management and continued to decline after Habitat took over. A maintenance worker at the complex says money often wasn't even available for steel wool to plug rat holes. But as late as 2003, a routine federal inspection still gave conditions at Grove Parc a score of 82 on a 100-point scale.

When inspectors returned in 2005, they found conditions were significantly worse. Inspectors gave the complex a score of 56 and warned that improvements were necessary. They returned the following year and found things had reached a new low. Grove Parc got a score of 11 and a final warning. Three months later, inspectors found there had been insufficient improvements and moved to seize the complex from Woodlawn Preservation.

After negotiations with tenants, the government agreed to allow a new company, Preservation of Affordable Housing, a Boston-based firm, to replace Habitat as the manager of Grove Parc. The company is negotiating to buy the development, which would then be demolished and replaced with new housing.

Officials at Woodlawn Preservation say the government didn't give them enough money to properly maintain Grove Parc. Habitat's Jarrett declined to comment on Grove Parc in particular but said it is hard to manage something you don't own.

But other Chicago developers and housing activists say federal subsidies can be adequate if managed properly. They say Grove Parc stands apart for how badly it fell into disrepair.

Preservation of Affordable Housing has assumed responsibility for numerous subsidized complexes across the country.

"Grove Parc is quite an exception to what we've normally done because it's in such bad shape," said the nonprofit's chief executive, Amy Anthony. "These complexes are often tired, they're always denser than today's philosophy, but they're not usually anywhere near as deteriorated."

Similar problems also plagued the next generation of affordable housing de velopment in Obama's district, created as part of the Daley administration's efforts to subsidize smaller apartment buildings scattered throughout neighborhoods.

One of the largest recipients of the subsidies was Rezmar Corp., founded in 1989 by Tony Rezko, who ran a company that sold snacks at city beaches, and Daniel Mahru, who ran a company that sold ice to Rezko. Neither man had development experience.

Over the next nine years, Rezmar used more than $87 million in government grants, loans, and tax credits to renovate about 1,000 apartments in 30 Chicago buildings. Companies run by the partners also managed many of the buildings, collecting government rent subsidies.

Rezmar collected millions in development fees but fell behind on mortgage payments almost immediately. On its first project, the city government agreed to reduce the company's monthly payments from almost $3,000 to less than $500.

By the time Obama entered the state Senate in 1997, the buildings were beginning to deteriorate. In January 1997, the city sued Rezmar for failing to provide adequate heat in a South Side building in the middle of an unusually cold winter. It was one of more than two dozen housing-complaint suits filed by the city against Rezmar for violations at its properties.

People who lived in some of the Rezmar buildings say trash was not picked up and maintenance problems were ignored. Roofs leaked, windows whistled, insects moved in.

"In the winter I can feel the cold air coming through the walls and the sockets," said Anthony Frizzell, 57, who has lived for almost two decades in a Rezmar building on South Greenwood Avenue. "They didn't insulate it or nothing."

Sharee Jones, who lives in another former Rezko building one block away, said her apartment was rat-infested for years.

"You could hear them under the floor and in the walls, and they didn't do nothing about it," Jones said.

By the time Rezmar asked Chicago's city government for a loan on its final subsidized development, in 1998, the city's housing commissioner was describing the company in a memo as being in "bad shape." The Daley administration still made the $3.1 million loan.

Shortly thereafter, Rezmar switched from subsidized housing to high-end development, fueled by the money it had made in subsidized work. Rezko's companies also stopped managing the subsidized complexes.

"Affordable housing run by private companies just doesn't work," Mahru, who no longer works with Rezko, said in an interview with the Globe. "It's difficult, if not impossible, for a private company to maintain affordable housing for low-income tenants."

Responsibility for several buildings fell to the Chicago Equity Fund, which had purchased government tax credits from Rezmar to help finance the projects. After Rezko walked away, the fund was obliged to maintain the buildings as affordable housing. If it did not, it would have to repay the government for the tax credits.

The fund found the buildings in terrible condition. In a 2001 plea to the state to temporarily suspend payments on its mortgages, a fund executive wrote that heating problems, lapsed maintenance, and uncollected rent made the buildings almost impossible to manage.

Most of the buildings have since been foreclosed upon, forcing the tenants to find new housing.

All the while, Tony Rezko was forging a close friendship with Barack Obama. When Obama opened his campaign for state Senate in 1995, Rezko's companies gave Obama $2,000 on the first day of fund-raising. Save for a $500 contribution from another lawyer, Obama didn't raise another penny for six weeks. Rezko had essentially seeded the start of Obama's political career.

As Obama ascended, Rezko became one of his largest fund-raisers. And in 2005, Rezko and his wife helped the Obamas purchase the house where they now live.

Eleven of Rezmar's buildings were located in the district represented by Obama, containing 258 apartments. The building without heat in January 1997, the month Obama entered the state Senate, was in his district. So was Jones's building with rats in the walls and Frizzell's building that lacked insulation. And a redistricting after the 2000 Census added another 350 Rezmar apartments to the area represented by Obama.

But Obama has contended that he knew nothing about any problems in Rezmar's buildings.

After Rezko's assistance in Obama's home purchase became a campaign issue, at a time when the developer was awaiting trial in an unrelated bribery case, Obama told the Chicago Sun-Times that the deterioration of Rezmar's buildings never came to his attention. He said he would have distanced himself from Rezko if he had known.

Other local politicians say they knew of the problems.

"I started getting complaints from police officers about particular properties that turned out to be Rezko properties," said Toni Preckwinkle, a Chicago alderman.

She had previously received campaign contributions from Rezmar and said she had regarded the company as a model, one of the city's best affordable housing developers.

But in the early 2000s, she called Rezko to ask for an explanation for the declining conditions. He told her Rezmar was "getting out of the business," she said - walking away from its responsibility for managing the developments.

"I didn't see him nor have anything to do with him after that," she said.

Preckwinkle, who will be an Obama delegate at the Democratic National Convention, said she would not answer any questions about Obama's role in her district, nor his relationship with Rezko.

Allison Davis, Obama's former law firm boss, dabbled in development for years while he worked primarily as a lawyer. He participated in the development of Grove Parc Plaza. And in 1996, Davis left his law firm to pursue a full-time career as an affordable housing developer, fueled by the subsidies from the Daley administration and aided, on occasion, by Obama himself.

Over roughly the past decade, Davis's companies have received more than $100 million in subsidies to renovate and build more than 1,500 apartments in Chicago, according to a Chicago Sun-Times tally. In several cases, Davis partnered with Tony Rezko. In 1998 the two men created a limited partnership to build an apartment building for seniors on Chicago's South Side. Obama wrote letters on state Senate stationery supporting city and state loans for the project.

In 2000 Davis asked the nonprofit Woods Fund of Chicago for a $1 million investment in a new development partnership, Neighborhood Rejuvenation Partners. Obama, a member of the board, voted in favor, helping Davis secure the investment.

The following year, Davis assembled another partnership to create New Evergreen/Sedgwick, a $10.7 million renovation of five walk-up buildings in a gentrifying neighborhood. The project, a model of small-scale, mixed-income development, was subsidized by almost $6 million in state loans and federal tax credits.

Conditions deteriorated quickly. Chronic plumbing failures consumed the project's financial reserves while leaving undrained sewage in some of the apartments. In October, after repeated complaints from building residents, the city government sued the owners, and a judge imposed a $5,500 fine.

New Evergreen/Sedgwick is managed by a company run by Cullen Davis, Allison Davis's son and also a contributor to Obama's campaigns. Cullen Davis said the problems were rooted in the way New Evergreen/Sedgwick was financed. Like most new projects, it is owned by a company created to own one building. That company determined how much to spend on renovations, how much to set aside for maintenance - and how much to keep as profit. When the maintenance funds ran out, there was no other source of money.

"All these deals are set up as islands," Cullen Davis acknowledged. In this case, "The margin of error at Sedgwick was a little too close to begin with."

Chicago's struggles with the deterioration of its subsidized private developments seemed to reach a new height in 2006, when the federal government foreclosed on Lawndale Restoration, the city's largest subsidized-housing complex. City inspectors found more than 1,800 code violations, including roof leaks, exposed wiring, and pools of sewage.

Lawndale Restoration was a collection of more than 1,200 apartments in 97 buildings spread across 300 blocks of west Chicago. It was owned by a company controlled by Cecil Butler, a former civil rights activist who came to be reviled as a slumlord by a younger generation of activists.

Lawndale Restoration was created in the early 1980s, when the federal government helped Butler take control of a group of old buildings, including lending $22 million to his company to redevelop the buildings and agreeing to subsidize tenant rents. In 1995, Butler's company got a $51 million loan from the state to fund additional renovations at Lawndale Restoration. In 2000 Butler's company brought in Habitat Co. to help manage the complex.

Nonetheless, the buildings deteriorated badly. The problems came to public attention in a dramatic way in 2004, after a sport utility vehicle driven by a suburban woman trying to buy drugs struck one of the buildings, causing it to collapse. City inspectors arrived in the ensuing glare, finding a long list of code violations, leading city officials to urge the federal government to seize the complex.

In the midst of the uproar, a small group of Lawndale residents gathered to rally against the Democratic candidate for the US Senate, Barack Obama.

Obama's Republican opponent, Alan Keyes, trailed badly in the polls and was not seen as a serious challenger. But the organizers had a simple message: Cecil Butler had donated $3,000 to Obama's campaign. Habitat had close ties to Obama. And Obama had remained silent about Lawndale's plight.

Paul Johnson, who helped to organize the protest, said Obama must have known about the problems.

"How didn't he know?" said Johnson. "Of course he knew. He just didn't care."

Butler did not return messages but in the past has said the government did not give him enough money to maintain the project. Habitat emphasized in a statement that its role at Lawndale was restricted to tasks that included financial oversight and management.

In 2006, following the foreclosure, the federal government sold the buildings to the city for $10. The city has since parceled out the buildings among two dozen developers, who are rebuilding Lawndale for the fourth time with yet another round of government loans and subsidies.

Even as Lawndale Restoration and Rezmar's buildings were foreclosed upon, and Grove Parc and other subsidized developments fell deeper into disrepair, Obama has remained a steadfast supporter of subsidizing private development.

And although he has distanced himself from Rezko, Obama has remained close to others in the development community. Jarrett participates in the campaign's senior staff meetings. And Obama chose another close friend, Martin Nesbitt, as his campaign treasurer. Nesbitt is chairman of the Chicago Housing Authority, one of the key overseers of the shift toward private management and development.

"Throughout his career in public service, Barack Obama has advocated for the development of mixed-income housing and public-private partnerships to create affordable housing as an alternative to publicly subsidized, concentrated, low-income housing," the Obama campaign said in a statement provided to the Globe.

As a result, some people in Chicago's poorest neighborhoods are torn between a natural inclination to support Obama and a concern about his relationships with the developers they hold responsible for Chicago's affordable housing failures. Some housing advocates worry that Obama has not learned from those failures.

"I'm not against Barack Obama," said Willie J.R. Fleming, an organizer with the Coalition to Protect Public Housing and a former public housing resident. "What I am against is some of the people around him."

Jamie Kalven, a longtime Chicago housing activist, put it this way: "I hope there is not much predictive value in his history and in his involvement with that community."

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