CHICAGO -- A federal audit's findings of the Presidential Towers in Chicago have added to the problems of the apartment complex, which defaulted on its federally backed mortgage in 1990.
The audit of Presidential Towers' financial operations has found that $1.26 million was improperly incurred or charged against the complex's operations and should be repaid. This comes as Presidential Towers and the U.S. Department of Housing and Urban Development work on a plan to keep the complex afloat, including refunding already redeemed bonds to pay HUD back.
The audit, which was issued March 20 but did not become public until last week, was conducted by HUD's office of inspector general. It recommended that the owners repay $1.26 million to the complex's project account. That money represents $455,277 in legal fees and $807,764 in rent concessions and operating loss payments for a commercial tenant of the complex.
Ted Brown, the public affairs officer for HUD's Chicago office, said the audit will have to be resolved before any workout between the owners and HUD can be accomplished.
A ruling on the audit is expected within 30 days by HUD's regional director, Gertrude Jordan, who would decide whether or not to accept the audit's recommendations.
Douglas Woodworth, executive vice president of the Habitat Co., the holding company for the real estate partnership that operates Presidential Towers, did not return phone calls.
However, in the audit, Habitat disputed the findings, stating that the legal fees were for a workout agreement that would benefit the project and were therefore eligible to be counted as project costs. As for the other money, Habitat argued that the concessions were "warranted, commercially reasonable, and consistent with sound business practices."
For more than a year, officials from HUD and Presidential Towers' owners have been discussing what to do with the 2,346-unit complex, located just west of Chicago's downtown business district, in the wake of the mortgage default. A HUD spokesman in Washington said last week that "informal talks" between the parties are continuing.
Those talks have centered on two options: a HUD foreclosure of the property and a plan to refund bonds for the project that had been redeemed by HUD in November 1990 and February 1991, according to the HUD spokesman.
Chicago sold $171 million of bonds for Presidential Towers in 1987 to refund construction loan notes issued in 1983. A 1990 default of the HUD-backed 1987 bonds forced HUD to pay out about $163.7 million, which was used to redeem the outstanding bonds -- making the default the largest in HUD's history.
Last year lawyers for Presidential Towers requested a ruling from the Internal Revenue Service to allow the refunding plan. Those lawyers said yesterday that the ruling request is still pending, but had been on hold until issues regarding the audit could be resolved and until the IRS issued final refunding rules, which it did last month.
Under the plan, the Illinois Development Finance Authority would issue $70 million to $80 million of tax-exempt bonds, with the proceeds going to pay HUD back for some of the money it lost because of the default. HUD would then take out a second mortgage note from the complex's owners for the rest of the money it paid. Debt service on the bonds would be secured with the complex's mortgage and paid with revenues from the complex.
A letter sent to the IRS last year from HUD's office of Multifamily Housing Management said that HUD would "cooperate fully" if the refunding plan is approved. HUD's spokesman said the agency has not heard from the IRS since that time.
The IRS yesterday again refused to comment on the Presidential Towers ruling request. Its final refunding rules, which generally take effect for bonds issued after June 17, say that "in the absence of other applicable controlling rules... the determination of whether an issue is a refunding issue is based on the substance of the transaction in light of all of the facts and circumstances."
IRS officials said this provision would allow certain untraditional transactions to be considered refundings -- but only under very limited circumstances, such as if the issuer was trying to do a refunding but was thwarted at the last moment before bonds had to be redeemed.
