CHICAGO -- Negotiations over bailing out a housing complex in Chicago that defaulted on its federally backed mortgage in 1990 will restart now that the project's owners have agreed to repay the federal government $1.16 million of mis-spent funds.

Dale Chouteau, HUD's regional inspector general in Chicago, said on Wednesday that the Habitat Co., the holding company for the real estate partnership that operates Presidential Towers, has agreed to pay the money back to the Department of Housing and Urban Development.

Once the money is repaid, Chouteau said negotiations will continue with HUD "on a workout arrangement to bring the mortgage current."

In March, a HUD audit of the apartment complex's financial operations found that $1.26 million in legal fees, rent concessions, and other expenses was improperly incurred or charged against the complex's operations and should be repaid. At that time, HUD officials said the audit findings would have to be resolved before any workout between the owners and the department could be accomplished.

Chouteau explained that HUD, in its audit ruling, reduced the amount to be repaid to $1.16 million after allowing the complex to charge to its project account some legal fees it incurred while negotiating with the department for an operating loan.

Douglas Woodworth, executive vice president of Habitat Co., said the firm was pleased the audit issues have been resolved and that Habitat officials will talk with HUD officials about a workout.

While Woodworth said a variety of restructuring options had been under discussion with the department before the audit, he declined to discuss which options are currently on the table. Earlier this year, a HUD spokesman said the discussions between the complex's owners and HUD centered on two options: a HUD foreclosure of the property and a plan to refund the bonds that HUD had redeemed in November 1990 and February 1991.

The discussions followed the 1990 mortgage default of the 2,346-unit complex, located just west of Chicago's downtown business district.

Chicago sold $171 million of bonds backed by HUD for the complex in 1987 to refund construction loan notes issued in 1983. A 1990 default of the 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.

In December, Habitat proposed a plan to refund the redeemed bonds through the Illinois Development Finance Authority. The authority would issue $70 million to $80 million of tax-exempt bonds, with proceeds going to pay HUD back for some of the money it lost through the default.

HUD would then take out a second mortgage note from the complex's owners for the rest of the money it paid out to bondholders. Debt service on the bonds would be secured with the complex's mortgage and paid with revenues from the complex.

In connection with the plan, lawyers for Presidential Towers last year requested a ruling from the Internal Revenue Service to allow the refunding. An IRS official declined to comment on the status of the request.

At that time, HUD also sent a letter to the IRS saying it would "cooperate fully" with the refunding if the ruling were granted.

Woodworth said the ruling request and the bond refunding plan "are not active at the moment." He declined further comment.

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