Authority: Call For State Review

An inconclusive audit of the beleaguered East Hampton Housing Authority has raised a question of whether the financing for the authority's Accabonac Highway affordable housing project has put the town in an illegal partnership with a profit-making entity.

Scott Allen, the authority's lawyer, told its members Tuesday that the question was significant enough that it should be answered by State Attorney General Dennis Vacco.

As a result, the authority's five members voted unanimously Tuesday afternoon to accept an audit of the authority's books that was left unfinished when accountants from Markowitz, Preische and Stevens, an East Hampton firm, were unable to nail down such basic issues as the ownership of the 28-acre site on which the housing is being built. Within minutes, they also voted to send the audit to the Mr. Vacco for a legal opinion.

State Constitution

Authority members said they were unable to sort out the complicated financial dealings set into motion by the authority's previous members, who, unlike the present panel, were appointed by Democratic Town administrations.

"It took me 70 years to get my good name and I'm not about to let it go down the drain because of someone who sat here before me," said David Lee of Sag Harbor, who was appointed last year by the Republican majority that controlled the Town Board from 1995 until last month.

Mr. Allen said the State Constitution prohibits municipalities from going into partnership with private enterprise. Nevertheless, Mr. Allen said it was unclear whether the current arrangement violated that law.

Co-Signer Issue

The Town Board agreed in 1992 to co-sign loans of up to $6 million so the authority could build the 50-unit housing project. The authority is an autonomous agency but it had too brief a history to have established proper credit. Two years later, the authority and the Bank of New York formed the Seymour Schutz Limited Partnership to put up the housing, with the bank agreeing to invest $3.15 million in the project in return for more than $5 million in tax credits, under a procedure sanctioned by the Internal Revenue Service.

No Legal Barrier

However, the former lawyer for the authority and the Town Democratic Party leader, Christopher Kelley, said the question being sent to the Attorney General was just "one more attempt to score political points."

Mr. Kelley and the former authority chairwoman, Margaret de Rouleaux, once a Democratic candidate for Town Board, were the primary architects of the complicated financing package.

"The town is not a party to the partnership agreement and is not participating directly with the bank. It's not an issue. We looked for any legal barrier to structuring the deal this way and there was none," said Mr. Kelley.

In a conference telephone call yesterday to The Star with Bill Ellsbree, the financial consultant who brokered the tax credits, and Randall Mayer, a legal expert on municipal bonds with the Manhattan firm of Whitman, Breed, Abbott & Morgan, the men contended the question stemmed from the fact that the authority's new members, lawyer, and auditors were unfamiliar with Federal tax-credit deals, municipal law, and with housing authorities in general.

"None of the benefits from this arrangement accrue because of the town's guarantee but because of the inclusion of the Federal tax credits," said Mr. Mayer.

For his part, Mr. Ellsbree agreed with Mr. Kelley that the authority's legal question was off base. "They should be focusing on the budget - I've been waiting for it since November - they shouldn't be focusing on whether one of the pre-eminent law firms on bond made a mistake," he said.

More Borrowing

So far, $4.1 million has been borrowed for the project, with the town as co-signer on the loans, meaning that the town would have to repay them were the authority to default.

The bank has put the first of three $1 million installments promised in escrow rather than turn it over, pending either a $1 million "gift" from the town to cover a budget shortfall or some other plan to obtain the rest of the money that will be needed.

Mr. Allen said the current authority board had "every intention" of borrowing an additional $1.9 million to finish construction "regardless of the bank and the town." That would mean a more than $1 million shortfall when its construction loans were transferred into a mortgage.

"So, it's not a question of finishing the project but a question of who is going to pay to finish the project. It will be completed and it will be occupied. Who the eventual long-term debt falls on will be resolved between the parties," said Mr. Allen.

He and Mr. Ellsbree said they were working on other ways beside a "gift" from the taxpayers to make the financing work. They involve more favorable interest rates, a projected $800,000 increase in the value of the tax credits since that deal was inked, and increasing the rents on some of the apartments to raise the authority's income.

Remove Authority?

Meanwhile, the auditors warned that conditions may have been met under which the Bank of New York could remove the authority from the project altogether. Those conditions involve the authority's either violating its fiduciary responsibility, breaching its contract, "willfully" violating the law, or going bankrupt.

The audits were done using 1996 records for the authority and for the Seymour Schutz Limited Partnership, named for a deceased authority member. Both said the authority had incomplete budget records for that year, lacked any visible plan for paying back its debts, was being sued by the general contractor, and that ownership of its main asset, the land, was unclear.

Mr. Kelley vehemently denied there being any confusion about the property deed - "Except maybe for Markowitz, Preische, & Stevens," he said - and even faxed The Star a copy.

Just Waiting

All sides seemed to agree the bank was holding on for now, waiting for conditions to improve and the chance to reap the benefits from its investment.

"Why would the bank want to take this over?" laughed Maureen Murphy, the authority chairwoman. She too was appointed by the Republicans who controlled the former Town Board, and has led the attempt, so far unsuccessfully, to move the project forward.

"A limited partner invests money and doesn't want to know from the day-to-day operations. The bank isn't interested in running an affordable housing complex," Mrs. Murphy said.

Even in the unlikely event the bank did remove the authority as the general partner, Mr. Mayer said that other legal restrictions supersede the terms of the partnership to protect the project's purpose as affordable housing. The apartment complex could never become high-priced condominiums, he said.

What Could Happen

Repeated calls to the bank officials involved in the deal and to the bank's public relations officer went unanswered for the second consecutive week.

Mr. Allen said the State Attorney General's staff normally takes 60 to 90 days to render a legal opinion and, if it finds some law has been violated, would recommend a way to cure the problem.

"Clearly, nobody asked this question until now," Mrs. Murphy said. "Believe me, we have thought of just resigning as a board but morally we just can't do it. We have to keep slugging."