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Misery's New Landlord

In a Move That Symbolizes a Failing Anti-Poverty Effort, the U.S. Is Taking Over Clifton Terrace

Toddlers and crack dealers crowd the corridors. Hookers sometimes bed their clients on the stairs. Human waste floods the basement for a week after a sewage pipe clogs.

Tenants in the Clifton Terrace housing complex off 13th Street NW get plenty of inner-city misery with the $1,140 a month needed to rent a two-bedroom apartment -- rent more common in elegant apartment buildings on Connecticut Avenue.

But Clifton Terrace, where the most recent city inspection turned up nearly 1,000 housing code violations, is more than just another blighted urban address. It is a product and emblem of a government anti-poverty effort now on the brink of a multibillion-dollar collapse. Under a federal program to help low-income families, taxpayers foot the bill for most of Clifton's sky-high rents. Clifton's landlord during the last 13 years says he and his partners have collected $31 million in public funds for running the three-building complex, which the government calls "deplorable," "squalid" and "grossly mismanaged."

On Tuesday, after years of ineffectual oversight, the government agreed to assume ownership of the complex -- and its nearly $4 million in needed repairs -- as part of a settlement with a landlord it accused in court of "slumlord performance." Clifton's costly tale of disintegration and despair, a story of good intentions and bad results, is mirrored in hundreds of complexes across the country.

It is a story of quick-footed entrepreneurs and sluggish government regulators, of poor tenants treated poorly and rich landlords grown richer. And it is a story that foreshadows fiscal calamity, as another federal effort to help the impoverished threatens to capsize.

Twenty-two years ago, the U.S. government concocted an ambitious scheme to improve living conditions for the poor: a program now known as "project-based Section 8." Instead of warehousing low-income families in aging, government-owned housing, the Department of Housing and Urban Development would give long-term contracts to private landlords to provide a better class of home. By offering entrepreneurs monthly checks and mortgage insurance, the government hoped to ensure that millions of children would grow up in respectable apartments, and grow out of poverty.

Landlords at thousands of housing complexes across the United States -- Clifton Terrace among them -- agreed to shelter the poor in apartments that meet strict federal housing standards in exchange for lucrative subsidies. A Section 8 apartment became, among low-income families, a coveted symbol of upward mobility. Thousands of quiet, smooth-lawned complexes gave sustenance to their dreams.

But today, instead of being the "decent, safe and sanitary" housing envisioned by the original legislation, a surging number of complexes -- some estimates say a quarter of the 8,600 properties in the government-insured portfolio -- are as inhospitable as the public housing projects they aimed to improve upon. According to a recent HUD-commissioned analysis, those 8,600 complexes, housing nearly 1 million families, have accumulated $10 billion in deferred maintenance and capital investment needs -- despite rents that in two-thirds of cases exceed market rates.

Exploited by landlords who collect their federal money while investing little in upkeep and battered by irresponsible tenants, many Section 8 complexes also have been neglected by HUD, which finds itself overmatched in trying to force owners to be conscientious.

Nicolas Retsinas, the federal housing commissioner who oversees the Section 8 program, acknowledges, "No doubt there are other Clifton Terraces out there we're not aware of."

Now, HUD officials and independent analysts believe, a day of reckoning is near. In the next few years, the contracts between HUD and thousands of complexes will expire. Budget forecasts show that renewing contracts at current rates would cost a staggering $225 billion in the next 25 years. Faced with that bill, Congress has ordered HUD to sharply reduce the inflated subsidized rents. HUD expects some landlords, deprived of the large sums to which they've grown accustomed, to exit the Section 8 program when their contracts run out. Many more are expected to default on their government-insured mortgages.

In the event of mass defaults, taxpayers will be stuck with an enormous bill for all those leaky roofs, rotting floors and insured mortgages -- as they are now stuck with the woes of Clifton Terrace. And every subsidized apartment pulled out of the program is one less apartment available to the poor. In a country where only one-third of families eligible for rental assistance now get it, many of those fortunate enough to have subsidized units will lose them.

"It's clearly a multibillion-dollar problem," said Robert Litan, a Brookings Institution economist. "And it's clearly going to happen."

"We're not going to walk away from this," Retsinas said. "But that doesn't mean it isn't going to be hard."

At once-stately Clifton Terrace, whose spongy roof offers a view of HUD headquarters across town, it's possible to see how the government got here -- and how expensive it will be to get out.

Welcome to the `Laboratory'

For 13 years, the primary owner of Clifton Terrace has been a North Carolina multimillionaire named Rick Marshall. A genial windsurfing enthusiast who also is a partner in 100 other subsidized complexes across the country, Marshall calls the yellowish trio of five-story buildings "my laboratory," a social test tube where his theories about poverty and psychology play out. "I want to do good work," Marshall, 56, said during a series of interviews. "I also want to make unconscionable amounts of money."

Those twin ambitions have not been easily reconciled at Clifton. Marshall made money, but tenants and the federal government have been hard pressed to see the good work. On Tuesday, in settling a suit filed against Marshall's partnership by the government, Marshall agreed to relinquish Clifton Terrace to HUD after more than a decade of taking profits from the complex. Last year alone, according to HUD's suit, Marshall and his partners improperly pocketed more than $1 million in profits and fees while leaving the complex "so unsafe as to present an immediate threat of injury" to all of Clifton's 800 tenants. Marshall, who says he did the best he could under difficult urban circumstances, countered that his partnership had fulfilled the terms of its contract and had a right to the money.

The concept underlying Section 8 -- that entrepreneurs are more efficient than government bureaucrats at achieving social imperatives -- has only increased in currency since the program's inception under President Richard M. Nixon. The privatization impulse now extends to prisons, public education, even welfare reform.

As applied to Section 8, that philosophy has given landlords great freedom to run their operations as they see fit. Last year at Clifton, for example, Marshall decided not to provide any security for six months to study the extent of crime under such conditions, even though HUD paid him $300,000 a year for security.

During the experimental period, tenant Eugene Jacquet, 73, was shot in the stomach in a laundry room by a man stealing washing machine tokens. There were no guards to give the assailant pause, nor locks on Clifton's front doors to keep him out. "We're not sure tenants want locks," said Marshall, who said he has spent more on security over the years than HUD has paid him for.

"In World War II, I got shot in the leg and whatnot," Jacquet said. "At Clifton, it's just a different kind of war. And Marshall didn't want to spend what it takes to fight."

With a business degree from the University of North Carolina, Marshall came to the subsidized housing business after a career as a food-service and cleaning contractor. In the 1960s, Marshall, who is white, and some friends bought a little less than half the ownership of five minority-owned companies to profit from government set-aside programs meant to aid black entrepreneurs. In 1974, after an audit, the Small Business Administration disqualified the companies from the set-aside program.

"Like many self-made people, I was opportunistic early on -- very interested in making money," Marshall said. "Not so interested that I think I was crooked, but I wasn't interested in social objectives."

Marshall sold his business interests and retired to the beach, a 37-year-old millionaire. But for the man who likes to joke, "I know enough about accounting to be dangerous," leisure soon got dull.

In 1979, he attended a seminar on the intricacies of Section 8, from tax benefits to low-interest mortgages to syndication fees. The large, reliable contracts intrigued him. Under the law, landlords supported by 15-year, HUD-guaranteed mortgages could collect about 30 percent of a tenant's income as a contribution to the rent and receive a government check for the balance. The precise level of that rent would be negotiated between the landlord and HUD.

Marshall hooked up with some Raleigh, N.C., real estate developers. "He bankrolled, and I was in the trenches," said Gordon Blackwell, one of the developers. "And we quickly did very well."

The Reagan-era HUD subsequently would be accused of widespread malfeasance, after a kickback and influence-peddling scandal involving contracts to rehabilitate subsidized housing. Severe cuts in HUD's staff, including sharp reductions in enforcement, limited the attention the agency could pay to Section 8 projects. During Marshall's early years in the program, 30 percent of HUD's staff was let go. "Some local HUD offices were good," Blackwell recalled. "But some, like D.C. and Chicago, didn't have a clue."

Another Marshall associate, who spoke only on the condition of anonymity, explained what that could mean in terms of profits. "You buy a property with basically no money down. It takes a while for a decent building to go to hell, so you can pocket a lot of the federal money," the associate said. "Eventually the building will slip, but it'll take HUD forever to figure out something's wrong. Ultimately, you'll declare bankruptcy, and HUD will sue for the property, but they'll be taking back a slum, and you've already got your money."

The rapid deterioration of a Section 8 complex in a rural or suburban community would quickly attract public notice. And even in the inner city, many Section 8 complexes stood out as havens of hope. But some landlords weren't so scrupulous, and an eviscerated HUD often couldn't police the contracts it had signed.

In 1983, dismayed by the program's high costs and dubious incentives, Congress revised its subsidized housing policy; today, thousands of complexes get Section 8 subsidies but no mortgage insurance. But the thousands of entrepreneurs already involved were secure in their long-term contracts. And HUD had neither the resources nor the inclination to battle the legally sophisticated landlords who were falling down on their obligations.

For a decade, inspectors general have criticized HUD for failing to use suspensions, fines and other weapons in the enforcement arsenal; when auditors chronicled problems at complexes, their findings often gathered dust. Agency officials traditionally have held that negotiating gently with Section 8 providers is preferable to forcing foreclosures, paying off mortgages, displacing tenants and having slum properties revert to government ownership. "Until recently," said housing commissioner Retsinas, "there was a clear priority to preserve housing and reduce claims" -- the mortgages HUD has to pay off when it forecloses on a property.

By the end of the decade, Marshall and Blackwell owned or managed 200 properties from South Carolina to Chicago -- many shipshape, others less so. One in the latter category was Clifton Terrace.

"I bid it without looking at it," Marshall recalled of the 1983 purchase. "I ran the numbers, and saw I could get some cash flow out of it."

A Complex's Fall from Grace

Designed by architect Harry Wardman during World War I, Clifton Terrace once featured marble foyers and chandeliers. But by the time Marshall took over, scandal had become the complex's chief hallmark. Officers of Clifton's previous management company, including Mayor Marion Barry's ex-wife, Mary Treadwell, had just been convicted of conspiring to defraud the government out of Section 8 dollars.

HUD, which had held the 285-unit complex since foreclosing on Treadwell and company in 1978, had high hopes for Marshall and his partners, who invested $1 million in repairs at Clifton in exchange for a low-interest HUD mortgage and generous rents. At the end of 15 years, in 1998, Marshall's group would be able to pay off the mortgage and rent to more-affluent tenants, a plausible proposition as nattily renovated Victorians began dotting the nearby U Street area.

Unfortunately, steady cash and long-term potential didn't yield decent housing. In 1988, five years after the purchase, HUD inspectors gave Clifton's physical condition its lowest possible rating, lambasting management for the complex's rats, leaky roofs and poor security. Since then, Clifton's conditions have never received a satisfactory grade from HUD inspectors, who complain that expensive jobs have been postponed repeatedly. Instead of replacing hazardous balconies and windows, for instance, Marshall simply sealed the windows and boarded up the balcony doors, drawing the wrath of city fire inspectors. By 1995, HUD had declared all but three units inspected in violation of federal safety standards.

Marshall says patchwork repairs are all his HUD contract required of him. "HUD doesn't care about Clifton's conditions," Marshall said. "They wanted to do it on the cheap." HUD denied the contention.

Marshall says he invested more in the aging complex than HUD required, paying for fencing, new appliances and other improvements beyond basic upkeep. He acknowledged that at least $5.3 million of the money spent on Clifton has benefited companies of which he also is an owner. For instance, he used the subsidy to pay his own management company to maintain Clifton. An elevator company he owned got $440,000 to make repairs in 1994 and 1995, records show, although a 1995 inspection found that the elevator doors didn't have the safety devices to prevent them from potentially crushing riders. Marshall also hired a construction concern he half-owned to do repairs.

Marshall said he hired his own companies because other businesses refused to work at the complex. HUD regulations allow such deals if they are competitively priced, but audits found that Marshall occasionally hired his own firms even when other companies underbid them. HUD officials acknowledge that they don't have the resources to examine the hundreds of contracts landlords let each year.

If a subsidized landlord's operating costs exceed his government-guaranteed income, the landlord can ask HUD to increase the federal subsidy -- a request that HUD has granted liberally at Clifton and other Section 8 complexes. As HUD's inspectors general frequently assert, those increases consume funds that otherwise would be used to house the many people waiting for subsidized apartments.

Marshall contends that Clifton's high costs derive from the complex's old age and what he describes as Washington's culture of poverty: drugs, rampant vandalism and government handouts that, he asserts, warp tenants' sense of responsibility. Tenant protection laws made it difficult to evict destructive tenants. "The problem is the character of some people here," he said, complaining that he could not "get rid of them."

Tenants counter that for years they couldn't rid themselves of Marshall, either. Under federal regulations, residents in Section 8 complexes usually cannot move without losing their subsidies and winding up at the bottom of a long waiting list for units elsewhere.

Marshall argues, correctly, that not every corner of Clifton is an ode to urban decay. A tour of apartments turns up Oriental rugs and computers and tenant pride; some residents, such as Beatrice Jefferson, stock up on bleach to wash the graffiti, and occasional blood, off hallway walls. But few residents can fully insulate themselves from the bleakness of courtyards and halls. One morning at Clifton, a barefoot girl darted up to the visiting Marshall and deposited a drawing of Pocahontas into his hands. Like all children at Clifton, she regularly weaves her way through drug deals and down urine-spattered stairs when she goes out to play.

Passing through the lockless front doors to the courtyard, she found little to play with. As usual, the Clifton staff had locked the tiny, rat-infested playground. The complex's day-care center closed last year. Even the Clifton convenience store is dicey. Clifton youngsters learn to check their chocolate bars closely, because vermin regularly get to them first.

Many Complaints, Little Action

Beginning in 1988, HUD auditors documented serious problems at Clifton. But, beleaguered by scandal and staff layoffs, HUD let Clifton Terrace slide just as the agency alleged that Marshall had.

In 1988 and again in 1989, HUD not only found Clifton's maintenance badly wanting but also contended that Marshall's management company had billed the agency for "ineligible" or "unsupported" subsidies. After one tenant was slashed to death in her apartment, Marshall's management company kept collecting her subsidy for six more months, according to HUD records. "There are going to be errors in a project as big as Clifton," said Marshall, noting the difficulty of hiring capable employees at a place with a bad reputation.

For such infractions, Marshall's company received a minimal penalty: a "limited denial" that made the firm ineligible for new HUD contracts in the District for a year. That penance for misdeeds at Clifton didn't affect Clifton itself. Marshall's business there went on unimpeded.

In 1990, the head of HUD's Washington field office urged that Marshall's firm be suspended permanently from all agency programs because of "continued billing irregularities" and Clifton's dismal conditions. But headquarters officials, hearing that Marshall had begun making repairs at Clifton, decided not to issue a suspension. In May 1991, fast on the heels of HUD's decision, came an inspector general's report that unearthed more serious problems in four Marshall-run complexes, including Clifton.

The 1991 review found the same phenomenon that HUD was to decry in its suit five years later: While key repairs at Clifton went unattended, the Marshall partnership paid itself more than $1 million in federal funds. Auditors also complained that the company had billed HUD for many questionable expenses. Following the money trail was arduous, the audit noted, because Clifton and Marshall's Raleigh office had conflicting ledgers. Marshall disputed many of the audit's contentions but agreed to rectify problems and invest some money in Clifton.

At the same time, at a D.C. complex called Trenton Park, another Marshall partnership was in serious straits. Trenton was then in bankruptcy, and attorneys for tenants were accusing Marshall's management company of "a scheme to siphon funds." Marshall and his partners denied any wrongdoing. The government eventually assumed their $3 million mortgage.

In 1992, Marshall parted amicably with Blackwell, sold the assets of his management company and created a new company with some of the same employees -- One Management, specializing in inner-city properties. And he turned again to HUD, contending that Clifton's high expenses warranted the third rent increase in four years.

At the time, a HUD staff member monitoring Clifton confided in a "memo to the file" that "one of my primary concerns is relative to increasing the rents when Marshall has not demonstrated to me that he is willing to allow needed or adequate income to flow to and remain in the project."

HUD raised the payment anyway, noting in documents its intention to consider the matter more fully at a later time. The federal subsidy now was double what it had been when Marshall bought Clifton nine years earlier. Across the country, Section 8 rents were similarly spiraling -- as were other program costs. Having collected millions of dollars in subsidies, increasing numbers of landlords were defaulting on insured complexes rather than investing in needed repairs. From 1990 to 1993, the number of apartments taken over by HUD climbed from 10,000 to 76,000.

In North Carolina, HUD paid out $28 million to cover defaults by Marshall partnerships alone; HUD officials there call Marshall's default record unparalleled. Marshall, who said he has so far repaid $19 million of the money as part of restructuring agreements, explains that he was undone by tax law changes and a soft market.

After the defaults, Marshall proposed managing another North Carolina complex. HUD denied that request. Still, neither the state HUD office nor Washington headquarters moved to fine or suspend him, or to challenge his $100 million in existing HUD contracts.

Heeding inspector general and General Accounting Office criticism, HUD has created a "SWAT" team to identify problem properties. So far, more than 200 landlords have been pressed into compliance, according to HUD. Some rents have been lowered, and some owners have been fined -- rare enforcement moves in the Section 8 program. But since President Clinton took office, HUD has lost an additional 3,000 employees. The inspector general's office continues to describe HUD's ability to monitor the Section 8 portfolio and protect taxpayer and tenant interests as "seriously deficient."

Again Clifton is a case in point. Despite a history of problems, Clifton's records weren't inspected by HUD from 1992 until after HUD Secretary Henry Cisneros invited camera crews there in August 1995 to announce the filing of the government lawsuit to take over the property.

In the three days before Cisneros's announcement, Marshall and his affiliates withdrew about $450,000 in profits and fees from Clifton, according to project financial statements filed in court. Marshall called the timing coincidental. HUD said in its suit -- and Marshall disputed -- that Marshall's firms shouldn't have taken profits because of the volume of unmade repairs. But in the settlement this week, the government gave up its effort to recover the money.

Instead, HUD agreed to take on Clifton's $3.1 million mortgage and shoulder the costs of an estimated $3.7 million in repairs at the battered complex when it formally takes possession Nov. 1. Moreover, it agreed that Marshall's history at Clifton won't be held against him if he applies for other HUD contracts.

Secure in his many other government contracts, Marshall walks away debt-free -- with more time to concentrate on his new passion, writing a book about what's wrong with welfare. Marshall says of his role in Clifton's troubles, "I put my complicity at zero."

The Clinton administration, prodded by Congress, is trying to find an exit from the Section 8 morass, enlisting private law firms and local housing authorities in an effort to lower rents and stabilize faltering complexes. But HUD officials concede that such efforts won't stave off a fiscal crisis. Covering the cost of defaults such as Clifton will run to billions more than what will be saved by reducing the monthly subsidy checks sent to landlords.

At Clifton on Tuesday, the day of the settlement, longtime resident Norma Johnson's ear was being bent by a neighbor who was "madder than an old wet hen." Her apartment had mysteriously flooded when maintenance turned the heat on.

Johnson thought about whether her new landlord -- the federal government -- now would protect Clifton's 800 tenants better than it had during the last 13 years. "I hope, I hope," she said after a minute, laughing. "And I'll tell you why: because this place can't get any worse."