The income-verification police: Part 2, investigation

April 6, 2011 | Affordability, Apartments, Cities, Co-ops, Income verification, Litigation, New York City, Rental, Theory

[Continued from yesterday's Part 1.]

 

By: David A. Smith

 

Yesterday’s post explored the economic intrusiveness of income verification via Alphonse Fletcher’s attempt to buy a fifth apartment in New York City’s Dakota co-operative, and the New York Times‘s salacious reportage about the board’s decision to deny the application based (they said) on their doubts about his financial wherewithal.

 

How do we know it’s real and not a fake?

 

In affordable housing, your income must be neither too low (you can’t make the payments) nor too high (you’re over-income).

 

 

You squeeze through a narrow income band

 

In market housing, the test is simpler – get your income over the bar.

 

Just for the right instant

 

To decide this, the landlord puts the applicant’s finances under a skeptical microscope.

 

3.         Landlord’s income eligibility verification

 

When rent-setting is means-adjusted (going up and down based on the resident’s income), as it is in portable Housing Choice Vouchers (Section 8) and in public housing, the landlord is legally required to conduct in-depth income eligibility verification.  (For affordable housing properties, the resulting income has to be neither too low nor too high, and the income verification is critical because it sets the resident’s ‘tenant share’ of rent contribution.)  The process is painstaking for both sides:

 

Although Mr. Fletcher is a well-known investor, the board, citing tax returns, bank records and other documents that he submitted when applying to buy the $5.7 million apartment …

 

As a general rule, the presumption of a right to privacy regarding financial information means that neither the certification nor the finding are publicly accessible documents.  With the litigation, they’ve now spilled into the open and that gives us an up-close look at the financial surgery:

 

Let’s look closely now, shall we?

 

The Dakota questioned:

 

[1] Whether the amount Mr. Fletcher’s firm said it managed — $492 million — was vastly overstated, with some assets counted twice.

[2] Whether the financial statements he submitted were objective, since they seemed to have been produced by people who worked for him.

[3] Whether his income — his 2007 and 2008 tax returns showed adjusted gross income of about $700,000 a year — was enough to meet his obligations.

 

I’d rather not!

 

All of this would seem highly intrusive – socially rude to be sure – were it not that these are the curious rules of engagement to which applicants submit when the landlord is imperial. 

 

(Mr. Fletcher said he did not submit his wife’s returns because he thought his own income and assets sufficed.)

 

The government can be imperial in affordable housing because it is conveying a charitable benefit (with taxpayer dollars), and co-ops can be imperious because – well, because there is little point in living in a co-op (rather than a condo) unless you like being imperious to potential neighbors.

 

Mr. Fletcher said the income reported on his tax returns was not a true picture of his earnings, and that he had millions of dollars in deferred compensation.

 

With Mr. Fletcher’s lawsuit, the board spilled its guts – or rather, Mr. Fletcher’s guts – all over the newspapers:

 

On Tuesday [February 15, 2011 – Ed.], the board filed a 237-page response in State Supreme Court that denied Mr. Fletcher’s claims and said he simply lacked the wealth he claimed.

 

The response was noteworthy in that it is rare for any co-op board, let alone a famous one, to disclose internal matters. Although Mr. Fletcher is a well-known investor –

 

So was Bernie – and even people who are honest can get way overextended.

 

It’s all real …

 

– the board …  called his statement of net worth “highly unrealistic.”

 

It also said the money Mr. Fletcher claimed to manage was “greatly inflated” because his firm, Fletcher Asset Management, double-counted its assets, which Mr. Fletcher said was $429 million, according to the court filing.

 

Don’t you feel reassured? FAM’s Web site

 

And because the firm reported a cumulative net loss from 2007 to 2009, the Dakota’s finance committee called the value that Mr. Fletcher put on his business “not credible.”

 

Without in any way impugning Mr. Fletcher, one can certainly understand why, if those descriptions are accurate, the board might have paused:

 

Mr. Fletcher’s annual mortgage payments — he also owns two smaller units at the Dakota, at 1 West 72nd Street and bought his mother an apartment there in 2001 — are about $1.5 million, yet his tax returns show his annual income is far less, the papers said. In 2008, Mr. Fletcher reported an adjusted gross income of $674,000.

 

Remember, they got Al Capone not for bootlegging but for tax evasion.

 

Yeah, but I could pay the rent, even from prison

 

The board also was concerned that Mr. Fletcher supplied information through an accounting firm that appeared to be independent but was actually run by one of his employees.

 

Again, if Mr. Fletcher were Bernie Madoff redux, a hypothesis for which we have absolutely no basis of supposition, then the presence of an affiliated accountant would be yet another red flag.

 

The response questioned whether Mr. Fletcher could afford another apartment when his total annual maintenance cost would rise to $228,873 and renovations would cost $1 million to $2 million.

 

We forget that purchase price is only part of total acquisition cost – you have to pay the maintenance, renovations, or improvements too.

 

“There was absolutely no discussion of or concern about plaintiff’s race; he is a longtime neighbor, was repeatedly approved for apartment purchases in earlier years, has been elected to the board eight times, and has twice been elected by the board as its president,” Bruce Barnes, the current board president, said in court papers. Mr. Barnes said that approving the purchase would expose the Dakota to “unacceptable financial risk.”

 

Remember, though the ongoing fees are much smaller, they are foreclosable too.

 

But most of all, the board said, the financial records Mr. Fletcher submitted made them doubt whether he had the resources to afford yet another home. His investment firm’s “apparent lack of profitability,” as well as other evidence, the board wrote, “suggested that it may be seriously troubled and a source of potential future costs or liabilities.”

 

4.         Income forensics and lifestyle prudishness

 

When individuals are involved, what begins as an exercise in income forensics because a referendum on personal lifestyles – and of a kind of economic prurient voyeurism creeps in, money being the last taboo.

 

That’s rather personal, sir

 

Income verification is a license to probe and pry into any corner of another’s life, with few repercussions (because the landlord holds power over the applicant).  Many people quite understandably find the financial peeping offensive, and it may be human nature to see in the elitism other isms:

 

In 1993 [he said in his suit], Mr. Fletcher signed a contract on the fifth-floor apartment for $1.375 million, but was forced to sell his first apartment, even though several white residents owned additional units they used as gyms, offices or guest rooms. The building, in its response, said no one was permitted to own two unconnected, full apartments; residents say the policy stemmed from when John Lennon and Yoko Ono irritated some neighbors by buying several units.

 

Yes, we took several units, what of it?

 

Many rules are made based to plug what are perceived to be loopholes based on individual cases of real or perceived abuse.  Though common law is a natural enough approach, it’s haphazard.

 

In 2002, Mr. Fletcher sought to buy his mother a ninth-floor two-room apartment, which once was Leonard Bernstein’s studio, for $1.06 million. The board demurred because Mr. Fletcher already owned other apartments, but agreed on the condition that only his mother and “no one else would be permitted to reside in Apartment 92, even overnight and even including close relatives,” according to his lawsuit. The board said that the rules were the same for all owners, and that it had gone out of its way by allowing Mr. Fletcher to purchase the apartment in a trust for his mother.

 

While these rules strike me as basically foolish, they are the co-op’s rules, and one who joins a living club accepts its rules.

 

He said that board members joked about repeatedly denying Ms. Flack’s quest for a new bathtub, and also discriminated against her by making her take her dogs into the service elevator while other residents with dogs used the main elevator.

 

Killing me softly with your rules

 

Dogs, though we may love them, do represent an urban high-rise living challenge, and many properties have detailed rules about which and how many pets a resident may keep, and under what pet rules.

 

The board said Ms. Flack was treated the same as other residents. Those walking dogs must use a service elevator if they have access to one, which Ms. Flack has, the papers said, adding that other residents complained when the singer brought her six dogs — the building has a limit of three, but Ms. Flack’s were grandfathered in — into the main elevator.  Ms. Flack declined to comment on Tuesday.

 

While I personally find all these rules stultifying, they are a consequence of verticality – as people live in ever-closer proximity, then they have an internal infrastructure – of elevators, doormen, corridors, trash compacters, heating/ cooling systems, even green roofs – and an internal set of shared amenities – gyms, lobbies, lounges, roof decks – and all these have to be governed by rules of civility and efficient shared use. 

 

All the same considerations apply whether the residents are rich or extremely poor, and whether their landlord is themselves (via the condo or co-op board) or a government instrumentality like a public housing authority.

 

Meanwhile, in a review of someone’s financial wherewithal, potentially anything is fair game, and no good deed goes unpunished:

 

In 2004, Mr. Fletcher made a $50 million pledge to institutions or people working to improve race relations, to coincide with the 50th anniversary of Brown v. Board of Education, the Supreme Court decision that outlawed segregation in schools. When he was seeking approval to buy the neighboring apartment last year, some board members questioned whether that promise would become a liability.

 

That’s less absurd than it sounds.  Some years back, Robert Mondavi pledged a large donation to the University of California Davis, only to have his net worth and liquidity take a substantial knock.  Meanwhile the university had undertaken ambitious plans to build a new center, and for a time as I recall there was considerable tension between the university and its donor, with the university threatening litigation.  Donors do retrench – like Mr. Fletcher:

 

Mr. Fletcher said he has donated more than half of the $50 million, but added that he was under no legal obligation to meet the $50 million mark.

 

There’s another little dirty secret of philanthropy: people pledge to get the headlines, and pay when they feel like it.  (Remember Ted Turner’s 1997 billion-dollar pledge to the UN?  It was in Time-Warner stock …)

 

Thanks a billion

 

He said he was highly offended that his philanthropic pledges had been questioned last year.

 

Looking back, Mr. Fletcher said, he regrets some of the publicity the pledge received. “I’m proud of what we have set out to accomplish, but I’m very disappointed that some have tried to turn philanthropy into a liability.” he said. “It’s a pledge, not a commitment, and that’s that.”

 

Just what is the difference between a pledge and a commitment?

 

On such questions turn the metaphysics of income eligibility.

 

The stuff that dreams are made of

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