That wasn’t the case. By mid-2006, when Jackson was considering the purchases, the District’s market had begun to fall, with reduced demand for multifamily buildings, said William Rich, vice president of the Alexandria-based Delta Associates, which tracks local market conditions.
“Sales had started to decline, and prices were dropping,” he said.
The sellers defended the deal.
“I thought they got it a little light, actually, only because I had higher offers,” said Madeoy, who said he could not recall specifics on the other buyers.
Spicer said the deal made sense. “We’re like anyone else on the free market,” he said. “When you can gross that kind of a profit, that’s a heck of a deal.” Spicer’s partner, Gitelson, said he could not recall specifics about the transaction.
Odagbodo said:“It was a good deal, but we had spent a lot of money trying to clean that building up.”
When told by The Post about the appraiser’s background, his past work for Madeoy and the adjustments in the appraisals, Jackson said: “My knees are shaking. I didn’t know anything.”
Jackson blamed East of the River’s lenders and the D.C. Department of Housing and Community Development. The appraisal “went through every department . . . and no one raised concerns,” she said.
Housing officials said they saw the appraisals but that oversight was supposed to come from a nonprofit group that the city used at the time to underwrite affordable-housing loans.
“We get a copy of it, it’s like an FYI,” said Chris Earley, acting chief operating officer of the housing agency. “The bottom line is [the nonprofit provides] the approval.”
The nonprofit is now known as the OpenDoor Housing Fund. OpenDoor’s president, Jerry Konohia, said he did not know how much review was done but that the District was ultimately responsible.
“We’re just the third-party lender,” he said. “They were the true exposed party.”
The D.C. housing agency’s newly appointed acting director, John E. Hall, said the District is shoring up its underwriting standards to avoid such problems in the future.
“It’s very clear to me that we have not effectively nor efficiently administered the [HUD] program,” Hall said. “I am committed to getting this agency on track. There is considerable overhaul that is going to be needed.”
‘The folks in the District deserve better’
In all, the city delivered about $4 million through the nonprofit lender to help East of the River buy the properties. To cover the rest of the $7.7 million purchase price, East of the River took on a series of mortgages from a bank and other nonprofit groups.
Then East of the River turned to the city again, this time for help raising money to pay for renovations. Jackson said she went to Greene, then the D.C. housing director, about getting a loan from HUD’s affordable-housing fund.
After Greene left District government in 2006, new housing director Leila Finucane Edmonds sent a letter to the mayor’s staff urging Fenty to support the HUD loan. Fenty quickly forwarded his endorsement to the D.C. Council, with East of the River ultimately receiving $3.5 million in HUD money.
Within months, however, East of the River began to topple. Straining under its bank mortgages, the nonprofit fell behind on loan payments. The bank foreclosed, and the other lenders followed.
Jackson blamed the project’s demise on a lack of private financing, saying East of the River could not find investors willing to provide additional money for renovations. “The bottom line is that we got caught up in a housing market that was going to crash,” she said.
Instead of canceling the project, the District waded in deeper. With the mayor’s and the D.C. Council’s approval, the housing agency in June 2008 allowed East of the River to use the $3.5 million in HUD money — meant for renovations — to pay off several of its mortgages.
In doing so, the city violated federal policy prohibiting HUD money from being used to pay off debt, HUD officials said.
When told of the deal by The Post last month, the federal agency launched an investigation and recently asked the District to repay the entire $3.5 million.
The District “has an historic track record of not doing good oversight, of having a huge turnover in managers, in not doing a [sound] level of underwriting,” said Mercedes Marquez, HUD’s assistant secretary for community planning and development. “The folks in the District deserve better.”
Edmonds said she could not recall specifics about the dealing, adding: “We just had so many complications trying to figure out a way to really get that project completed.”
Fenty did not return calls and letters seeking comment.
Even with the loan adjustments, the damage at East of the River had already been done: The nonprofit filed for bankruptcy in August 2009, records show.
After East of the River went under, the city scrambled to save the project. It wrote off the $4 million in city loans that had been used to buy the properties. The city released East of the River from all liability and found a new developer to take on the renovations, William C. Smith & Co., which assumed the $3.5 million HUD loan.
Earlier this year, the renovations were completed and tenants moved in — two years late.
“It’s funny how all of this ties together now,” Jackson said. “Life has a lot of lessons, and this is one for all of us.”
Staff researchers Jennifer Jenkins, Meg Smith and Julie Tate contributed to this report.