The group home on Lamont Street NW where nine residents died in a fire earlier this month had been run as a profit-making operation in which the owners were making money at the rate of $15,000 a year on a $10,500 investment.
This annual return on investment of 150 percent was possible because the owners were able to borrow $199,500, or virtually all of the $210,000 purchase price, according to city land records.
In addition the owners could realize another $20,000 in tax benefits from mortgage interest deductions as well as the anticipated appreciation of the house at 1715-17 Lamont St. NW in the Mount Pleasant area near the National Zoo.
The profit was high because of $4,000 in monthly rent paid by the Volunteers of America (VOA), the nonprofit group that ran the home. Tax assessors and real estate experts say that this was an abnormally high rent for the size, condition and location of the Lamont Street house.
One of the two lawyer landlords, John G. Carleton, sits on the advisory board of the VOA.
Together, Carleton and his partner Mark E. Brodsky have bought more than 60 city properties in the last five years. Among them are:
Two other buildings in the Mount Pleasant area that are rented to VOA as halfway houses for federal prisoners. One of the houses, at 3932-34 14th St. NW, earns $6,000 in annual profits, according to the lawyers.
Three other homes leased to Daniel J. Nellum, who operates them as emergency care facilities for disturbed children under contract with the city government. In each case, the lawyers obtained 90 to 100 percent financing from city lending institutions. Their down payments for all three homes totaled $10,795.
Under commercial leases they sign with the group home operators, the lawyers have no legal liability for accidents in the homes.
To maximize the income on the Lamont Street home, the VOA obtained an occupancy permit from the city for 51 residents. Under a District of Columbia law that went into effect last August, foster care homes that house from 1 to 50 patients could collect $236.60 per resident a month. But with a permit for 51 residents, VOA could collect $271.60 per resident a month.
VOA collected the higher payment under the permit although only 47 residents lived there.
The higher payment category meant that VOA received $1,410 more a month, or nearly $17,000 more a year.
In an interview Friday concerning the Lamont Street fire, Brodsky said, "I feel on a personal level that a tragedy has taken place . . . in a piece of property that I happen to own. How does the mayor feel when someone gets run over on 16th Street?"
Added Carleton: 'Of course, we have irrational feelings of guilt, but looking at it in the cold light of reality, we didn't do anything wrong."
Brodsky called the Lamont Street project "one of the most socially redeeming things I was ever involved in because the value and the bricks and mortar was less important than the fact that the Volunteers of America were providing a place for people whose only alternative would have been an institution."
The city's chief building inspector, Ralph E. Spencer, said the rambling 21/2-story duplex should never have been granted a District occupancy permit, the basic city certification that a building meets fire safety standards, because the house lacked a fire escape and fire doors.
The city building inspector who certified the building as safe last August, James L. Ferguson, was suspended from his job after the fire.
At City Hall, Mayor Marion Barry said he would take personal responsibility for the investigation into what went wrong with licensing procedures in the case of the Lamont Street home.
Within three days, the mayor and his top housing, fire and human resources officials launched a major inspection effort involving 93 inspectors who are in the process of screening the more than 500 group homes in the city for safety violations.
The executive director for VOA's Washington chapter, James F. Whitt, said that his organization fully complied with fire safety standards. "The record will show that anything we were asked, we did."
"The one thing that has been missed on that house is that this house was operated for 12 years previously . . . So what are they going to do, go back and fire all of the other 12 inspectors?" Brodsky asked.
"A poor old woman set fire to a couch with a set of matches and the fire department cited that as the cause of the fire, so the overriding notion, in terms of blame or liability, is that there has never been a charge of any sort of deficiency. I don't think there's a finer facility in Washington with regard to its physical plant," said Brodsky.
Added Carleton: "It was a showcase for these kinds of things. Now everyone says there should have been a fire escape, and there probably should have been."
The Lamont Street property is one of dozens of properties Brodsky and Carleton, both 34, have bought since they met almost nine years ago at the Securities and Exchange Commission, where they worked in the enforcement division. Brodsky lef the SEC in 1971 to practice law, invest in real estate and operate a Kensington antique importing business that he says grosses as much as $1.5 million a year.
He wears gray flannel suits, expensive Italian shoes and drives a burgundy Mercedes 450 SL covertible.
Carleton, former branch chief of the SEC's enforcement division who left the commission in 1977, drives a Porsche.
They run their business from behind the locked, wrought-iron gates of the former Hungarian Embassy at 2437 15th St. NW, across from Meridian Hill Park. The three story palace of beaux-arts design was once the vice presidential residence of Calvin Coolidge.
For the VOA, an 83-year-old splinter group from the Salvation Army, the Lamont Street home was a chance to more than double their halfway house business here. VOA collected up to $166,219 a year in Social Security and city foster care payments from the residents.
The payments came from residents who were among the 3,470 St. Elizabeths Hospital outpatients placed on "convalescent leave" status in 220 group homes throughout the city.
The Lamont Street home represented a big step for the lawyers and the VOA in the expanding market for community care homes. The VOA was in the right position as a nonprofit halfway house operator with a proven track record. And, Carleton and Brodsky were riding the crest of a seven-year real estate investment wave in which they had established strong ties to several Washington banks. The strongest of the ties was to National Savings and Trust Co., where bank president Leo Bernstein was a financial mentor.
They bought the $210,000 Lamont Street duplex in February 1978 for a modest 5 percent down, signed a first mortgage of $168,000 with National Savings and Trust, a second mortgage of $31,500 with the seller, Emma Taylor, and leased the building to VOA.
It was a deal representative, they say, of their formula for success: small downpayments, large mortgages and a pyramiding progression of real estate acquisition, a classic strategy in Washington's booming real estate market.
In the first year under VOA management, the expense of running the house outran revenues, according to Whitt, the 48-year-old Kentucky native and executive director of VOA's Washington chapter since May 1976.
Whitt said he signed a "percentage" lease with the lawyers. The initial rental payments were $2,500 a month, a price, Whitt said, that allowed the lawyers to "break even" on their mortgage payments. By September 1978, the rent increased to $4,000 a month, but only after the City Council raised the level of federal subsidy to the former St. Elizabeths residents. The $1,300 a month profit for the lawyers "didn't seem unreasonable" to Whitt because VOA was not required to put up a security deposit and could terminate the lease if St. Elizabeths withdraw its residents.
"These aren't outrageous profits," said Brodsky in an interview Friday.
"We have a couple of these things where we lose money," added Carleton.
In an interview last fall, Brodsky said, "If you buy a property on Seventh Street, you're a 'slumlord,' and a 'speculator;' on 16th Street, you're an 'investor.' On Connecticut Avenue, you're an 'ambassador' and in Georgetown, an 'elder statesman.'
"I ofter say, Israel is a nation of prime ministers, Washington, D.C., is a city of real estate speculators-in the best sense of the word. But you speculate when you hang out a shingle to practice law, or drill an oil well, or dive off a tower-you speculate that there will be water in the bucket."
For the price equal to one month's rental profit on the Lamont Street home, a fire escape stairway to the building's second story could have been erected, according to a spokesman for a Washington ironworks firm. The addition of the fire escape, city officials said, might have saved lives during the April 11 blaze. However, building inspectors had not required one.
Whitt said he "anticipated" his revenues to climb on Lamont Street as federal payments to his residents increased. City Councilman Polly Shackleton (D-Ward 3) is expected to introduce legislation tomorrow to raise the federal subsidy by more than $100 per resident for group homes like the one on Lamont Street.
Had one of their buildings not burned down, Carleton and Brodsky probably would have been left to quietly prosper in their insider's world of fine print and high finance, save for the occasional notoriety of landlord-tenant disputes. They were once scolded by Superior Court Judge Gladys Kessler for trying to evict poor, elderly, Spanish-speaking tenants from one of their properties.
But the partners also enjoy the reputation of representing tenants associations with equal vigor, even as they develop and manage their own substantial portfolio of commercial and residential properties. What emerges from interviews with their clients, colleagues and competitors is a portrait of two aggressive attorneys, one a soft-spoken Southern gentleman (Carleton), the other, hard-nosed and silver-tongued (Brodsky), who has a flair for the dramatic.
"They're Chang, McTank, McQuarter Cats, one part this and one part that," said attorney Fred Repetti, 40, who, as counsel for the contract purchasers of Georgetown's Hammond Court Apartments, frequently spars with Carleton, who represents the tenants. "Carleton and Brodsky wear different hats at different times. They're both attorneys, developers and investors - and they represent both landlords and tenants. They pop up all over the place."
"They're a little bit special - experts in terms of real estate housing and rental law, landlord-tenant and condominium conversion - bright, capable fellows, very competent," said attorney Leonard S. Melrod, an elder statesman of Washington real estate and banking who has had "very satisfactory" dealings with the partners.
It all began at the SEC where they met eight years ago. The first Washington real estate deal Carleton and Brodsky ever made was with each other. Brodsky sold his partner-to-be a red 1967 Porsche 912 in exchange for a one-third interest in a three-bedroom $21,000 house Carleton had bought in 1969 on McArthur Boulevard for $2,100 down.
They took out a $7,500 home improvement loan, fixed up the house, and rented the back bedroom to a Treasury Department employee for$125 a month plus one-third of the utilities. That almost carried the $200 monthly payments of principal and interest.
In 1972, Brodsky said, they sold the house for $67,500 and put their profits into a five-bedroom, three-bath, $65,000 house nearby. They put down $10,000, secured a first mortgage for $45,000 at 8 percent interest, talked the seller into taking back a $10,000 second trust and began to rent the house to students for $800 a month.
A student moved in, a student moved out and "the checks kept coming with different names on them," said Brodsky. "People would move or get married, or leave to work on the Alaska pipeline."
Brodsky said they sold the $65,000 house for $197,500.
"It's fun, really, when you get over your anxieties," said Brodsky last fall. "I bought everything that was in my power to buy . . . I had no inherited wealth. We started from scratch. I'm fulfilling my fantasies on a daily basis.
"My fantasies weren't the fantasies of the drug generation," continued Brodsky, who graduated from Temple University and the University of Miami Law School and who has come a long way since he moved to Washington to live in a $85-a-month efficiency on his $9,600 starting salary of a GS-11 government lawyer.
"Success and the American Dream is the dream to chase. And it's coming back into vogue."
"Our only regret," added Carleton last fall, "is that we didn't do it sooner."