Rhode Island politicians, their relatives and friends are making hundreds of thousands of dollars through a multimillion-dollar federal program intended by Congress to provide housing for the poor.
Known as Section 8 after a section of federal housing law, the five-year old program allows developers to build multimillion-dollar apartment complexes at virtually no risk and with little of their own money.
The program lends developers nearly all the money needed to build projects and to pay off the government loans, and even lets them make quick profits by selling shares on projects as tax shelters.
Political leaders, including Rhode Island Gov. J. Joseph Garrahy, a Democrat, have used their influence to get friends and allies selected as developers of the lucrative housing projects, according to sources close to the housing program.
And other political figures, including Philip W. Noel, the Democrat who proceeded Garrahy in the statehouse, have been selected as developers.
The selection process for Section 8 developers varies somewhat from state to state because of the leeway allowed state govenments by the federal Department of Housing and Urban Development (HUD), which funds the program.
In Rhode Island, a key role is played by the Rhode Island Housing and Mortgage Finance Corp., a semi-public agency created by the state legislature in 1973 during the first of Noel's two terms as governor.
A newspaper investigation of political influence on Section 8 in Rhode Island found:
Garrahy and his executive assistant, William G. Dugan Jr., promised Russell J. Boyle that his proposal for a $3 million project would be approved by the state housing agency. Boyle, an old friend of the governor and a political power in Providence, admitted the governor has "promised" him the project. Boyle and his partner could make $450,000 from sale of tax shelters in the project alone, according to current market figures.
Noel is part owner of two projects worth $4 million but said he sees no conflict of interest in his getting approvals for Rhode Island projects through the state agency he helped establish while governor. "I know some people are going to beef about that, so I'll laugh all the way to the bank."
Frank Caprio, a former Democratic candidate for state attorney general and mayor of Providence, is a partner in a $1.8 million project. Lt. Gov. Thomas R. DiLuglio, who practices law with Caprio, was an original partner but sold, his interest to his father-in-law in 1975 when he decided to run for state office.
James DiPrete Jr., former mayor of the Republican-controlled city of Cranston, has a half-interest in four projects costing $18.2 million. He said he stands to make $696,000 from the sale of tax shelters in the projects.
A three-man partnership that includes Joseph Matteo, who is related by marriage, to the governor's wife, was selected as a developer of a $1.1 project in Providence.
One Rhode Island developer who lacks political friendships said he paid a $100,000 bribe in a successful attempt to influence the selection process. He refused to allow his name to be used, but portions of his account were confirmed by three other sources.
The bribery allegation -- first reported Sept. 26 -- is being investigated by Dennis J. Roberts II, the state attorney general.
But reports of political influence have left most state and federal officials unmoved.
For example, Lawrence B. Simons, HUD assistant secretary for housing, said he is concerned only with getting the housing built, not with who builds it.
Garrahy conceded that his office made calls to the state housing agency on behalf of Matteo, Boyle and others, but denied that the calls were meant to influence the agency. The other political figures contacted conceded their ownership of Section 8 projects but denied political influence played a role in their selection.
The scramble for Section 8 projects among politicians and developers is a result of the high profits permitted by the program.
When the state housing agency approves a Section 8 project, the developer receives a low-interest mortgage loan, usually financed through sale of tax-exempt state bonds.
Technically, the mortgage is for 90 percent of the development cost. However, the developer does not have to come up with the other 10 percent. Because the developer is building housing for the poor, the government allows him a guaranteed profit of 10 percent of the project cost, excluding certain fees and land acquisition costs.
The developer uses this paper profit to cover the bulk of his down payment. Several Rhode Island developers and an official of the state housing agency said a developer often puts down no more than $5,e00 of his money at the mortgage closing for a $3 million or $4 million project.
The developer pays off his mortgage over 25 or 30 years through rents charged low-income tenants.
However, most of the rent money comes from HUD. Tenants pay no more than 25 percent of their incomes for rent, with the rest paid by HUD to project owners in the form of rent subsidies. The subsidies are increased automatically as operating costs for apartment buildings go up.
For modest two-bedroom apartments for low-income families and poor elderly, the monthly rents allowed by HUD are as high as $738 in Austin, Tex., $933 in Los Angeles and $577 in Washington. The figures include utilities.
In Rhode Island, the approved rent is as high as $535. By comparison, a two-bedroom apartment in a modern complex with a swimming pool, sauna and tennis courts can be rented for $400 a month, including utilities.
Section 8 rents are determined by HUD through a complicated "fair market" formula that is supposed to reflect local rent structures. However, James Wallace, and economist in the HUD area office in Boston, said so many factors go into the formula that it boils down to "a house of cards type of thing." Another HUD official, who asked not to be named, said HUD can use the formula to justify any numbers.
When the mortgage is paid off, through the subsidized rents, the developer will own the multimillion-dollar building.But he does not have to wait that long to make money.
Most of his profit comes during the first five years through sale of shares in the project as tax shelters.
Two partners in the $3.2 million Foxpoint Manor project in Providence, for example, will make $540,000 over five years from the sale of tax shelters. according to one of the principals. Since the developers usually do not need much of this money to build their projects, it goes directly into their pockets.
Persons in the 50 percent federal income tax bracket buy shares in the projects in order to take on their returns depreciation, mortgage interest and other paper losses generated by the projects.
Robert R. Gaudreau said his Gaujreau and Co. investment firm has handled tax shelter sales for 40 percent of the Section 8 projects in Rhode Island. He said federal tax laws designed to encourage investment in housing for the poor make a Section 8 tax shelter worth 30 to 40 percent more than a comparable shelter in a conventional real estate deal.
An official in the federal Office of Management and Budget said his agency is becoming concerned with the high cost of the Section 8 program. The official, who asked not to be named, said a high-level debate on the merits and costs of the program is beginning.
Supporting just one tenant in an average Section 8 apartment for 30 years will cost the government $343,000, according to a study by the Congressional Budget Office.
There are already 330,000 Section 8 apartments in the country. If no other project is constructed after this year, HUD still will be bound by law to spend $231 billion in rent subsidies over the next 30 years to support projects already built, according to a report prepared earlier this year by the House Appropriations Committee.