Moderate-income tenants at McLean Gardens, a Northwest complex long considered a model for condominium conversion, have discovered that the units they began negotiating to purchase in 1979 now cost more than double what most had expected to pay.
Nevertheless the McLean Gardens residents' association is making one more effort to keep the majority of the tenants in the complex at Wisconsin Avenue and Porter Street NW by seeking below-market rate financing and possible co-investors.
A one-bedroom apartment that one tenant originally had thought would cost about $35,000 now carries a price tag of $76,000. The majority of the complex's 116 households have incomes below $20,000 a year, and 10 percent qualify for subsidized housing, a tenant spokesman said.
"It's just devastating," said one tenant. "A lot of people are in a financially worse situation. A majority of people I don't think can buy."
Although some tenants may be unable to buy their units, those who do will pay substantially less than outsiders. A one-bedroom unit will cost tenants $59,000; outside buyers will pay $109,000.
"I think that's a good deal," says Tenants' Association Chairman Jack Koczela who believes most tenants indeed will be able to buy their units. "I'm sorry most of those who disagree are not looking at the facts."
Nine of the remaining 116 households already have decided to take an $18,000 payoff and move out. If other residents find themselves unable to obtain the financing necessary to purchase units, they also will be entitled to an $18,000 payoff, provided they move out within an stipulated period of time.
The units would be party financed through a second trust provided by the McLean Gardens Ltd. Partnership, a complicated financial arrangement involving several investors which the tenants' association joined in 1979. The general partner is Arthur Rubloff and Co.
Initial terms call for 9 percent interest over a seven-year period, for tenants only. In addition some 12 7/8 percent loans are available for first mortgages for tenants and the general public. The partnership arranged for that financing some time ago. McLean Gardens manager David Epner says the partnership will do everything it can to find permanent financing for the residents. The association also will seek co-investors for its members, a spokesman said.
Attempting to readjust to the harsh realities of high interest rates is but the latest battle in the association's 10-year battle to retain the 43-acre McLean Gardens' tradition as a source of housing for moderate-income families.
Throughout the '70s, tenants fought off developers attracted to the complex because of its unique architecture, park-like setting and convenient location. By 1979, the owners, CBI Fairmac, could no longer afford to hold on to the units and the tenants decided to try to buy into the complex themselves.
Using newly formulated city laws, they retained some leverage by becoming partners in McLean Gardens Limited Partnership's condominium plan. Residents planned to plow back profits into discounts on units.
When the agreement was reached in late 1979, association chairman Jack Koczela said it was "the best they could negotiate." Indeed it looked good, since the tenants actually had not put anything other than the leverage they possessed based on their rights under the District's renter's law. About 50 tenants who were not interested in buying received a hefty $12,000 for moving out. The plan also provided 150 units for a tenant run cooperative, a plan that later fell through.
But another association officer, Richard Breitman, believed he saw a fatal flaw. Units later would be priced for sale based on acquisition and development costs. Within the next year and a half, prices would balloon as interest rates soared, he predicted, and the project had the potential for running into serious trouble.
McLean Gardens also seems to have experienced serious management problems but details concerning them are sketchy. Jeffrey Server, representative of the principal partner, will say only that "we've had management problems, but we've removed them."
One condominium specialist left as managing partner last summer when some renovated units were found not to be up to the project's standards. The units had to be redone, which put renovation behind several months, according to David Epner, who replaced the specialist. Some tenants maintain that there were poor cost controls and delays in response.
"We had a great deal of difficulty getting access to books, because there weren't any," said Andy Vogt, a tenant spokesman.
Epner is philosophical about these problems, however. Given the size of the development, delays are inevitable, he said. Also, peculiarities in the complex's architecture required 36 different floor plans, which complicated renovation, he notes. Phase one with 210 units finally will be completed this month, and phase two with 360 units will start opening up in July.
Lost construction time was especially damaging because development financing has become so expensive. Continental Illinois Bank in Chicago had provided the $31 million rehabilitation loan at two points above prime. But when the prime climbed above 20 percent, the partnership faced potential difficulties: Continental informed the partnership that its financial position was "precarious" because its loan-to-value ratio was out of balance.
Meanwhile, some of the tenants went ahead with their ill-fated plan to turn 150 units of McLean Gardens into a cooperative. Koczela, the motivating force behind those efforts, saw the cooperative as the best way of assuring that McLean Gardens would remain available to moderate-income persons in the future. While condominium owners frequently seek to resell their units at the highest price, a co-op could set a maximum return price in order to hold down prices, he points out.
To make a co-op affordable for low- and moderate-income persons, below-market interest funds had to be obtained from the federal government. However, there was no money left in the programs the tenants tried to tap.
The group of 49 tenants sought money from the National Consumer Cooperative Bank -- only to learn that the bank had frozen loans in the District because it felt it already had made too many housing loans there. Further complicating their efforts, the tenants' group was told it could not receive title until the partnership's development loans were paid off. Given delays in renovation, that was unlikely for some time to come.
Thus, the co-op plan was scrubbed early this year. The tenants then turned back their units to the partnership for development. The prospect of selling those units at something nearer to market prices was enough for the partnership to straighten out its loan-to-value ratio with the bank and remove the threat of bankruptcy. In exchange for the units, Rubloff agreed to set prices on the tenants' units, which the tenants grudgingly agreed to late in April.