It sure looked like a good deal at the time.

A nonprofit developer promised to spend millions renovating three rotting apartment complexes in some of the most blighted neighborhoods of Southeast Washington. It would be one of the largest redevelopment projects in years east of the Anacostia River, helping dozens of low-income renters suffering through roof leaks and winters without heat.

In late 2007, then-Mayor Adrian Fenty sent a letter to the D.C. Council touting the developer’s experience, construction team and financing. The council swiftly approved the deal, lending $3.5 million in federal funds to help pay for the renovation of 98 units priced for the poor.

But the project died before a shovel ever hit dirt.

East of the River Community Development Corp. had taken on nearly $8 million in mortgages to buy complexes riddled with leaks, sewer backups, and buckling stairwells, roofs and floors.

Soon after the city delivered the federal money, the group declared bankruptcy and shut down. The District lost millions of dollars while the project was delayed for years.

But one group reaped millions. A handful of real estate speculators, including three previously convicted in a sweeping housing fraud scandal, had sold the complexes to East of the River based on adjusted appraisals written by one of the sellers’ associates, The Washington Post found.

The project is a case study of the breakdowns in the nation’s $2 billion-a-year affordable-housing program, in which extensive construction delays have derailed the development of thousands of homes.

The District’s East of the River project involved an inexperienced developer that cut an ill-fated deal with savvy speculators under the watch of a local housing agency that failed to protect the government’s investment.

Waste and weak oversight are endemic at housing agencies nationwide. A Post investigation found that about $400 million in affordable-housing funds from the U.S. Department of Housing and Urban Development is tied up in hundreds of troubled construction projects, including the one proposed by East of the River.

“Nothing was ever done to our building. It was a shell,” said Marva Jones, a court clerk who had lived in a $580-a-month apartment in one of the buildings that East of the River was supposed to renovate. “The buildings were just sitting there — two years later.’’

The East of the River Development Corp. was created in the late 1980s to bring growth to the distressed neighborhoods east of the Anacostia River. It helped foster small construction projects and academic and recreational programs, and it built its headquarters and space for a children’s medical clinic on Martin Luther King Jr. Boulevard, amid the bustling, embattled hub of Southeast.

In February 2006, East of the River hired Linda Jackson to replace Executive Director W. Retta Gilliam, a beloved advocate who had been struck and killed by a car while crossing Suitland Road a year earlier. Jackson had been the low-profile director of a nonprofit that built a recreation center in the area.

Within months, Jackson launched East of the River on a project far larger than anything the group had attempted previously.

At the time, the city had federal money and tax credits to fund affordable housing. Federal rules require that 15 percent of local HUD money go to community-based nonprofits, even if they have little experience in construction.

Jackson said Jay Greene, then director of the D.C. Department of Housing and Community Development, was encouraging East of the River to purchase property for renovation.

“We didn’t just get into this out of the blue,” said Jackson, 59. “We had several conversations with [the city] that led us in that direction.”

That’s when real estate agent Gemma Morris came knocking.

A longtime fixture in District real estate circles, Morris was representing a small group of speculators with ties going back decades.

Steven Madeoy, Jack Spicer and Marvin Gitelson had known one another for years: Spicer and Gitelson had both worked with Madeoy’s father, an appraiser at what was then the Veterans Administration. Madeoy had worked for Gitelson soon after he got out of college.

All three were convicted in a scheme in the 1980s that involved getting straw buyers to purchase properties in the District at inflated prices using fraudulent appraisals. HUD backed the loans and ultimately lost millions of dollars. The Post called it the largest real estate fraud of its kind in the city’s history; about 30 people were convicted.

Madeoy, then in his mid-30s, was described by prosecutors as “a predator of the most vicious sort.” He was convicted on 81 counts of conspiracy, bribery and fraud, serving 21 / 2 years in federal prison. His father and brother-in-law were also convicted. A defense psychiatrist at the time described Madeoy as “a very caring person” whose motivation was not greed but to “create a success for his father,” court records show.

In 1992, while he was still in prison, Madeoy was convicted on a new charge: bid-rigging D.C. real estate auctions. He was released from prison in 1994.

Madeoy, of Potomac, returned to real estate, buying apartment complexes in the District and Maryland.

Spicer, a well-known real estate agent who had cooperated with prosecutors during the HUD investigation, served four months in a halfway house. Gitelson served one year in prison and six months in a halfway house.

In recent years, Spicer, 64, of Bethesda, and Gitelson, 76, of Northwest Washington, have also been buying and selling property.

Spicer had frequently used Gemma Morris to broker his real estate deals. In 2006, as East of the River was searching for properties to buy and renovate, Spicer suggested that Madeoy use Morris as well.

“That’s because I deliver,” recalled Morris, who was not involved in the HUD scandal.

‘It’s a profitable practice. . . .
It’s not illegal’

Morris immediately set up a meeting with Jackson and proposed that East of the River buy two decrepit apartment complexes, one owned by Madeoy, the other by Spicer and Gitelson. Both properties had been acquired for a quick sale, a process known as “flipping.”

Jackson said she did not know Madeoy, Spicer and Gitelson or any details about their pasts.

“If [Morris] had told me about their criminal backgrounds, I probably would have walked away from the deal,” Jackson said.

One of the properties that Morris was pitching was a 26-unit, rent-controlled building perched on a hillside on 29th Street SE that Madeoy had purchased in August 2005 for $1.2 million. He borrowed 100 percent of the purchase price with loans from private investors. The loans stipulated that the money would be paid back in one year.

The sale had a tangled history that included the involvement of a District politician.

In 2004, when the building was first put on the market, apartment developer Steve Schwat offered $950,000 to buy it. Schwat planned to make repairs without displacing families. At the time, the complex was home to a tightknit group of tenants who would share dinners and keep watch over one another’s children.

The Schwat sale never happened.

Before the deal was sealed, tenants were contacted by Paul Strauss, a lawyer who serves as the District’s “shadow senator,” an unpaid elective office that lobbies for D.C. statehood. Strauss and his law partner, Richard Bianco, offered to help tenants negotiate cash settlements in exchange for moving out.

Schwat couldn’t afford to pay tenants to leave. But Strauss and Bianco said a new buyer had emerged, with a $1.2 million purchase price that included payouts of $13,000 or $18,500 per tenant. The buyer was Madeoy.

Strauss said that he considered the deal good for tenants and that they directed him to accept the offer. “My recollection was that these were happy tenants,” Strauss said.

Bianco said he could not recall whether he knew about Madeoy’s background at the time, saying, “We came in and represented the tenant association and got them a good deal.”

Just before tenant leader Marva Jones signed the move-out agreement, she met Madeoy. Over casual conversation at the settlement office, he mentioned that he had changed his life after serving time in prison.

“I’m going, ‘Oh, my God. Who are we doing business with?’ ” Jones said.

A year later, Madeoy’s two associates, Spicer and Gitelson, bought a 30-unit garden-style apartment complex on T Street SE for $1.8 million. Like Madeoy, they drew 100 percent financing from other investors. The loans were to be paid back within months.

Just weeks later, after meeting with Spicer’s longtime real estate agent, Jackson at East of the River agreed to buy both the T Street property offered by Spicer and Gitelson and the 29th Street property offered by Madeoy. She said she thought she was making a good deal for the people of Southeast.

“People flip properties,” Jackson said. “It’s a profitable practice. It’s done. It’s just done. It’s not illegal. People do flip. Now, I was not aware during these transactions that that was what was happening, and I’m not condoning it at all.”

Madeoy, Spicer and Gitelson told The Post that they were simply trying to sell their buildings and suggested that Morris come up with a buyer. “There was no collusion — zero,” Gitelson said.

Spicer added: “Everything we’ve done is 100 percent kosher. I’ve had my aggravations, and I never want to go through that again.”

Jackson also wanted to buy a third property on Jasper Place SE, a 40-unit building owned by Peter Odagbodo of Prince George’s County. The property was presented to her by Ari Firoozabadi, a broker at Marcus & Millichap.

It was in bad shape, with building-code violations for leaks and other problems. In 2005, Odagbodo had failed to pay nearly $46,000 in utility bills, records show. Tenants had contacted housing advocates to force repairs.

Tenant Andre Wallace recalled how he would bundle his three children in blankets and keep boiling water on the stove, hoping the steam would heat the apartment, which had no working furnace.

“Nobody would come up there and fix it,” said Wallace, who paid $550 a month in rent.

Later, architects found that the roof had rotted, allowing so much water to penetrate the complex that the walls had become unsound.

“It was uninhabitable,” recalled Michael Wiencek, an architect who had been hired by East of the River.

Jackson decided to buy that building, too.

She said she was aware the buildings needed work, but “we truly wanted to provide more affordable housing.”

‘When the going is good,
you get out’

The sellers were charging a premium for the three properties.

Madeoy was asking $2 million for his vacant 29th Street property — $800,000 more than he had paid the year before.

Spicer and Gitelson wanted $2.5 million for the 46-year-old T Street property — $700,000 more than they had paid for it two months earlier.

Odagbodo’s price for the run-down Jasper Place property was $3.2 million — $2.7 million more than he had paid four years earlier.

Odagbodo’s broker, Firoozabadi, said the price was fair. “There was a buyer that was willing to pay for it and when the going is good, you get out,” he said. “It’s capitalism.”

To justify the asking prices for the three buildings, Jackson hired property appraiser Wayne Rogers.

Rogers, of Bethesda, had known Madeoy since the late 1990s, with Rogers occasionally providing appraisals for Madeoy’s properties. In 2003, the two, among others, had been sued by a Montgomery County couple who accused them of using inflated appraisals and false documents in the District and Baltimore. The case was dismissed when neither party showed up for court. Madeoy said he did not recall the lawsuit, and Rogers declined to discuss any legal matters.

Rogers had also been sued over his appraisals by several lenders, including one that accused him of using false information to justify property valuations, records show. The case was settled in 2001. Seven years later, the D.C. Department of Consumer and Regulatory Affairs fined Rogers $6,000, placed him on probation for two years and ordered him to take continuing-education classes after one of his clients complained about an appraisal, records show.

Rogers’s appraisals for the three East of the River properties were based largely on what he said were comparable sales of similar buildings in the District. But in each of his three appraisals, the buildings were different in size, condition and unit mix, records show.

In addition, in two of the appraisals, for T Street and Jasper Place, Rogers wrote that he had made “adjustments” in the comparable sales, raising their values by as much as 170 percent. He offered no explanation in the documents.

Appraisers will often adjust the value of comparables based on such things as lot size, condition or age of the building and features. But adjustments of more than 40 percent can raise red flags with underwriters and usually come with detailed explanations, according to two veteran appraisers who reviewed the reports for The Post.

The questionable comparisons, along with a series of other inconsistencies, allowed Rogers to significantly inflate the value of the properties that East of the River planned to purchase, the appraisers said.

“There are so many problems that are riddled in these reports — it’s a mess,” said appraiser Al Riley, whose Gaithersburg-based firm has worked in the D.C. region for three decades. “These reports do not comply with uniform standards of professional appraisal practice. The errors and omissions perpetrated throughout these appraisals lead to an unreliable conclusion of market value all the way through, from page one through the last page.”

Rogers, 58, would not talk about the appraisals, saying they were privileged documents prepared for East of the River. “You’re stepping over all kinds of codes for me, and I’m not comfortable with doing that,” he said.

He said East of the River’s lenders vetted the appraisals, adding: “Banks don’t lend 10 cents without having documents reviewed.”

Rogers said that Jackson had asked him to prepare the appraisals and that he had not done any work for East of the River before then. He acknowledged working with Madeoy in the past, saying, “Appraisers do work for people a lot, the same people.”

Madeoy said he could not recall whether he had recommended Rogers to East of the River.

“You’re going back six years,” he said. “I can barely tell you what I’ve had for lunch.”

The other sellers — Spicer, Gitelson and Odagbodo — also said they had no idea why Jackson hired Rogers. “I want to keep arm’s length in every direction because of the headaches I had in the 1980s,” Spicer added.

The real estate agents, Morris and Firoozabadi, said they had no role in the appraisals.

Jackson said that she could not recall why she selected Rogers but that she thought a commercial lender had recommended him.

At the time, the appraisals raised questions inside the ranks of East of the River.

Rick James, a banker and appraiser who had been hired by East of the River as the deal was taking shape, said he had urged Jackson to reconsider.

“I just didn’t agree with any of the reports. The comparables on the appraisals were significantly lower and just not applicable,” he said. “It just didn’t make any sense.”

Jackson said James never advised against buying the buildings, adding: “Those appraisals were scrubbed, reviewed and approved.”

She also said that she believed the asking prices were not out of line. “It was 2006, and the market was very hot,” she said. “There was very little room for negotiating.”

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.