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The Wall Street Journal
July 5, 2006
PAGE ONE
Housing Ministry
Scrutiny of Down-Payment Gifts Threatens Charitable Movement
Nehemiah Aided Home Buyers While Founder Got Fees; IRS Questions Tax Status
A Sales Gimmick for Builders?
By MICHAEL CORKERY
July 5, 2006; Page A1
SACRAMENTO, Calif. -- A decade ago, Don Harris, then a minister at a Baptist
church here, came up with a simple idea for helping needy families: Give
them down-payment money to buy their own homes.
By late 2001, the nonprofit group he set up to raise and distribute those
gifts, now called Nehemiah Corp. of America, had helped 100,000 low- and
moderate-income families across the country buy homes. Mr. Harris's "social
ministry through affordable housing," as he described it on NBC's "Today"
show, became a contributor to the nation's housing boom.
Picture: http://tinyurl.com/ovh3u
[Don Harris]
But now, the business model Mr. Harris devised to make that happen is under
intense scrutiny from several quarters, plunging Nehemiah and the many other
nonprofit groups that copied his formula into uncertainty.
Mr. Harris stands accused of improperly enriching himself at Nehemiah's
expense. According to a lawsuit filed against him by Nehemiah in California
state court in 2003, a for-profit marketing company partially owned by Mr.
Harris collected $42 million in fees from Nehemiah between 1998 and 2002.
Some other down-payment-assistance programs relied on similar business
models in which executives had financial relationships with for-profit
marketing affiliates, raising questions about whether charity was their main
motive. Marvin Friedlander, chief of the Internal Revenue Service unit that
issues legal decisions involving tax-exemption issues, says the agency is
concerned about the for-profit marketing arrangements and is pursuing a
"very active program" to recover any excessive benefits to executives.
The IRS also has raised concerns about how the programs raise down-payment
money. Nehemiah and many other programs rely on home sellers -- both home
builders and individual homeowners -- to fund the down-payment gifts. The
IRS said that practice is benefiting profit-driven sellers and may not
qualify as a charitable activity. In May, the IRS said it would review the
tax-exempt status of such programs. In Ohio, some home buyers who accepted
down payments from a charity are suing the home builder who provided the
gifts to the charity, claiming the builder inflated sale prices by adding
the cost of the gifts.
Mr. Harris didn't respond to requests for comment. In his answer to the
Nehemiah lawsuit, filed in Sacramento County Superior Court, Mr. Harris said
the marketing arrangement was approved by Nehemiah and that he acted in
"good faith" and with reasonable business judgment. In a court filing in
April, Nehemiah indicated that it had reached a confidential settlement with
Mr. Harris and that it would seek to dismiss the case in 2007 "if and after
the settlement conditions are fulfilled." Nehemiah's lawyer declined to
elaborate.
Top executives at Nehemiah and some other large down-payment-assistance
groups maintain that they have improved business practices and discontinued
controversial marketing arrangements. Scott Syphax, who took over as
Nehemiah's chief executive officer in 2002, says he has been pushing for
closer oversight of the industry by the federal government, which he says
might have prevented some of the early problems.
No one disputes that the down-payment-assistance groups boosted home
ownership for lower-income Americans. Between 2000 and 2005, they provided
gifts to 625,000 families, several leading groups estimate. During that
period, the number of owner-occupied homes increased by about 3.3 million,
according to the U.S. Census Bureau. By helping lower-income Americans
without tapping government money, the groups seemed to deliver just the kind
of assistance the Bush administration was calling for from faith-based and
other nonprofit groups.
Some of the nation's largest home builders participated in the programs,
including Atlanta-based Beazer Homes USA Inc., Los Angeles-based KB Home,
and Dominion Homes Inc. of Dublin, Ohio.
But separate governmental reports have raised two concerns. The inspector
general of the U.S. Department of Housing and Urban Development reported in
2000 that default rates on mortgages made through gift programs were well
above average. (Nehemiah disputes that finding.) And the Government
Accountability Office reported last November that homes purchased with
down-payment gifts were priced about 2% to 3% higher than comparable homes
bought without such assistance.
In 1997, Mr. Harris, now 41 years old, was serving as a minister at Antioch
Progressive Church in a working-class neighborhood of Sacramento. Mr.
Harris, a lawyer, was well-known in town, having worked for the former mayor
and at a prominent local law firm, McDonough, Holland & Allen. "He was very
knowledgeable about real-estate issues," says Walter Edwards, an original
Nehemiah board member, noting that Mr. Harris sat on the board of the
Capital Area Development Authority, which was redeveloping large swaths of
the city.
Mr. Harris noticed that many community residents had jobs and decent credit,
but couldn't come up with enough cash for a down payment on a home. At the
time, no-down-payment mortgages -- where home buyers can borrow 100% of the
purchase price -- were available mainly to people with good credit and
fairly high incomes. The Federal Housing Administration, an agency under
HUD, insured mortgages for first-time home buyers and those with decent
credit, but required them to put up at least 3% as a down payment.
Since the 1970s, HUD has permitted buyers to use gifts from family members,
employers or charities for down payments. Mr. Harris decided to build a
nonprofit group around this provision. His innovation was to persuade home
builders and home sellers to put up money for down-payment gifts. Many
sellers saw it as a way to boost home sales. Home builders and real-estate
agents would steer lower-income buyers to the charity. The charity would
provide the down payment as a gift and collect an identical amount, plus a
small fee, from the home seller.
Mr. Harris sold Antioch Progressive Church on the idea and formed a
nonprofit group called Nehemiah, named after the Old Testament figure who
rebuilt Jerusalem. Curtis Mitchell, who is Antioch's pastor and Mr. Harris's
stepfather, had raised Mr. Harris and regards him as his own son. The church
lent Nehemiah $35,000.
In May 1997, the HUD office in Sacramento cleared Nehemiah's plan to raise
down-payment funds from home sellers, on a six-month basis. The group's
first gifts allowed about 160 people in Meadowview, a Sacramento
neighborhood filled with older rental homes, to purchase mostly duplexes. On
average, buyers received gifts equaling 5% of a $101,000 purchase price.
Franklin Lue, a real-estate agent and retired auto mechanic who had once
sought bankruptcy protection, received a Nehemiah down-payment gift in 1998.
It enabled him to buy a three-bedroom house in a Sacramento suburb for
$131,000. "I was turned down by all the traditional banks and the credit
unions," says Mr. Lue, who says he has never missed a mortgage payment.
"It's because of Nehemiah that I'm in this home."
In Nehemiah's early days, Mr. Harris met Ron Mellon, a broker and marketer
for a local home builder. Mr. Mellon says he was impressed with Mr. Harris
and Nehemiah and thought he could help the fledging charity grow.
Mr. Mellon says he had no interest in working for a nonprofit. He formed a
company called Invision Marketing & Sales Inc., which Nehemiah retained to
help it reach real-estate agents, home builders and other industry
professionals. He contended that a for-profit company would perform better
than a nonprofit group because marketing representatives who earned
commissions would work harder. "Don [Harris] didn't have any marketing
experience," he says. "What I offered was a proven commodity."
Chart: http://tinyurl.com/m2mp2
[A Helping Hand]
Home builders typically would pay Nehemiah 6% of a home's sales price, which
covered a 5% down-payment gift and a 1% fee. Mr. Mellon says Invision would
usually take one-third of the fee.
Mr. Harris persuaded Nehemiah's board in November 1997 to invest $40,000 in
the marketing company. Nehemiah received a 51% stake, according to the
subsequent lawsuit.
In July 1998, Nehemiah's board transferred 3,750 shares of Invision to Mr.
Harris as compensation for his work, the lawsuit said. Later, the board
transferred 4,900 additional shares to Mr. Harris. According to the lawsuit,
Mr. Harris told the board that "such compensation was commonplace in the
nonprofit sector as a means to retain effective leadership," and that the
share transfers had been reviewed by Nehemiah's lawyer. Craig Allison, a
lawyer for the board, says directors "relied on Mr. Harris recommendation
and expected that any decisions that were made would be in the best interest
of Nehemiah."
In the spring of 1998, HUD's national headquarters approved Nehemiah's
program of seller-funding, which allowed the group to offer down-payment
grants throughout the nation.
That October, Nehemiah's board agreed to sell its remaining shares in
Invision back to the marketing company for less than they were worth, the
lawsuit said. Mr. Harris misled the board, the suit alleged, by saying that
Invision intended to expand and compete with some companies that
participated in Nehemiah programs, and that Nehemiah's remaining involvement
would create a conflict. In his answer to the complaint, Mr. Harris said the
transactions were "just, fair and reasonable." They left Mr. Harris with 38%
of Invision, and Mr. Mellon and a third partner divided the remaining 62%,
the lawsuit said.
Rapid Growth
After receiving national HUD approval, Nehemiah grew rapidly. For the year
ended June 1999, it took in $67 million in down-payment contributions and
fees, and in the following year $139 million. Mr. Mellon says he traveled to
real-estate conventions continually, and Invision's staff grew to 50. "Our
goal was to get the word out to every builder and Realtor in the country,"
he says.
Nehemiah and Mr. Harris were lauded for fostering economic development in
once-blighted neighborhoods. From the money it made on fees, Nehemiah
donated to other charities and lent $12 million to Antioch to build a new
church.
Nehemiah's success prompted others to launch similar nonprofit groups -- and
for-profit marketing arms. In 1999, two men in Provo, Utah, created Buyer's
Fund Inc. and the next year a for-profit marketing firm, Neighborhood Gold.
The marketing company received 75% of fees paid to Buyer's Fund by home
sellers, according to a lawsuit filed in Utah state court by a former
president who claims he was forced to resign for raising objections to some
of the charity's business practices. The nonprofit group's founders
"personally pocketed $12.5 million" in less than four years, the lawsuit
alleges. "My clients did nothing wrong," says Stephen Quesenberry, a lawyer
for the founders, referring to the plaintiff as a "disgruntled" former
employee. The two founders are no longer running the nonprofit.
AmeriDream Inc., based in Gaithersburg, Md., used a marketing firm called
Synergistic Marketing Inc., which was started by the charity's founders,
according to testimony at a 2004 Senate hearing on charity oversight and
reform.
Mr. Friedlander, whose IRS unit is now scrutinizing down-payment assistance
groups, says there is concern that fees paid by some down-payment charities
to marketing firms may have been excessive. The IRS says its rules prohibit
officers of nonprofits from benefiting excessively from charitable
activities.
An audit in 2000 by HUD's inspector general concluded that in some cases,
home sellers were raising sales prices to recoup down-payment grants. In
Columbus, Ohio, homeowners have sued Dominion Homes, alleging it defrauded
buyers by not disclosing that the costs of down-payment grants they received
from Nehemiah were tacked on to prices of their homes. "In essence, people
paid more than fair-market value for their homes," says Edwin Hollern, the
home buyers' lawyer.
Cliff Rece, who in 2002 paid $178,000 for a Dominion House in a Columbus
suburb, contends the home is now worth less than that because the cost of
his down-payment gift was built into the price. "We want to move but we
cannot without taking a loss," says Mr. Rece, who is part of the lawsuit.
William Cornely, Dominion's chief financial officer, says the lawsuit is
"without merit." Dominion still participates in down-payment assistance
programs, he says, but less frequently than it used to.
Advocates of down-payment-assistance programs note that some charities have
been working to eliminate problems. In January 2001, Mr. Harris hired Mr.
Syphax to succeed him as chief executive. Mr. Syphax, a former
public-affairs executive at Eli Lilly & Co., had worked as a volunteer and
later as a paid consultant to help guide Nehemiah's lobbying efforts in
Washington.
'Extreme Difficulties'
In a subsequent court filing, Mr. Harris, who continued as Nehemiah's
chairman and general manager, said he began experiencing "extreme
difficulties" with Mr. Syphax over Nehemiah's direction and charitable
mission. In 2002, Mr. Harris resigned as general manager, then as chairman.
Mr. Syphax declines to discuss Mr. Harris's departure.
Mr. Syphax says that when he took the job, he conducted a "mock" IRS audit
of the down-payment program. The audit, he says, revealed that "excess
benefits" in the form of marketing fees had gone to a "former officer" of
Nehemiah, whom he declines to identify. Mr. Syphax says he decided to move
marketing in-house, and did not renew a contract with Invision.
Mr. Syphax says he was concerned about losing Nehemiah's tax-exempt status,
and through a representative requested help from the IRS with handling the
excess-benefit issue. (The IRS declines to comment on Nehemiah.) He says he
also alerted HUD about a variety of industrywide problems, including
questionable marketing arrangements and inflated sales prices. He says that
some other gifting groups, which he declines to identify, complained to him
about his contacts with the government.
The chief executive officer of AmeriDream, Ann Ashburn, says her group has
gone through a "self-cleansing process." Its founders have resigned and
AmeriDream no longer uses their marketing firm, AmeriDream's spokesman says.
Nehemiah sued Mr. Harris in May 2003, accusing him of "unseemly wheeling and
dealing in the nonprofit world," according to an amended complaint. It also
sued Mr. Mellon, who settled with the charity.
Mr. Mitchell, the pastor of Antioch Progressive Church, says his son is
"hurt because of all of the allegations that have been said about his
intent." Mr. Mitchell says he remains proud of Nehemiah. "I'll never allow
anyone to steal God's glory for what has been done in this church and in
this ministry," he says.
http://online.wsj.com/article/SB115206534292398085.html
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WSJ: Scrutiny of Down-Payment Gifts Threatens Charitable Movement
