After a state audit ruled New Haven overpaid a businesswoman $1.5 million for a parcel of land, the city is asking taxpayers to come up with the cash.
The deal dates back 13 years ago to a construction project for High School in the Community. The city bought the school in 1995 from Betsy Henley-Cohn, a longtime New Haven business owner, financial supporter of Democratic politicians, and wife of then‑U.S. Rep. Samuel Gejdenson.
The city paid $2.2 million for the property at 167 – 175 Water St. in the Wooster Square area. The $6 million project, fully funded by the state, was completed in August 1995.
In an interview last week, Henley-Cohn said her company sold the property at a more than fair price.
“The way we looked at it, the school board got a great deal,” she said.
The state disagreed. In a 2007 audit, the state Department of Education decided that $1.75 million of the project expenses, including $1.5 million for the land sale, were ineligible for state funding.
Click here to read the audit. Click here to read the city’s response.
The audit has left the city scrambling to pay back an unexpected $1.75 million to the state during an economic crisis. To make the payment, the school system has asked the Board of Aldermen to approve a mid-year adjustment to its capital projects budget. The aldermanic Finance Committee approved the request on Nov. 20. It’s set for a final vote before the full board on Monday.
A Tale Of Two Appraisals
What happened?
Two city employees who worked on the project have since died; the school system still couldn’t find its original two appraisals as of press time. But the story can be pieced together through a string of documents.
The dispute boils down to a disagreement over how the 2.7‑acre property was appraised, said the city school construction czar, Sue Weisselberg.
The city hired two firms to determine fair market value of the property in late 1994. The project was originally designed as a “turnkey” project: The city would buy the property only after all the renovations were done, at which point it would “turn the key” to a finished school.
One appraisal by the Michaud Company estimated the “as-is” value of the parcel at $700,000.
A second appraisal done by Blue Ribbon Appraisals Company took a different approach. It didn’t give an “as-is” figure. It gave only a quote for the value of the finished school: $6.5 million. Michaud also gave a figure for the total project: $3.9 million.
The State Bond Commission referenced both appraisals when it approved a $2.2 million acquisition price for the property in December 1994, according to documents provided by the city. The Board of Aldermen approved the project on Feb 21, 1995.
With those blessings, the $2.2 million land sale was signed off by Henley-Cohn, of Knollwood Washington LLC.
The acquisition funds were held in escrow until August 1995, when the city bought a completed school, Weisselberg said. In the fall of 1995, High School in the Community started classes at the building, where it’s been ever since. HSC, a faculty-run school of about 320 students, became a magnet high school.
A Second Look
When state auditors came back to look at the project over a decade later, they took issue with the sale.
Raymond Inzero, chief of the state education department’s Internal Audit Office, scratched his head over how the city came up with the $2.2 million price.
“Where does that come from?” he asked. “We don’t see anything that says that that’s a fair price.”
Inzero’s audit makes no mention of the Blue Ribbon report: He didn’t include it in the draft report because the city couldn’t find a copy; he later ruled that it was not relevant because it didn’t specify an acquisition price.
Inzero didn’t find the Blue Ribbon report relevant because the school system didn’t end up buying a “turnkey” project: The city entered into one contract for acquiring the land, and a separate contract, also with Henley-Cohn’s business, for renovating the facility.
Since the contracts were made separately, the city should have based its purchase on an appraisal of the property “as-is,” Inzero reasoned. The only firm that defined that figure was Michaud.
“I didn’t have anything to go on except that one appraisal, and that’s what we used,” Inzero said. If the city thought that figure was inaccurate, it could have gotten a second quote on the “as-is” price. But it didn’t, so state school construction regulations required the city to stick to $700,000, he ruled. Any penny over would have to be paid on the city’s tab.
Inzero also found a quarter-million dollars in ineligible costs due to inappropriate change-orders and using the property for “other uses.” He sent the school system a draft audit on June 12, 2007.
Mayo’s Math
In a letter of reply from schools Superintendent Reginald Mayo, the city admitted the lesser overages, but not the whopping $1.5 million regarding the sale of the land.
In his rebuttal, dated June 26, 2007, Mayo made a case for why the school system paid $2.2 million for a property that had been valued at a third that much. As evidence, he presented: the Blue Ribbon appraisal, a 1991 city assessment, and the amount of debt owed on the property.
Exhibit A: Debt
In his main argument, Mayo said that the Michaud appraisal failed to take into account the debt owed on the property, a factor he deemed relevant.
As of March 1995, the Water Street parcel had a total of $1,850,000 in outstanding debt:
• A $1.2 million first mortgage from Chase Manhattan Bank of Connecticut;
• A $400,000 second mortgage from Trustees of the Betsy Henley-Cohn Irrevocable Insurance Trust Indenture I;
• A third mortgage from Chase Manhattan, in the amount of $250,000.
“This indicates that the value of the property was at least $1,850,000 as of that date,” reasoned Mayo.
The seller later told the school system that those mortgages “could increase to” $2.2 million.
“This indicates that the value of the property was actually $2,200,000, as third-party lenders were willing to loan that total amount of money against the property,” Mayo argued.
Mayo’s argument was shot down by both a state auditor and an expert in the field.
“We didn’t buy that,” said Inzero in an interview this week. “Take a look at the current mortgage crisis: You think just because you have a mortgage on a property, it’s worth that much?”
There are plenty of homeowners right now whose debts exceed the value of the property, he argued. Many are forced to sell their homes at a loss.
Norman Benedict, a Hamden appraiser who has taught classes on the subject for 40 years, agreed.
“Mortgage is not the prime consideration” in appraising a property, he said. Property values change dramatically over time: If a person got a subprime loan a couple years ago, the value of the home today could be far lower than the amount owed.
Even using Mayo’s logic, Inzero said his office couldn’t corroborate the $2.2 million figure. The debt owed was only $1.85 million, and of that amount, $400,000 was held in a family trust.
“Come on,” Inzero said. The logic “was good for the property owner, because they were able to pay off the debt with that, but that doesn’t mean that’s the value of the property.”
Exhibit B: Property Reval
Before it was sold to the school system, the 2.7‑acre property was home to offices, an electrical company, and two banks, according to Henley-Cohn.
In October 1991, a firm hired to assess all property in the city pegged the value of the parcel at $4.86 million, according to the city.
The $700,000 figure “in no way compares” to the assessment just three years prior, Mayo argued.
Inzero rejected this argument, too.
“They need to have an independent appraisal,” Inzero said, not a city assessment from a few years before. “We’re not going to accept that.”
Exhibit C: Blue Ribbon
The Blue Ribbon appraisal assessed the whole project at $6.5 million. The total budget ended up falling in that ballpark, justifying the acquisition price, Mayo argued.
He vouched for the firm’s track record: The school board has used Blue Ribbon Appraisal Company for several projects, and the appraisals have come in within 10 – 15 percent of other appraisals for the same property, he wrote.
Inzero said Blue Ribbon’s report couldn’t be used because it didn’t define an acquisition price.
The state’s final audit came out a few months later, in October 2007, rejecting the school system’s plea to leave the grant money intact.
“Unfair”
The school system thought it would have 20 years to pay the money back, according to Weisselberg. In August of this year, as an economic crisis swept the nation, the state came knocking. It gave the school system until late October 2008 to pay back the funds.
“It seems on the face of it perhaps unfair,” said Weisselberg, “when there’s a lot of time to conduct an audit, but … not a lot of time to pay it back.”
Inzero countered that the state gave the school system a whole year to get the funds together, plenty of time to budget for the reimbursement in its FY09 fiscal year. He said the audit wasn’t done in 2007 because the school system didn’t submit its final paperwork until 2001.
The school system has to pay the state back the $1.5 million difference, plus $242,096 in ineligible expenses and $21,109 for energy rebates. That’s a total of $1,757,076.
The city vowed to get the funding through a bond authorization, prompting a mid-year amendment request before the Board of Aldermen. The state has promised not to yank other grants away from the city to make up the shortfall, Weisselberg said.
Abandoned
In an interview last week, Henley-Cohn recounted how her property fell victim to the last time the real estate market collapsed.
The two adjacent properties, 167 – 175 Water St., were owned by a company called Cohn and Monaco, under the name C + M Associates. Henley-Cohn poured money into the property, only to have it abandoned after its tenants went bankrupt, she said.
To fix up the site for tenants, C + M took out a $6 million construction loan and made millions of dollars in improvements, Henley-Cohn said. The improved building became the offices of the First Constitutional Bank.
After that, however, the economy took a tumble. Amid a rash of bank failures, the First Constitutional Bank went bankrupt. Webster Bank took ownership in an FDIC-assisted takeover. Then Webster Bank consolidated its headquarters elsewhere, abandoning the building.
When the Michaud Company came to take a snapshot of the property in 1994, its main tenant, Webster Bank, had left town, Henley-Cohn said.
She noted there are three ways to do appraisals: By using comparable sales, replacement cost or current income in rent. Henley-Cohn suspected the Michaud appraisal was done in the third way. With little rent coming in, the value appeared low, she reasoned.
Inzero said Michaud didn’t have many comparables to go from. It based the appraisal on a number of factors, but did not mention income from tenants.
Henley-Cohn said she couldn’t remember the details well enough to explain the difference in appraisals, but she was certain she gave the city a fair deal.
“I think it was the cheapest school that they ever bought,” she said.
“It’s certainly one of our least expensive projects,” Weisselberg agreed. But she noted it didn’t have the features, such as energy efficient windows, that the school system is now making a regular part of each school redo. In its Master Plan Update for 2008, the school system had recommended a $25 million upgrade, including $1.5 million of city funds, of HSC, including “window replacements, energy upgrades, fa√ßade/entrance improvements, small additions,” she said.
What recourse does the city have, other than asking its taxpayers to repay the state? Inzer said the city could ask state lawmakers to draft special legislation allocating the funds — an unlikely event during a budget crisis, he thought.
Weisselberg said she would be approaching the state legislature for help.
Meanwhile, her request is poised for approval at Monday’s Board of Aldermen meeting at 7 p.m. in City Hall.
As the land deal becomes scrutinized, the city has removed the listing for the property from its Vision Appraisal site. “The information for this parcel has been suppressed at the owner’s request,” the site reads. The listing had been on the site last week.
This is just the tip of the iceberg. Wait until the bill comes in for the "new" Hooker (read "deStefano") school, including the price paid for the land and the fact that the construction is proceeding six days per week (a LOT of overtime).