How lease deal profited Menendez
Sunday, September 24, 2006 Star-Ledger
 
For the 20 years that Robert Menendez owned a house on 41st Street in Union City, the property served him well -- first as his home and office, then as a profitable investment.

That was before the three-story brick building caught the attention of federal investigators and became a political headache for the Democratic senator in this fall's election campaign.

Questions have surrounded his rental of the house to the North Hudson Community Action Corp., a nonprofit agency that Menendez, as a congressman, helped win federal funding. Menendez says there was nothing wrong with the deal, but Republicans allege he improperly made a profit at the expense of taxpayers.

A review of the lease, obtained by The Star-Ledger, shows that his income from the property depended on the flow of federal money: An escape clause -- unusual but not unheard of for non-profit organizations -- allowed NHCAC to void the lease if its federal funding dried up.

Interviews and examination of other records of the property show how a series of actions by the city, county and federal governments while Menendez was Union City's mayor and then its representative in Congress helped him earn a profit as a landlord.

Campaign spokesman Matt Miller said that at each step along the way Menendez acted properly and did not use his political influence to benefit himself. He acknowledged, however, that Menendez "misspoke" when he said last month that he only broke even on the rental.

Miller said too much attention is being given to questions "about a house that Bob Menendez rented out 12 years ago and that he hasn't even owned for three years. This is a distraction because the press makes it a distraction."

RESIDENTIAL TO COMMERCIAL

Menendez and his former wife, Jane Jacobsen Menendez, purchased the house in 1983 for $92,000. Menendez had his law practice downstairs, and his family lived on the top two floors. The previous owner, a doctor, had a similar setup.

Menendez became Union City mayor in 1986. Two years later the family moved to another home in town, and Menendez rented the 41st Street house as office space to a lawyer and an advertising agency.

David Spatz, Union City's zoning consultant, said a variance would have been required for the house to switch from mixed use as home and office to all-commercial use.

The city building department's file on the property does not contain any record of such an approval. Nicholas Recanati, who was the city's construction official in the early 1990s, said in a recent interview that many of the department's records were destroyed by a flood at that time.

Recanati said he approved the continued use of the building for offices after NHCAC moved there in 1994, since that did not amount to a change in use. "When I had the job, everything was done above board as far as I'm concerned," Recanati said. "I don't know what happened in 1988."

Miller, Menendez's spokesman, said the senator could not recall whether or not he got a variance to rent commercially. "He can't remember exactly how this happened 18 years ago. Eighteen years is a long time," Miller said.

TAX APPEAL

Menendez left the mayor's office for Congress in 1993 and was replaced by his friend and ally, Bruce Walter.

In 1994, Menendez successfully filed a tax appeal with the city, contesting an assessment set by a 1991 revaluation that had increased his property taxes by more than $2,000, to over $9,000.

The Hudson County Board of Taxation reduced his assessment from $301,500 to $203,000. That reduction of nearly a third led to a drop in his tax bill from $9,160 in 1993 to $6,748 the following year. County records, which show comparable sales and appraisals backing up a petitioner's claim, are not kept back that far, officials said.

Hugh McGuire, Union City's tax assessor at the time, said Menendez's property included a vacant lot next to the house. He said the 1991 revaluation overvalued it by failing to take into account zoning rules that prevented building on the narrow second lot.

"He may have gotten a higher reduction because of the type of property it was," said McGuire. "If someone came in with the same type of property, they would have been treated the same way."

THE LEASE

In November 1994, Menendez signed a lease with The North Hudson Community Action Corp. The nonprofit agency provides social services and health care for the poor, and has long relied on federal funds. It moved the administrative offices for its Head Start early education programs into the house.

As a congressman, Menendez had voted along with hundreds of his colleagues to fund Head Start. Menendez said he received verbal clearance from the House ethics committee to ensure his roles as congressman and landlord did not pose a conflict of interest.

Ellen Weintraub, who served on the House Ethics Committee at the time, said there was no rule against such an arrangement as long as the rent was market rate. The three-year lease charged $3,100 per month, which Menendez said was slightly under market rate, a statement backed up by local real estate agents in a 1996 Jersey Journal article.

The lease included language that says the nonprofit agency's "ability to pay rent" and meet its obligations under the agreement "is dependent upon tenant's receipt of certain federal and/or state funding." It gave the agency the right to terminate the lease with 60 days notice if that funding fell through.

Joseph Lauro, a spokesman for the agency, said the provision is included in leases NHCAC has with landlords for its other buildings. Real estate experts say such a clause is not unprecedented in leases with nonprofit organizations.

"I think it's a bit unusual but not completely atypical in a leasing transaction with a nonprofit," said Wayne Heicklen, a New York real estate lawyer with more than two decades of experience with commercial leases.

Alex Knott, political editor for the Center for Public Integrity, a nonprofit watchdog agency in Washington, D.C., said that clause reinforced his view that the rental was a conflict of interest for the congressman.

"He may not receive income if this group doesn't receive federal grants. It's pretty clear-cut there," Knott said. "It also clearly shows that federal money was going to go back into his pockets by renting this property."

Miller said the lease does not raise conflict questions because North Hudson's funding was controlled by federal agencies that make decisions according to federal formulas based on merits.

CLEARING A PROFIT

In an interview last month, Menendez said the rent payments from NHCAC barely covered his mortgage, taxes, insurance and maintenance.

"What they were paying basically carried the cost of the property," Menendez said.

But a review of public records indicates the arrangement was profitable.

For example, Menendez collected $40,800 in rent in 2001, according to an annual statement he filed with the Union City tax assessor's office. The tenant paid utilities, and the only expenses Menendez listed on the form were $2,975 for insurance and $1,000 for building maintenance.

Menendez's property tax bill was $9,399 that year, city records show. That left him with $2,285 per month to pay his mortgage. He had taken a $74,000 mortgage in 1983 to purchase the house for $92,000. (He sold the house in 2003 for $450,000, after collecting more than $300,000 in rent over nine years.)

Miller said the congressmen could not recall how much his mortgage payment was, but acknowledged he made a profit. "He misspoke when recounting from memory the details," Miller said. "But the point he was trying to make is that it was leased at fair-market rent, and that is correct."