Thursday, February 25, 2010

Rushern Baker on the Spot, Part Four

Meet David H. Hillman. He’s a 67-year-old, self-made white billionaire. He once lived in Bethesda, but now lives in an 11,809-square-foot, $6.3 million mansion in McLean. He is one of the biggest apartment building owners in the Washington metro area. He has given thousands of dollars to Republican politicians including George W. Bush, John McCain, George Allen, Michael Steele, Mitt Romney and Rick Santorum in addition to thousands more to the Republican National Committee. And a year from now, he could be the second-most powerful man in Prince George’s County without even living there.

Why? Because after spending over three-quarters of a million dollars, he may finally get Rushern Baker elected County Executive.

David Hillman could write an encyclopedia on hard work, success and power. Gazette columnist Blair Lee profiled him in 2005, writing, “Hillman, the son of a grocer, was an accountant back in the 1960s when one of his clients offered to sell him a mismanaged apartment building. Hillman, who knew nothing about real estate, took the offer and began building a real estate company, Southern Management, that today owns 70 apartment buildings (23,000 units including 890 units in Prince George’s), employs 1,200 people and is worth more than $2 billion.”

Hillman’s Southern Management Corporation (SMC) is one of the Washington-Baltimore area’s most prominent companies, and Hillman is one of the area’s most famous businessmen. Hillman is a member of the University of Maryland-Baltimore Foundation’s Board of Trustees and gave $1.7 million to establish the Hillman Entrepreneurs Program for students at Prince George’s Community College and the University of Maryland. Hillman has been a major player in the revival of Downtown Baltimore, renovating and leasing 1,800 luxury housing units there since the late 1990s. Hillman has also been involved with Baltimore’s massive “Superblock” development on the west side of downtown, at one point suing the city over the block’s parcel composition.

Successful people often become successful by overcoming big problems. So it has been with Hillman and SMC. Consider the following.

1. United States of America vs. SMC, 1992
This case concerns the Fairfax-Falls Church Community Services Board, which cares for drug and alcohol addicts who at first live in its residential facility and later are placed in housing rented by the board. In 1989, the board approached SMC to arrange for housing for its clients and was unable to lease any units. The federal government then sued SMC under the Fair Housing Act alleging that SMC’s failure to accept the board’s clients constituted illegal discrimination against handicapped individuals. A federal jury did not find discrimination, but did find that SMC violated the rights of the board’s clients and imposed $36,280 in damages. The trial court imposed an additional $50,000 and enjoined SMC against discriminating against handicapped people in the future. SMC appealed the verdict to the U.S. Court of Appeals, 4th Circuit. The appeals court said, “With the benefit of hindsight, we can see that there is no question that SMC denied housing to the Board on the basis of the substance abuser status of the prospective tenants and the perception that they would be undesirable tenants; the jury verdict puts this issue beyond dispute.” The appeals court vacated the monetary damages but upheld the injunction.

2. Racial Discrimination Lawsuit, 1998-2000
Sharon Reeves, a black property manager working for SMC in the 1990s, alleged that SMC President Ron Frank promised to promote her if she lowered the vacancy rates in the apartments she was running. Reeves claimed she did so, but that Frank (who is white) fired her anyway. After Reeves accused the company of racism, Frank brought her back but assigned her to a white supervisor who (according to Reeves) threatened to fire her “black ass.” Reeves quit in 1996 and sued for discrimination in 1998. During the trial, Reeves’s lawyer discovered that Frank had stated during a deposition in an unrelated case that calling an employee a “black baboon” did not violate SMC’s anti-discrimination policy. SMC settled the lawsuit on confidential terms and would not talk about it with the Washington City Paper.

3. FTC Investigation, 2001
In 2001, staffers at the Federal Trade Commission investigated whether SMC violated the Fair Credit Reporting Act “by furnishing derogatory information – I-9 credit ratings, which denote debts that have been charged off to profit or loss – to a consumer reporting agency while knowing or consciously avoiding knowing that the information was inaccurate.”

The agency wrote:

Staff has serious concerns about whether SMC’s practices violated the FCRA. From our investigation, it appears that SMC, upon a renter’s termination of a lease with an outstanding debt, automatically reported an I-9 rating within approximately 30 days (and sometimes fewer) of the renter’s move-out date. In many instances, it appears that SMC failed to determine that the debt was uncollectible – the accounting basis for charging it off – before using the I-9 rating, even though less derogatory ratings indicating that the debt was overdue but not yet uncollectible were available and may have been more accurate. The I-9 rating is the most adverse rating available, and its presence on a credit report can contribute to a creditor’s decision to deny credit to a consumer.
However, the agency decided to close its investigation because SMC only engaged in these practices for “a very short period of time.”

4. David Hillman and Suzanne Hillman vs. Internal Revenue Service, 2001
In an epic battle that had to happen, David Hillman – one of the Washington area’s most powerful real estate owners – once squared off against one of the country’s most powerful federal agencies, the IRS.

In 1997, the IRS sent written notice to Hillman and his wife that they owed “$294,556.00 in federal income taxes for taxable year 1993 and $309,696.00 in federal income taxes for taxable year 1994.” The issue was the Hillmans’ treatment of management expenses charged by SMC to a number of their real estate partnerships characterized by the IRS as “passthrough entities.” The Hillmans deducted fees charged by SMC to the passthrough entities from their income and the IRS objected, taking them to federal Tax Court. The Tax Court initially found in favor of the Hillmans, but the IRS appealed the case to the U.S. Court of Appeals, 4th Circuit. The Appeals Court found that the Hillmans could not legally deduct the fees and decided in favor of the IRS. The case established a precedent for the real estate industry and is still cited by the IRS in its advice memoranda.

5. Lawsuits Involving Renters
Maryland courts have recorded so many lawsuits involving SMC that they may be literally uncountable. The Maryland Judiciary Case Search website reports that “Southern Management” has been a party in more than 500 lawsuits in Prince George’s County.

And the site reports that “Southern Management” has been a party in more than 500 lawsuits in Montgomery County.

The majority of these lawsuits are probably claims for unpaid rent or damaged property. That does not necessarily reflect badly on SMC as evictions and rent claims are an unfortunate part of the apartment rental business. But is SMC’s staggering volume of litigation truly necessary?

So what does David Hillman and SMC have to do with Rushern Baker? Plenty, because Hillman is BY FAR Baker’s biggest financial supporter. We’ll get into that tomorrow.