A CLOSER LOOK AT COMMUNITY SWEAT EQUITY HOUSING CORP.; WHAT WENT WRONG?

Copyright 1998 Southeast Missourian

"Like any landlord, sometimes things get down, and we're trying to get them back up," said Michael Sterling of Community Sweat Equity Housing Corp., a not-for-profit organization begun in Cape Girardeau in 1993.

Sterling, the treasurer of CSEH, spoke on Nov. 3, the day that the last four homes purchased by CSEH were scheduled to be sold at public auction on the steps of the Common Pleas Courthouse in Cape Girardeau.

"We didn't want to be landlords for a great deal of time," Sterling said, pointing out that the program was never designed for CSEH to hold on to the properties.

The primary purpose behind CSEH was to provide a means for low- and moderate-level families in Cape Girardeau to become homeowners by investing work -- sweat equity -- along with money. Three local banks and a local real-estate broker worked closely with Sterling and other members of the CSEH board to try to make that dream of becoming homeowners a reality for some residents.

In the first 18 months of its existence, CSEH purchased 10 homes in eastern Cape Girardeau. But four years later, eight of the properties were gone -- foreclosed on by the banks or deeded back to the banks in lieu of foreclosure. The other two are in danger of being lost if financing for the tenants cannot be secured by the first of December.

Citing customer confidentiality, none of the three banks that entered into the arrangement with CSEH would speak about the particulars of the loans or how the homes were lost. But Jim Ham of Mercantile Bank said that the institutions wanted CSEH to succeed.

"We worked with them diligently to make these loans survive," Ham said.

He added that Sterling had been in his office for an hour on Oct. 26, working with Ham to try to figure out a way to save the loans on the four properties that CSEH still held at the time. He and Sterling even went out to look at the property.

But to no avail.

Eight days later, two of the homes were sold back to the bank in public auction on the steps of the Common Pleas Courthouse in Cape Girardeau. The sale of the other two properties was postponed in hopes that the tenants could secure financing to purchase the homes.

"We don't want the properties back," said Ham of the bank's reason for delaying the sale.

The sale has been postponed twice more since Nov. 3 as the tenants still seek financing through a local mortgage company. And the foreclosure sale still looms as a possibility for the courthouse steps.

What went wrong?

"I don't know," said local real estate broker Thomas M. Meyer as he tried to answer what happened to bring the housing enterprise to a halt.

Meyer had worked with Sweat Equity since 1994. He even managed the properties for CSEH for over two years, turning managerial control of the properties back to Sterling and the CSEH board at the end of 1997.

Both Meyer and Sterling attribute the loss of the properties to several things, including tenants who would not pay, houses that were in disrepair and problems with the management of the property itself.

Sterling placed the blame primarily on the unexpected costs of maintaining the property, especially when the property was in disrepair. Bernice Coar-Cobb, president of CSEH and Sterling's wife, agreed.

"We went in and immediately found problems," said Coar-Cobb.

A few of the homes needed new roofs, refrigerators, stoves and air conditioning, Coar-Cobb said. Others needed painting or had raw sewage in the basement.

"We learned a lesson: Never purchase a house without some money set aside to fix it up," Sterling said.

The only money that CSEH had came from the rent. The tenants were not even required to put up a deposit because of the sweat equity concept of the program.

Because CSEH had no cash reserve, the costs of maintaining the homes siphoned money from the funds used to pay the mortgages. The more expensive the maintenance, the less money CSEH had to put toward the mortgage payment, Sterling said.

"Even if every tenant paid, we still kind of ran short," he said.

But it wasn't simply the problems with the houses that affected the ability of CSEH to hold on to the properties. An additional problem came from tenants who did not pay their rent on a regular basis.

"Some of the tenants did not make any rent payments, which crippled the overall program," Meyer said. "In this business, you run across some deadbeats."

Sterling said some of the properties were grouped together in a single loan so that if one tenant did not pay, it affected the stability of the other properties that shared the loan. Some of the tenants fell far enough behind that they had to be evicted.

"We did the human thing to keep them in the houses as long as we could," Sterling said.

But Sterling and Meyer have disagreed about who paid and who didn't.

Who paid?

Meyer managed the properties of CSEH until the end of 1997. In his final letter to the CSEH board, dated Dec. 18 of that year, Meyer confirmed that he was returning management of the remaining properties to the board. By that time, only seven of the original 10 properties were still owned by CSEH.

The decision for Meyer to return the managerial control to the board was made by mutual consent between Meyer and the board, Sterling said.

In his letter to the board, Meyer not only summarized the condition of each of the properties, but also told the board members something about the tenants of each home. Five of the seven tenants were in the position to make some sort of financial arrangements with the banks or the CSEH board to purchase the homes, Meyer said.

"I believe she can move forward with a purchase," Meyer wrote of one of the tenants.

"Mercantile Bank will certainly review this purchase after one year or so," he wrote of another.

"We would strongly recommend assistance in financing this property for them, after a year or two," he said of a third.

Of the seven, five were possible homeowners, Meyer told the board. The last two, however, were questionable.

One of the last two received assistance from HUD, and Meyer termed the possibility of her buying the house "very remote." He suggested that the board help her maintain the property until a time in the future when she could move.

But because the house was not maintained according to minimum HUD standards, the HUD subsidy for the house, located at 1020 Sturdivant, was lost last April. Since that time, Mercantile Bank has foreclosed on it. It was sold back to the bank on Nov. 3 for $5,000.

The seventh tenant is the only one not specifically named by Meyer in his letter to the CSEH board and the only one that Meyer singled out to the CSEH board as having problems paying the rent.

The house was located at 237 S. Pacific. The tenant was Helen Sterling, Michael Sterling's mother.

Who didn't pay?

In his letter to the CSEH board about the property at 237 S. Pacific, Meyer wrote two brief sentences: "Presently rented. This needs to have the rent brought up to date to maintain the cash flow required to handle the mortgages."

Meyer, who has worked frequently with rental property, said last week that slow payments are a normal expectation of landlords, even saying that some tenants are "professional delinquents."

He confirmed that Helen Sterling, who lives in the property at 237 S. Pacific, was slow on payments, but that the payments were always eventually received. He called her actions "consistent with other tenants."

But CSEH treasurer Michael Sterling, Helen Sterling's son, denied that his mother did not pay her rent.

"That's not true," Sterling said.

He said on the contrary that it was the rent paid by Helen Sterling and by the tenant at 628 S. Pacific that were paying for the other homes and were keeping the loans current.

But at the end of September 1997, Meyer, who was still managing the property for CSEH, sent a letter to Helen Sterling reminding her that she was late in her rent payments. He told her in the letter that when her rent came due on the first of October, she would owe just under $1,000, about three months rent.

A copy of the letter was sent to Michael Sterling.

"We are going to get into a situation where it's my word against his," Meyer said in response to Michael Sterling's denial. "I am going to stay with exactly what I said."

"I would add that this is somewhat normal, not out of the ordinary for the tenants" of CSEH, he said.

But if there were a difference between Helen Sterling and most of the other tenants, it lay in the disposition of the property she rented from Community Sweat Equity.

When notice was given in October by Mercantile Bank of the sale of four properties in public auction, the house that Helen Sterling lived in was listed to be sold. But on the day of the auction, the sale of two of the four properties was delayed: the home at 628 S. Pacific and 227 S. Pacific, Helen Sterling's house.

The sale of the house was being delayed while Helen Sterling sought financing through a local mortgage company to buy the house, Michael Sterling says.

Unanswered questions

Sterling and Meyer have disagreed about other matters related to the financial condition of CSEH.

Meyer said that when he returned managerial control of the organization back to the CSEH board at the end of last year, the bank loans were fairly balanced. A few of the tenants had been behind in their rent -- he would not say who -- but Meyer indicated that they had given him the money to catch back up.

Sterling, however, said that when Meyer returned the property to the board's control the loans were not current.

"He knows that," Sterling said. "I don't know how much, but we weren't current."

Coar-Cobb added: "When we got them back, we were in the hole $3,000."

The question of the financial situation of CSEH and the status of loans at the end of last year may be a key to understanding what went wrong for CSEH. Within a year after Meyer returned control of seven properties to the CSEH board, five of the properties were lost and the other two were seriously threatened.

But the question is not only one for which there are disagreements between Sterling, Coar-Cobb and others tied to Community Sweat Equity.

In November 1997, CSEH filed its annual report with the Missouri secretary of state's office to register as a non-profit corporation. The report, signed by Coar-Cobb, lists the principal place of business or corporate headquarters of CSEH as 530 Good Hope St. in Cape Girardeau. The report also lists Jim Roussel as a member of the organization's board of directors.

Roussel is president of Anchor Construction Group Inc. His business is located at 530 Good Hope.

But when contacted last week, Roussel stated that he knew nothing about being on the CSEH board and was unaware that his business was listed with the state as the corporation's headquarters.

He did acknowledge meeting with Sterling and Coar-Cobb once in his office last year concerning the work of Community Sweat Equity, but he said that he had not been in contact with anyone connected with CSEH in over six months.

Sterling also said he believed Sweat Equity had filed with the Internal Revenue Service for federal tax-exempt status. He did acknowledge that he could be mistaken about the tax exempt status and referred the question to Joseph Russell, an attorney in the Limbaugh, Russell, Payne and Howard law firm.

But when contacted, Russell said that he had done nothing for CSEH in "a long time" and said that he did not consider himself the corporation's attorney.

When asked about CSEH's standing with the IRS, Russell said he had no knowledge of any tax-exempt status for CSEH. He said that he had not filled out any paper work for CSEH and did not know if anyone else had. He added that while it was possible that CSEH did have such a standing, he was not aware of it.

A search by the IRS earlier this month, however, showed no such federal tax-exempt status for Community Sweat Equity Housing Corp.

NEXT: Beyond the question of federal tax-exempt status was a question of the use of county tax revenues which passed from the county through a senior citizens day care center and to CSEH. The use of the county funds led eventually to an investigation by the sheriff's department.