Former City of Buffalo officials improperly allowed a developer to spend $100,000 in federal funds for so-called "soft costs" during the ill-fated renovation of the Jackson Building in 1993, federal officials say.
Among the "soft costs" claimed by developer Joseph J. Jacobi were a $78,000 real estate commission, a $7,000 appraisal fee and a $30,000 finder's fee that ultimately found its way back to Jacobi.
The expenses were covered by $100,000 of a $400,000 federal block grant that Jacobi convinced Buffalo Urban Renewal Agency officials to lend him for a $9 million project to buy the Jackson Building at 220 Delaware Ave. and renovate it into commercial and residential space.
But within months after Jacobi got the block grant money, his plans fell apart for lack of a major lender to finance them, records show.
"The use of (block grant) funds to reimburse the developer for soft cost or purchase deposits . . . does not appear to be an allowable CDBG (block grant) expenditure," federal housing official Michael F. Merrill told city officials in a May 12 letter.
Merrill, who is director of community planning and development for the Buffalo office of the Department of Housing and Urban Development, could not be reached to comment Friday.
Jacobi denied using any of the block grant money to pay for the $78,000 real estate commission.
However, the city's block grant funds were mingled with other dollars used in the development, making it difficult to prove what they were ultimately used for, according to Michael L. McCarthy, the Buffalo Urban Renewal Agency's general counsel.
HUD is now asking the city to repay the $400,000 because of "significant irregularities" in processing in the Jackson Building loan, McCarthy told urban renewal officials at a Thursday meeting.
McCarthy blamed many of the problems on Sam Iraci, a top aide to former James D. Griffin, who made last-minute changes to the city's loan documents in December 1993 shortly before Griffin left office.
The changes, which were made without Urban Renewal Agency approval, damaged Buffalo's chances of recovering its loan funds in case of a foreclosure action, according to McCarthy, who has called for a federal investigation of the matter.
McCarthy said his predecessor, former agency counsel Daniel P. Devine, also failed to file the city's mortgage at the Erie County clerk's office. As a result, he said, the city could not enforce its property lien on the Jackson Building.
He added that last summer, the former owner of the building, Canada Life Assurance of Toronto, foreclosed on the property, taking back the building and wiping out any chance the city had to pursue its claim against Jacobi.
Jacobi has denied that anything improper was done during the project.
"If you look at the figures, you will see that more than $1 million was spent on soft costs for the project," he said.
According to records, Jacobi purchased the Jackson Building on June 1, 1993, for $1.3 million from Canada Life Assurance. Four
months later, urban renewal officials met and agreed to lend Jacobi $400,000 from city block grant funds for his acquisition and "soft costs."
Records also show that $300,000 of the loan was used to reimburse Jacobi for his down payment on the Jackson Building, while $100,000 went for soft costs.
Among the costs claimed by Jacobi were:
$78,000 for a real estate broker's commission to M.J. Peterson Real Estate.
$7,000 for an appraisal fee to Dennis Penman, a top official of M.J. Peterson.
$30,000 for a finder's fee to Joseph L. Cutuli of Oswego who agreed to help Jacobi obtain a $3 million commercial loan for the development.
The records also included a May 1993 agreement between the developer and Cutuli, which claimed that Cutuli already owed Jacobi $45,000 from another business transaction.
Under the agreement, Jacobi used the $30,000 finder's fee to repay himself for part of Cutuli's debt, according to the records.