Every time the Philadelphia Housing Authority tore down an outdated high-rise apartment building in recent years, a nonprofit corporation it controlled stepped in to develop new housing on the site.
Under the direction of PHA's longtime executive director, Carl R. Greene, the nonprofit had a free hand to select architects, engineers, contractors, and lawyers, earning millions in tax-free development fees, and amassing $66 million in assets - mainly cash and short-term bonds - by 2010.
Operating largely out of public view and with little scrutiny from federal housing officials, the nonprofit has left its mark all across the city - it has developed about 2,000 units, from the Mantua and Lucien E. Blackwell redevelopments in West Philadelphia to two senior residences in North Philadelphia, just to name a few. And more are on the drawing board.
It also provided Green with a large pool of money to apply to pet projects, such as a planned $20 million headquarters on Chestnut Street and a green roof for a senior housing complex in North Philadelphia.
But the future of the nonprofit - known by the unwieldy name Philadelphia Housing Authority Development Corp., or PHADC - could be in jeopardy because of its failure to comply with changes in the federal tax code that required certain types of nonprofits to disclose detailed financial information to the IRS starting in 2006.
As a result, it could lose its tax-exempt status, according to two former IRS officials, including Marcus Owens, who ran the tax agency's exempt organizations division for a decade.
Without its tax exemption, PHADC would have to start paying taxes on income and could face IRS penalties, draining its assets and jeopardizing tens of millions of dollars in housing deals that are under way and that depend on PHADC's being a nonprofit.
Loss of the tax exemption would be "catastrophic," said PHA's new administrator, Michael P. Kelly, who succeeded Greene after the latter was ousted in September after disclosures that he had secretly settled sexual-harassment cases with three female employees for $648,000.
Greene's attorney, Clifford E. Haines, said his client took no responsibility for the failure to file with the IRS, though Greene directly ran the nonprofit, which had no regular staff. "Mr. Greene's duties did not include tax matters," Haines said in an e-mail.
Control of the nonprofit gave Greene authority over all aspects of PHA construction, allowing him to pick professionals and decide what to pay them, said a national developer who has worked with housing authorities around the country. "That brought him insulation from criticism and political power," the developer said.
PHA has asserted that PHADC does not have to file financial-disclosure statements with the IRS because it is an affiliate of a government unit.
Nevertheless, after The Inquirer asked Kelly about the lack of IRS filings, he said PHADC would start to submit statements to the IRS beginning with the fiscal year that just ended March 31. He said his agency would also seek a "determination" letter from the IRS to clarify PHADC's status as a nonprofit.
"I don't want to play on the edges of this thing," Kelly said, adding that PHADC was "too valuable not to exist."
"I recognize the seriousness of this," he said.
The IRS originally approved PHADC for tax exemption in 1997 under a category different from "government affiliate," according to filings with the IRS. It classified the nonprofit as a "supporting organization," serving the needs of only one group, in this case the housing authority.
In 2006, Congress targeted supporting organizations for changes. It was then that the IRS began requiring them to file a financial-information return, Form 990.
William Cressman, an IRS spokesman in Philadelphia, declined to comment on the status of PHADC, but two former IRS lawyers outlined filing requirements and described the consequences of not filing.
"In my mind, they should have been filing the 990s all along since 2006," said Milton Cerny, a lawyer with McGuireWoods in Washington and a former IRS technical adviser to the commissioner for nonprofit organizations who advised field offices on tax controversies.
Owens, a former IRS lawyer practicing with Caplin & Drysdale in Washington, said the updated regulation automatically revokes a group's tax exemption after three years of noncompliance. In light of the 2006 provision, the IRS will soon publish a list of organizations whose tax exemption has been revoked.
"The IRS cannot make exceptions," Owens said.
PHADC, he said, "can reapply for tax-exempt status, but it's going to be a mess."
Although PHADC releases an annual independent audit, filing the IRS form would provide the public with a deeper understanding of how the organization received and used money.
For the last decade, the nonprofit has been riding the crest of the building boom at PHA, with the blessing of the U.S. Department of Housing and Urban Development.
In the late 1990s, HUD began encouraging housing authorities to act more like developers and pursue private funding to build affordable housing.
Congress came up with money through so-called Hope VI grants to encourage the demolition of high-rise apartment projects. Dozens of other housing authorities across the country established development nonprofits to team with private investors, but none became as large as PHA's.
Although established in 1997, PHADC was inactive until 2001. That was when Greene began to radically overhaul Philadelphia's stock of public housing, changing the face of entire neighborhoods. PHA replaced outdated high-rises with a mix of new rental units and affordable homes for sale.
The nonprofit became a critical player, forging partnerships with private investors and hiring such big-name construction companies as the Keating Group, Hunter Roberts Construction Group, and Dale Corp. It earned fees amounting to as much as 10 percent of a project's cost.
In the process, the nonprofit squeezed out competitors such as Michaels Development Co., Pennrose Properties, and Community Builders Inc., and gained control of an increasingly large pool of money. It plowed proceeds back into construction, including the planned $20 million PHA headquarters on Chestnut Street. Half of the cost is to be paid for by the nonprofit, with $1 million already spent.
PHADC has no staff and relies instead on housing authority employees. Its charter calls for a three-person board, all of whom must be PHA employees.
Money flows into PHADC - from developer fees as well as payments from PHA - and flows out in the form of funding to PHA for projects.
Even within PHA, the nonprofit's role is little understood. The housing authority began releasing internal audits for PHADC only in 2006. Earlier audits do not exist. In an interview, Kelly said he found that omission "confusing."
"I would think that would be part of the overall financial record-keeping and financial disclosures of the agency," Kelly said.
Patrick Eiding, a member of the five-person board that ran PHA until HUD recently assumed control, said he was surprised to learn that the housing authority had a nonprofit with $66 million in net assets. Appointed to the board in 2003, Eiding, who heads the Philadelphia council of the AFL-CIO, said he had no recollection or records about how the development nonprofit fit into the business of the housing authority.
The subject, he said, never came up in board meetings.
"I couldn't find anything in my books from either the executive sessions of the board or the regular sessions, nor any financial reports on it," Eiding said.
Jereon Brown, a HUD spokesman, declined to comment about the nonprofit until the department completed a comprehensive review.
"We have auditors and people reviewing every program with the housing authority, and this is part of that review," Brown said.
At The Inquirer's request, Kelly released new information about PHADC's operations.
In the most recent audit, for the year that ended March 31, 2010, PHA contributed $1.5 million to the nonprofit. The money came from two PHA sources: proceeds from the sale of affordable homes and land, and collection of temporary "bridge loans" issued by PHA to public-private partnerships that invested in new projects.
At the same time, the housing authority received a "grant" from the nonprofit of $14 million.
Kelly said that money had been invested in about a half-dozen projects. They included $2.9 million to redevelop the Mantua public housing high-rise in West Philadelphia into 101 low-rise units and $8.7 million for Warnock Plaza, a senior-citizen housing complex in North Philadelphia.
Kelly said the nonprofit served as "a bridge" connecting the housing authority with private investors and syndicates, who put money into low-income housing projects in exchange for tax credits.
"I believe this is a very valuable tool for redevelopment," Kelly said.
Of the nonprofit's $66 million in net assets, Kelly said half had already been committed. Those projects include:
$10 million to redevelop the Queen Lane public housing project.
$5.5 million for 19 affordable houses in the Martin Luther King redevelopment in South Philadelphia.
$9 million toward the new PHA headquarters.
$4.6 million for further work at the former Mill Creek housing project in West Philadelphia, now the Lucien E. Blackwell Homes.
Kelly said most of the remaining money was not committed. "At this moment, it's not tied to anything. It's just there," he said, adding, "I don't know if that's a bad thing."
With proposed HUD budget cuts for public housing, "you want to have that kind of cash sitting around to continue doing this kind of stuff," Kelly said.
He said he planned to expand the nonprofit's board, possibly including a resident representative, and would institute annual meetings to make its operations and role more transparent.
Unlike Greene, he said, he will not head the nonprofit, but will name someone else to oversee its work. "I want someone to report to me, as opposed to me reporting to myself," Kelly said.
He has come up with a 12-point "corrective-action plan" for the nonprofit. It includes improving record-keeping, developing guidelines for audits and financial reporting, and instituting a formal process for developing and managing activities.
"The last thing we need," Kelly said, is for the nonprofit to be diminished "or perceived as not credible because we've lost our status."