I am retired and take educated guesses on all things financial.

September 05, 2009

September 5, 2009: Boston Capital Corporation: Questionable Property Management Hurts Investors

Boston Capital Corporation and its affiliates operate several tax credit and loan schemes to corporations and individual clients. One of their earliest investment pitches was Tax Credit Funds, which implied a handsome return of generated tax losses and to preserve and protect the assets of the investment partnerships resulting in the eventual disposition of apartment complexes around the country that met HUD standards for subsidized housing vouchers.

These investments Funds (called Boston Capital Tax Credit Fund followed by a Roman Numeral to classify the order of these $150-200m offerings) were sold by handsomely commissioned agents, often financial planners. The tax "losses" created by aggressive financing and government tax credits would be valuable as they were used to offset gains on certain income that was taxed, thus creating a positive tax result from negative tax credit application. It made sense, especially since Boston Capital appeared to be politically connected to the Democratic Party which was writing the tax credit legislation. George Mitchell of Democratic Party pedigree was an influential member/advisor of their Board. All went well for some time and tax credit "losses" were paying off for investors. However, the cash investors invested ($1000. per "unit") is now being swept away by inept property management, fees upon fees and poor oversight of the property portfolios.

Take Series XV as a case in point.

Series XV has about forty three apartment complexes. The Fund began operations in 1992 with $38m of investor monies buying 68 properties. Investors have seen practically no return on the sales. Apartment complexes remaining have been documented to have been poorly managed, materially neglected and seem not to have a systemic game plan for resolving issues. Of course, Boston Capital has made their fortune prior to letting apartment complexes deteriorate, and continue to make money hand over fist through additional commissions, fees and "other charges".

Examples of management problems:

Lakeside Apartments: Occupancy 55%.

Livingston Plaza: Occupancy 67%.

Showboat Manor Apartments: Real Estate taxes were delinquent.

A Typical Fee Hit To Investors:

"The investment general partner transferred its interest in Wood Park Pointe to AN ENTITY AFFILIATED WITH THE GENERAL OPERATING PARTNER for its assumption of the outstanding mortgage balance and cash proceeds to the investment partner of $37g. Of the total, $1455.00 represents reporting fees due to an affiliate of the investment partnership and the balance represents the proceeds from the sale. Of the remaining proceeds, $15g was paid to Boston Capital for expenses related to the sale, which includes third party legal costs. The remaining $20,545.00 will be returned to cash reserves..."

These examples are not uncommon.

The frequency of "an entity affiliated with the general operating partner" is an interesting sales tactic, and one that hints to raise red flags somewhere. In addition, fees and management practices certainly do not appear to be in the best interests of unit holders. Perhaps Boston Capital Corporation hopes unit holders are not active investors.

In fairness to Boston Capital, tax credits for several years met or exceeded expectations, and the Reznick Group, P.C. has stated that all financial are in order. Information regarding performance of their programs appears to be readily available.

That said, the questions of extracting maximum value after the initial Lease-up of the apartment complexes remain. And initial investor money appears to be of little consequence to Boston Capital Corporation after the big money has been made.