More Than Just a Boneheaded Mistake

Carolyn Kay
MakeThemAccountable.com

So you thought the problem of Barack and Michelle Obamas’ 2005 mansion purchase was dead and buried.  Well, not any more.  A reader of my website who is a tax accountant of many years, one who specializes in criminal matters, says he believes the Obamas have a tax problem.

Simply put, the allocation of purchase price between the Obamas’ lot and the lot next door, which were both owned by the same couple and had long been sold together, makes no sense unless the amount paid for the lot adjoining the Obamas’, by the wife of now convicted political fixer Tony Rezko, was specifically meant as a favor to the Obamas, so that they could afford their mansion.  If so, the difference between what Ms. Rezko paid for the side lot and what it was actually worth would be construed by the IRS as income to the Obamas.  After looking at the Obamas’ tax return for 2005, my source was able to say that in his opinion they did not declare any such income, and therefore did not pay taxes on it.

Barack Obama once called the house purchase a boneheaded mistake, but my source believes it is worse than that.  Much worse. If Barack Obama were to attain the White House, this problem could be devastating for the Democratic Party, says my source.  That is why he wants this information made public now.

Here are the specifics.

On June 15, 2005, Barack and Michelle Obama bought a landmark mansion on Chicago’s South Side for $1.65 million.  The lot next door was sold the same day for $625,000 to Rita Rezko, wife of Antoin “Tony” Rezko.  Tony Rezko was at that time under investigation for fraud and influence peddling, for which he was eventually  convicted.  The specifics of these sale transactions were reported by the Chicago Tribune in an article published November 1, 2006.  The information on the sale is also available online at the website of the Cook County Recorder of Deeds.

According to the Tribune, the Obamas’ price was “some $300,000 less than the asking price.”  The Rezko property, the article said, was purchased for “the full … asking price.”  That means the previous owners were paid $2.275 million for the two properties.  It is reasonable to assume, then, that when the previous owners listed the properties for sale, their asking price for the two was $2. 575 million or thereabouts.  How that total amount became the two amounts is what is at issue here.

Obama claimed in a long interview with Chicago media on March 14, 2008, as Tony Rezko was about to go to trial, that the sellers had tried to sell the house and adjoining lot together, but were not receiving offers, because of the high price.  The sellers, he said, had already listed the properties separately by the time he and Michelle became serious about making an offer, and that the house, along with its lot, was listed for $1.9 million.  I understand from knowledgeable sources  that the multiple listing service for the area may have the records to confirm this assertion, but I do not have access to those kinds of records.  Archpundit, a Chicago blogger and strong Obama supporter, posted 94 pages of related documents (pdf) earlier this year, which contain documentation of the $1.9 million listing in January of 2005, but no earlier listings.

Taking Obama at his word, we are led to believe that the sellers are the ones who allocated the $2.5 million or so that they wanted, in total, between the two properties. Since we do not have access to the original calculation and who made it, we can only try to determine if the allocation made at the time was reasonable.

Intrinsic Value

An empty lot only has value to a developer, or a developer’s wife, if he can build on it and sell for a profit.  Could the Rezkos have done that?

The Obamas’ house is in is an official landmark district, and I learned from a Senior Permit Reviewer at the Landmarks Division of the Chicago Department of Planning and Development that any construction in that district must be approved by the Commission on Chicago Landmarks.  She said the Commission makes sure that the construction conforms to the look and feel of the neighboring structures.  That means, for the district in question, that the structure could not be a high rise.  A one-unit home is a possibility, but would have to be very expensive in order to ensure a profit.  A small condominium building or several town houses might be a possibility, given the proper zoning, but they would also have to be expensive.  Of course, expensive is the norm for that neighborhood.

I am not an expert on real estate development, but it does seem that there might be potential for some profit in building on the empty lot bought by Rita Rezko.

The property, after 1,500 square feet was sold to the Obamas (see below), has changed hands twice since Rita Rezko bought it.  According to the Cook County Recorder’s website, Rita Rezko sold the property on 12/28/06 for $575,000 to 5050 S Greenwood LLC.  Bloomberg reported on February 18, 20008 that the buyer’s name was Michael Sreenan.  5050 S Greenwood LLC sold the property to John D. and Marjorie S. Poulos on 3/17/08 for $675,000.  I do not know these people, nor do I know their relationship, if any, to the Rezkos.  If they do have business or personal relationships with Tony Rezko, these would not be the kind of arms length transactions that would ensure a market price for the property.

Comparison of Naked Land Values

It is common in the real estate industry to separate the house vs. land value from a total purchase price by assuming that 75% of the price is attributable to the house and 25% to the land.  And 25% of the $1.65 million that the Obamas paid for their house and land is $412,500.  By this test, the Rezko property should have been priced at less than that amount, as it had less square footage.  Instead, Rita Rezko paid half again as much.

Assessment Associated with a Subsequent Transaction

Again from the 11/1/06 Tribune article (and also from the Recorder’s Office’s online records), we know that on January 11, 2006 the Obamas bought a strip of the Rezko lot that adjoined their property.  As the Tribune describes the transaction,

Using a standard formula, Obama’s appraiser estimated the 1,500-square-foot portion at a market value of $40,500.

But Obama felt it would be fair to pay the Rezkos $104,500, or a sixth of their original $625,000 purchase price, because he was acquiring a sixth of their land

If an assessor valued 1/6 of the property at $40,500, wouldn’t that mean the market value assessment of the whole Rezko property at that time would be $40,500 x 6 = $243,000? Admittedly, the valuation of a strip of land may be lower because it is such a small portion of a property, but could that possibility account for the huge difference between the two values?

The Times of London created a handy graphic to help visualize the properties and the transactions (extracted from this pdf file):

Relative Assessed Values

The Cook County Assessor’s website shows only the current assessed values of the two properties, but by a call to the office I was able to find out the 2005 assessments for tax purposes. Be aware that assessed values for taxes in Chicago are not anywhere near the market value.  I am only concerned here with the relative values, which should give us some indication whether the allocation of purchase prices between the two properties might have been reasonable.

The allocation between the two properties at the time of the listing was about 75% for the house and its lot ($1.9 million), and 25% for the adjoining lot ($625,000). That is very much out of kilter from the allocation above, based on assessed values..

What the Obamas Could Afford

At the time, the Obamas’ finances were good, but not good enough to buy a $2.5 million mansion.  The 11/1/06 Tribune article reports that the Obamas obtained a $1.32 million mortgage on their property (the information is also available on the Recorder’s Office website).  That means their down payment was $330,000 ($1.65 million – $1.32 million).  A venerable institution like the Northern Trust, which lent the Obamas the money, would never have engaged in any of the risky practices that later caused the housing market crash.  Therefore, they would have applied a formula to determine what the Obamas could afford to pay for their home, based primarily on the size of the down payment.  Apparently, the magic number turned out to be $1.65 million.

The Obamas wanted the mansion.  But the sellers, as we saw, wanted more for the two lots than the Obamas could afford or were willing to pay.

Who Determined the Relative Prices and How?

According to Obama’s 3/14/08 Chicago media interview, he played no part in the determination of the properties’ prices.

The sellers have refused to speak to the media.  A member of the Obama campaign spoke with the husband of the couple, and exchanged emails, portions of which were shared with a Bloomberg reporter, who wrote on February 18, 2008,

The e-mail says that the sellers “did not offer or give the Obamas a ‘discount’ on the house price on the basis of or in relation to the price offered and accepted on the lot.” It also says that “in the course of the negotiation over the sales price,” Obama and his wife, Michelle, “made several offers until the one accepted at $1.65 million, and that this was the best offer [the sellers] received on the house.”…

The e-mail between [the seller] and the campaign adviser also says that the sellers had “stipulated that the closing dates for the two properties were to be the same.”

But no statement has been made public by the sellers about how the price allocation between the two properties was made, or when, or whether anyone influenced that calculation.

Obama seems to believe that what he said at his 3/14/08 press conference with Chicago media is all he ever has to say on this subject.

Neither of the Rezkos has spoken publicly about these land deals. But Tony Rezko was convicted in early June of 2008 for fraud and influence peddling by the office of U.S. Attorney Patrick Fitzgerald.  Presumably, that office is now negotiating with Rezko as to whether he will testify against any of his cohorts and any other information he can provide for further investigations by that office.

Barack Obama has not been implicated in any of the wrongdoing for which Rezko was convicted, but might Rezko be tempted to reveal his side of this transaction? He was an experienced developer.  He was broke, $50 million in debt, and living on borrowed money at the time of the 2005 purchase, according to ABC News’ The Blotter on March 5, 2008. According to the article, Rita Rezko made only $37,500 per year, six months after the purchase and,

Rezko’s bleak financial picture raises the question of how the Rezkos were able to buy a vacant lot adjoining the home of Sen. Barack Obama in 2005, at a time Rezko says he was already in deep debt…

How were the Rezkos able to make the down payment, and qualify for the loan, on the lot?  The same story may give us a clue:

[Rezko] said he had an ongoing relationship with Nadhmi Auchi, a London-based Iraqi billionaire convicted on French fraud charges, who Rezko described as a close friend and business associate.

Did the “ongoing relationship” between Rezko and the Iraqi-born Auchi involve money changing hands prior to the purchase of the lot next to the Obamas?  It did in 2007, according to now retired Sun-Times columnist Robert Novak.  On February 28, 2008 Novak reported that Rezko “got $3.5 million from Auchi’s company in April 2007.”  In other words, did foreign money enable a U.S. Senator to buy his mansion?

There could also be Senate ethical considerations for Senator Obama, if he did not disclose a benefit to him, as required by Chapter 5 of the Senate Ethics Manual (pdf).

Judicial Watch has already filed ethics complaints over the house purchase, in regard to what it considers preferential treatment for Obama in obtaining the mortgage on the property.  From the press release:

Judicial Watch, the public interest group that investigates and prosecutes government corruption, announced today [date not given] that it has filed separate complaints with the Federal Election Commission (FEC) and the U.S. Senate Ethics Committee against Senator Barack Obama for allegedly accepting a below-market rate mortgage loan in 2005 not available to the general consumer.

Patrick Fitzgerald sent a former Illinois governor to prison.  He brought down the top aide of a sitting vice president of the United States.  He continues to investigate Rezko and his partners’ actions to determine if there were more illegalities, especially whether the sitting Illinois governor could be involved. He may be interested in what Rezko has to say about this property purchase next door to a U.S. Senator, now a presidential candidate.  And Rezko may be willing to talk, in exchange for a more lenient sentence, scheduled to be handed down on September 3, 2008.

Updated on 8/12/08 to change the date of Obama’s Chicago media conference, erroneously posted originally as 3/16/08.  The conference was on 3/14/08.

Update on 8/20/08: according to the Associated Press, “A federal judge in Chicago has delayed the sentencing of political fundraiser Tony Rezko for more than a month… Sentencing is now set for Oct. 28, one week before the election.”

Update on 8/23/08:

More bad news for Obama: Rezko sentencing one week before Election Day (Marathon Pundit)

Barack Obama is having a bad week. Declining poll numbers, a new Bill Ayers scandal, and now this–his longtime friend and property neighbor (through his wife) Antoin “Tony” Rezko–will be sentenced on October 28. That’s just one week before Election Day. Originally the convicted political fixer was to be sentenced on September 3. But at the request of Rezko’s attorneys, they asked for more time to prepare post-trial motions.
As the photo shows, the lot the Rezkos bought when Obama bought his house is for sale.  I pulled the information below from the MetroPro website:

I could find no information on the website about the “sale pending” claim.

Update on 10/15/08:
Fundraiser Tony Rezko’s sentencing date canceled as his attorneys, prosecutors seek deal (by Mike Robinson, AP)
A federal judge canceled convicted fundraiser Antoin “Tony” Rezko’s sentencing date Wednesday and one of his lawyers said he is working with federal prosecutors in hopes of getting a break for his client. The decision to postpone the Oct. 28 sentencing barely stopped short of confirmation that Rezko is spilling his secrets to federal prosecutors. Speculation that Rezko is telling what he knows about Illinois political corruption has swept through Chicago’s federal courthouse for weeks.

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