I am so looking forward to Obama's "I am not a crook" speech.
Clever Real Estate Strategies for Politicians
GOP MOM
The story about Senator Obama's house purchase is well known. On June 15, 2005, Barack and Michelle Obama closed on a new house in the historic Kenwood district of Chicago for $1,650,000, or $300,000 below the listed asking price. On the same day, Rita Rezko, the wife of Tony Rezko, closed on the adjacent vacant lot for $625,000, which was the full listed asking price. The Obamas subsequently purchased a 1,500-sqft strip of land from the Rezkos on January 11, 2006 for $104,166, increasing the side lot buffer between their properties.
The media confronted Senator Obama about these transactions because Tony Rezko was under federal investigation at the time for political pay-to-play schemes. In 2008, Rezko was convicted of fraud, money laundering, and aiding and abetting bribery for government business. During his press conferences, Senator Obama insisted that he did not coordinate his purchase with Rezko in any manner:
"Look, I bought a house. He bought a piece of property next to the house, and that
transaction was entirely separate, as I said it was negotiated entirely separately. It
wasn't something that we were coordinating in any sort of fashion, in terms of the actual
transactions themselves, there was no quid pro quo"
Senator Obama, Sun-Times Interview Excepts, November 7, 2006
"the house purchase was negotiated between ourselves and the seller. It was not
contingent on the lot. The lot had nothing to do with the sale of the house"
Senator Obama, Transcript of Sun-Times Interview, March 15, 2008
"there was simply no connection between our purchase of the house, the price of the
house and the purchase of the lot"
Senator Obama, Transcript of Chicago Tribune Interview, March 16, 2008
Ultimately, the Chicago and the mainstream media accepted Senator Obama's explanation of events. In the meantime, the political blogosphere tried to keep the story alive but no one was able to prove any direct connection between the purchases. As difficult as it is to believe, major facts have been misreported and crucial third party information has never been examined.
Documented evidence proves that Senator Obama and Tony Rezko coordinated their purchases as well as the relative values of the house and the lot. Significant economic value was transferred between the properties after the execution of the purchase agreements and prior to the closings on June 15, 2005. Furthermore, this transfer fully explains Senator Obama's reason for buying the extra strip of land. In sum, Senator Obama would not have been able to purchase the house at such a large discount if Rezko had not purchased the adjacent lot.
So, how is this possible after all of this time?
Property History
The story begins on July 19, 2000 when Lakeside Bank Trust #10-1985 sold a newly rehabbed mansion for $1,650,000. The buyers were Mr. Frederick E. Wondisford and Ms. Sally Radovick, husband and wife, who were new professors at the University of Chicago. The seller via the trust was Citilife Developments, LLC, which was a real estate development firm controlled by F. Scott Winslow. (Cook County Recorder of Deeds documents #99085286, #99085287 and #00661600)
Contrary to mainstream media reports, the Wondisfords did not buy the adjacent vacant lot at that time nor did they intend to buy it. They were worried, however, about Winslow's future development plans for the property. The lot was zoned R5 multifamily, and they believed that a multifamily development next to their high priced mansion would severely reduce its value. As a condition of their purchase agreement, the Wondisfords insisted on a restrictive covenant on the vacant lot, permanently limiting its future development to a single-family residence. Winslow agreed to this restriction, and his trust filed a Declaration of Covenants, Conditions, and Restrictions of Record at the closing. (CCRD document #00603539)
After closing on the house, Winslow and the Wondisfords changed their respective minds about the vacant lot. Through an entirely separate transaction, the Wondisfords bought the vacant lot for $415,000 on August 16, 2000. The Wondisfords did not receive a discount on the vacant lot for their prior purchase of the house. As a general rule of thumb, real estate developers estimate the cost of land at approximately twenty-five percent of the final value of a project. Based upon its value as a deed-restricted R1 single-family lot, the Wondisfords paid market value for the lot when compared to the sales price of the house. (CCRD document #00650070)
The Wondisfords owned the house and the vacant lot under different forms of legal ownership and they did not release the restrictive covenant, which was written to 'run with the land'. If they removed the restrictive covenant, the Wondisfords might have increased the value of the vacant lot but they would have simultaneously decreased the value of the house. The overall economic effect would have probably been negative due to the landmark status of the properties. At minimum, it would not have been worth the risk without a specific development plan.
House and Lot Hunting
By August 2004, the Wondisfords received a job offer from another university and they planned to move. They hired Donna Schwan with MetroPro Realty as their agent, and she placed the house on the market for $1,950,000 on August 6, 2004.
Within her description of the property, Schwan mentioned at the end of the remarks section that the vacant lot was sold separately. She did not enter an asking price for the land, and there is no evidence that she separately listed the land at that time. The Wondisfords intended on selling the house first with the restrictive covenant in place and then offering the vacant lot as an upgrade. If the house buyer did not want the vacant lot, the Wondisfords planned to sell the land to a single-family developer based upon the sales price of the house.
The Wondisfords continued to market the house throughout the fall and winter, but they did not get an acceptable offer. Like many sellers, they were probably getting a little antsy but they were not particularly desperate. They stuck to the original asking price rather than lowering it to motivate potential purchasers.
In January 2005, agent Miriam Zeltzerman with Urban Search of Chicago brought Michelle Obama to the house. Zeltzerman scheduled this showing even though the asking price was outside of the Obamas targeted price range. Mrs. Obama loved the house and Zeltzerman subsequently scheduled a follow-up appointment for Senator Obama and a friend, Tony Rezko.
According to Senator Obama, Rezko knew Scott Winslow and he spoke to him about the properties prior to the house tour. Rezko shared what he learned about the properties with Senator Obama and asked him if was interested in the vacant lot. Senator Obama said the house was "already a stretch" and he was not interested in the land. Apparently, Rezko expressed interest in the lot at that point but they did not discuss the matter any further. After this meeting, Senator Obama was adamant that they independently negotiated their contracts.
Based upon the documents released by Senator Obama, the Obamas negotiated with the Wondisfords on the house through their agent between January 15 and January 23. On January 23, they reached an agreement for $1,650,000 with a mortgage contingency date of February 17. Senator Obama also said in a 2006 interview that "the lot was purchased first; with the purchase of the house on the adjacent lot, the closings could proceed and did, on the same day, pursuant to the conditions set by the sellers". Furthermore, Senator Obama said Rezko paid the full listing price because there was already a competing bid on the land for the same amount and he could not have paid less for it.
The problem with this explanation is the land listing and the restrictive covenant. Journalists misinterpreted the former because they did not know about the existence of the latter.
House and Lot Transactions
When Senator Obama and Rezko met at the property in early to mid-January, Senator Obama told Rezko that he loved the house but he could not really afford it. Senator Obama expressed some concern about selling his existing condo, having enough money for the down payment, and financing the balance of the purchase price. Senator Obama and Rezko discussed these issues and they worked on a plan for Senator Obama to buy the house and for Rezko to buy the land.
However, there was a catch. Rezko wanted to release the restrictive covenant because it would make the land a little more attractive. While the landmark commission might limit any development plan, future developers would still have more options under the actual R5 multifamily zoning than the deed-restricted R1 single-family zoning. Thus, Rezko could mitigate his potential loss in the deal.
Senator Obama expressed some concern about releasing the restrictive covenant. Like the Wondisfords, he was worried that a multifamily development next to his high price mansion would negatively affect the value of the house. Senator Obama and Rezko then discussed methods for increasing the side yard between the properties, and Rezko agreed to sell the Obamas a strip of land after the closings.
At that point, one of them appears to have come up with an idea to list the vacant lot for sale. Schwan listed the land for sale on January 19, 2005, which was after the property tours and after the start of the negotiations. She offered a single-family site to residential developers for $625,000. She clearly listed the land by its effective zoning under the restriction rather than by its actual multifamily zoning. Since at least 1998, the actual zoning on these properties has always been R5 / RM5 multifamily.
As further explained below, the purpose of the listing is only consistent with an attempt to 'test the market' for a residential developer who was willing to buy the vacant lot with the restriction in place. In this scenario, the land would have been developed as a single-family residence. While Rezko eventually paid $625,000 for the lot, they did not need someone to pay the full amount because the Obamas would no longer needed to purchase the strip of land. The final cost for the Obamas would have been the same and Rezko would not have needed to buy the vacant lot. They had plenty of time to market the land while they secured the financing for the deals.
Remember, Senator Obama said the land sold first. In truth, it was actively marketed during the Obamas mortgage contingency period. The media simply misinterpreted the land listing data. Since the journalists covering this story were unaware of the restrictive covenant and its influence on the property zoning, the only item in the listing that mattered to them was the price.
Despite the marketing efforts, they never received an acceptable offer for the land as a single-family development site because it was overpriced for this purpose. Rezko therefore moved forward with his commitment to purchase the land. The Obamas then placed their condo on the market, eventually receiving an offer with a closing date prior to their closing date on the house.
With all of the deal points in place, the Wondisfords executed an Abrogation Agreement on April 1, 2005. This agreement effectively released the restrictive covenant on the land, allowing a multifamily development on the vacant lot once again. In the simplest of terms, this agreement decreased the value of the house and increased the value of the vacant lot during the transaction period. As a matter of ethics and law, the Wondisfords could not have released the restrictive covenant without the Obamas written approval. The Obamas had been under contract since late January, and the removal of a restrictive covenant was a major change to the condition of the property. Senator Obama knew about the restrictive covenant. At his press conferences, Senator Obama misled the media when he said - there was simply no connection between our purchase of the house, the price of the house and the purchase of the lot The only other explanation is that the Wondisfords and the Rezkos conspired to release the restrictive covenant without the Obamas knowledge, a highly unlikely scenario. (CCRD document #0510503131)
The Abrogation Agreement and the land listing are highly complimentary documents, proving the importance of the restrictive covenant in these transactions. Schwan advertised for sale a single-family development site after the start of the negotiations, while the Rezkos eventually bought a multifamily development site. The purpose of the land listing was not to report a closed sale, to obtain competing bids, or even to fool the media. The listing details are inconsistent with each of these purposes. To argue otherwise, one would need to explain multiple errors in the land listing and to question the competence of the listing agent. The use of the land listing to 'test the market' is consistent with all of the documented facts and outcomes.
The Abrogation Agreement and the land listing completely unravel Senator Obama's explanation of events. Senator Obama said that the land sold without the restrictive covenant prior to the house, but the Wondisfords would never have agreed to this deal without an acceptable contract on the house. Even if they made a profit on the land, they might lose more on the house if potential buyers balked at a multifamily development next door. After all, this was the reason that they insisted on the restriction when they bought the house.
Even if Senator Obama revised his timeline, and if he argued that the house sold before the land, the Wondisfords would not have sold the house without the restrictive covenant for such a steep discount without an acceptable contract on the land. While the release of the restriction clearly enhanced the value of the land, any rational developer would have wanted a contingency period to meet with the landmark commission. If the landmark commission were uncooperative, the Wondisfords would have had problems selling the land in a timely manner or for the dollars necessary to offset the reduced sales price on the house.
Furthermore, Senator Obama's explanation that there were other offers on the properties is moot. Even if they existed, these offers would need to be compared based on price and on the status of the restrictive covenant. For example, if someone were actually willing to buy the vacant lot for $625,000 with the restriction in place, the Wondisfords would have agreed to this deal and they would have closed immediately. Such a sale would not have negatively impacted the value of the house and they would have locked in their profits.
The Wondisfords agreed to these transactions because they were coordinated, and the total price for both parcels was acceptable. They were not particularly concerned about the individual pricing of the house and the lot, but they did insist on concurrent closings on June 15, 2005 to avoid financial risk. If one of the deals did not close, they did not want to own either the house or the land under these circumstances.
Finally, these documents strongly indicate that Senator Obama and Rezko first discussed the strip of land during the property tour. Senator Obama wanted to preserve the aesthetic balance of the house by increasing the side lot buffer. Even though Rezko was under federal scrutiny at the time, Senator Obama felt compelled to move forward with this transaction to protect the value of his home.
Estimated Payment for the Restrictive Covenant
Restrictive Covenants are a well-established property right, traded by landowners and recognized by the courts. In fact, restrictive covenants have been recognized in eminent domain proceedings. Similar to mineral rights or air rights, a restrictive covenant can be bought and sold separately from underlying parcel that controls the restriction. To be clear, the Wondisfords restrictive covenant had significant economic value, and Senator Obama and Rezko basically traded this property right.
Senator Obama would likely argue that he received a discount equal to the fair market value of the restrictive covenant. He would point out that the land resold twice, each time for a profit. He would ignore the highly unusual circumstances surrounding these transactions, including a sale to Rezko's attorney, and the fact that they are completely irrelevant. The future increase or decrease in the property value is meaningless. Senator Obama had an ethical duty to obtain an appraisal on the restrictive covenant when he bought the house, which was supposedly his reason for obtaining the appraisal on the strip of land.
While any retroactive valuation of the restrictive covenant would be highly controversial, one can fairly estimate the amount that Rezko actually paid for the release of the restriction. The key is to identify and to use actual arms-length transaction data. It is irrational to think that a singlefamily home would not appreciate while the value of single-family, deed-restricted lot next door would appreciate 50% in the same period of time. The 2005 sales prices for the house and the vacant lot were not arms-length transactions. Rather, Rezko and Senator Obama set the relative values between themselves. The Wondisfords actually took a significant loss on the house when commissions and transfer taxes are taken into account.
The only facts that are truly independent are the following: 1) the Wondisfords original purchase price of $1,650,000 for the house, 2) the Wondisfords original purchase price of $415,000 for the deed-restricted lot, and 3) the Wondisfords total required sales price of $2,275,000 for both properties. With a rational assumption that the house and the deed-restricted lot would appreciate in substantially the same manner, the house was worth approximately $1,818,000 and the vacant lot was worth about $457,000 at the time of the sale. Hence, Senator Obama should have paid $1,818,000 for the house with the restrictive covenant. In reality, Rezko paid approximately $168,000 for the release of the restriction. The net purchase prices were $1,650,000 for the house and $625,000 for the land.
When the additional strip of land is taken into consideration, Senator Obama should have paid $1,894,000 for the house and the buffer strip. Instead, he paid $1,754,000. Thus, Rezko paid approximately $140,000 for the release of the restrictive covenant in this scenario.
Depending on your approach, Rezko paid between $140,000 and $168,000 for the restrictive covenant. He purchased the land and the restrictive covenant even though he had no desire to own the property. As previously noted, he tried to avoid ownership by selling the land to a single-family developer. He also moved forward on this transaction without a contingency to meet with the landmark commission. A rational developer would have never done this deal unless he was doing a favor for the other party and he was expecting a favor in return.
Meanwhile, Senator Obama accepted this deal without an appraisal on the restrictive covenant to determine its fair market value. If these deals were above reproach, Senator Obama would have corrected the media reporting errors. Instead, he withheld information and he assisted them in distorting the facts, most notably the restrictive covenant and the land listing. In truth, Senator Obama was only able to buy the house with the help of Rezko, a man convicted of fraud, money laundering, and aiding and abetting bribery.
Final Thoughts
Ultimately, Senator Obama and Rezko engaged in a complex financial transaction, calculating that the public would not appreciate the significance of their actions. Rezko was not helping a family member to purchase a house at a steep discount. As proven by his federal conviction, Rezko engaged in this behavior to gain an illegal advantage with politicians for legislation and government contracts.
Right now, the public is trying to understand the cause of the mortgage crises. They need to look no further than this deal. When politicians accept personal financial help from insiders like Rezko, they create legislation for the benefit of a select few rather than the public at large.
Such politicians also subject themselves to blackmail. According to numerous media reports, foreign nationals financed Rezko. The public must openly speculate about who holds undue influence over Senator Obama and how these people can influence domestic and foreign policy. This has nothing to do with dubious associations or even poor judgment. This is about political corruption in government. Unfortunately, Senator Obama's actions should concern anyone who believes in a well-functioning government of the people, by the people and for the people.
We are willing to accept corruption at the highest levels of government because we believe that all politicians are corrupt. We have created a moral equivalency between politicians in general and white collar criminals in particular. Political membership is now a free pass to engage in personal enrichment at the expense of the public. While corruption in politics is nothing new, the desire to win at all costs has outstripped our fundamental belief in law and order. Hate for our opponents drives our passions and controls our judgments. We are willing to turn a blind eye to obvious malfeasance as long as our agenda will prevail.
Our principles should not stem from our policies, rather our policies should stem from our principles. Politicians are only a reflection of the people that they represent. Until we are willing to demand excellence from our leaders, we will never have any real change in this country. We will continue to have clever and charismatic politicians fulfilling their own wants and desires. Our momentary victories will be illusionary as our agendas are quickly replaced by the hidden plans of our saviors. If we are unwilling to defend our principles, we will tempt the wheel of fate one too many times and our freedoms will eventually be swept away by the hardhearted hands of history.
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