GRAND RAPIDS — A lawsuit filed last week alleges a West Michigan real estate firm engaged in racketeering and other fraudulent practices in order to charge higher rents at properties intended for affordable housing.
The case — filed in the U.S. District Court for the Western District of Michigan — alleges that Eenhoorn LLC, an investment and property management firm, violated the federal Racketeer Influenced and Corrupt Organizations (RICO) Act.
The suit claims Eenhoorn and its affiliated entities perpetrated a scheme to strip away affordability requirements for at least eight apartment properties in four states, including in Michigan. All of the properties had been built by other development firms using Low Income Housing Tax Credits (LIHTC), but were eventually sold to Eenhoorn-related entities.
Those related entities put the properties through what critics describe as a “planned foreclosure” to get around the federally mandated LIHTC rent restrictions and unlock the company’s ability to charge market-rate prices for the multi-bedroom units.
“The essence of the fraudulent scheme perpetrated by the … Defendants was to represent and pretend that bona fide foreclosures were [not] planned when, in fact, the transactions were carried out merely to strip the real estate development of their LIHTC status,” the lawsuit states.
MiBiz first reported on the case against Eenhoorn in January. At that time, Eenhoorn President Paulus Heule denied any wrongdoing, saying that each of the properties was in financial distress and that using the deed in lieu of foreclosure process was legitimate in each case. He added that the company has an internal policy not to raise rents on tenants in former LIHTC units.
Heule, who also serves as the Honorary Consul to the Kingdom of the Netherlands in West Michigan, did not respond to requests for comment as this report went to press.
Nyal Deems, an attorney at Grand Rapids law firm Varnum LLP who represents Eenhoorn, declined to comment on the RICO case.
The case was brought by John Smith, a staff attorney at Legal Aid of West Michigan, a nonprofit advocate for low-income families and individuals. Smith filed the suit on behalf of a client who had been a tenant in a LIHTC unit at one of the Eenhoorn properties in Michigan.
In January, Legal Aid represented a different tenant in filing a lawsuit against Eenhoorn and its affiliated companies for alleged violations of the Fair Housing Act.
The use of the deed in lieu of foreclosure process also drew attention from the Michigan State Housing Development Authority, which sent a letter to the U.S. Internal Revenue Service saying the use of planned foreclosure “thwarted” the policy objective behind the LIHTC program. The MSHDA letter did not mention Eenhoorn by name.
The latest lawsuit specifically details Eenhoorn’s allegedly fraudulent use of the deed in lieu of foreclosure process.
Smith contends that the RICO statute — commonly known for its use in breaking up organized crime syndicates — applies here because of the company’s use of interstate mail or wires in carrying out the process.
“(The RICO) statute is actually applied quite frequently in business transaction cases,” Smith said.
At this point, Smith said he continues to wait and see how the judicial process will unfold regarding both cases.
Lawyers for Eenhoorn filed a motion to dismiss the first lawsuit, which now awaits a judge’s decision on whether the case will be heard, Smith said. He added that he had not received any response to the second case as of the time this report went to press.
Despite little evidence of other companies using the deed in lieu of foreclosure process to sidestep federally mandated rent restrictions, the Eenhoorn example has attracted national attention, particularly from affordable housing advocates who would like to eliminate the loophole.
Bipartisan legislation introduced in the U.S. Senate in early March would do just that. A bill to expand LIHTC development also includes provisions to preserve the existing supply of low-income housing nationwide.
“The affordable housing crisis is exploding all across the country. We are facing pressures from all sides: demand for rental housing has increased by 21 percent, but we are building units at the lowest rate since the 1970s,” Sen. Maria Cantwell, D-Wash., one of the bill’s sponsors, said in a statement. “If we do not act to increase the Low-Income Housing Tax Credit — our best way to build new affordable homes — by 2025, over 15 million Americans could be spending half their income on rent. This is unacceptable.”
Although he welcomes LIHTC expansion and reform garnering the attention of policymakers, Smith said he’s not following the developments particularly closely.
“I think a lot of people are hoping the IRS takes some action to at least issue some regulations on the deed in lieu of foreclosure process,” Smith said. “But I’m more focused on these cases than the broader issues.”