Jtgaltomega’s Blog

October 25, 2012

The Obamas and Chicago Politics: A Guide to Wisdom

Barack Obama has portrayed himself as a principled leader who got his start as a community organizer.  As president, he has envisioned himself as a hero of the working class, depicting Mitt Romney as a heartless corporate raider who is only looking out for the moneyed interests.  Yet, interestingly enough, the Obamas themselves have also been accused of helping political insiders at the expense of the poor, possibly receiving personal benefits in exchange.

During the 2008 election, Hilary Clinton accused Barack Obama of representing “slum landlord” Tony Rezko, helping Rezko develop substandard housing projects for inner-city residents.  As an Illinois state senator, Obama also wrote letters to city and state officials, supporting the use of taxpayer funds on a Rezko project.  Some critics suggested that Rezko repaid Obama through campaign contributions and personal payoffs.  In 2005, for example, the Obamas and Rezko simultaneously closed on a house and an adjacent vacant lot, respectively.  Many argued that Rezko overpaid for the lot, effectively subsidizing their purchase.  Barack Obama forcefully countered these charges, noting that he represented a local church group, not Rezko, and that other local officials also supported the taxpayer funding.  Obama further insisted that he did not coordinate his house purchase with Rezko in any manner whatsoever.

Meanwhile, Michelle Obama came under scrutiny after she was promoted to Vice President for community and external relations at the University of Chicago Medical Center.  Her promotion in 2005 came with a huge salary increase.  Many wondered if the University was indirectly rewarding her husband, a recently elected US Senator, who made an earmark request to help pay for the Medical Center’s pavilion project.  Even more shocking, Congressman Bobby Rush accused the University, and by extension Michelle Obama, of patient dumping in 2009.  Rush called for a congressional investigation, complaining that Michelle’s signature program steered uninsured inner-city residents from the Medical Center to satellite clinics.  In both cases, a University spokesperson responded to the allegations.  Regarding any lobbying for money, government affairs officials, not Michelle Obama, would have handled any requests.  As for their Urban Health Initiative, people simply misunderstood the program, which promoted medical homes in neighborhoods.

As is typical, these stories exploded in press reports, only to eventually fade from public discourse and consciousness.  The Obamas and their supporters had reasonable explanations for each situation, and, beyond the steamy headlines, no one provided any evidence to counter their arguments or to suggest a broader scheme of wrongdoing.  In reality, journalist simply lacked necessary framework to understand Barack Obama’s early career and his role in Chicago politics.

Beyond the obvious associations, all of the Obama controversies have a common thread, the University of Chicago and its community affairs department.  The Obamas were integral elements in University’s well-designed and fully integrated strategy to end its conflicts with its poor minority neighbors.  In order to execute their ambitious plan, community affairs executives embarked on an extensive array of development projects and social welfare initiatives that required significant taxpayer funds.  They created Michelle’s positions and oversaw her advancement in the University, ensuring favorable access to and results from Barack Obama.  Journalists failed to connect Michelle’s employment to Barack’s political activities because they did not understand the University’s strategy, its expansive agenda, or its methods for executing that agenda through an assortment of non-profit organizations.  Barack Obama effectively concealed his efforts on behalf of the University and his wife by pursuing taxpayer funds for the non-profit agencies that actually implemented the University’s initiatives.

Furthermore, journalists failed to note that the University had a financial interest in the properties that Obama and Rezko purchased, raising serious questions about its employer-assisted housing programs and its efforts on behalf of key personnel.  Even worse, reporters overlooked documented evidence that proves Obama and Rezko coordinated their transactions.  Obama and Rezko manipulated private zoning rights, as controlled by a restrictive covenant, to significantly adjust the price of the properties.  Obama knowingly lied about these details, which fully explain how he bought his house at such a steep discount and why he subsequently purchased a buffer lot between their properties.  Even more intriguing, the evidence supports a broader inquiry as to whether Obama, Rezko and the University structured four transactions, including the sale of the Obamas’ prior condo, to assist the Obamas in the purchase of their home.

As will be revealed by the details of these stories, Barack Obama was the ultimate Chicago politician who self-servingly pursued the agenda of his state senate district’s most powerful business interest, overlooking the impact on his most vulnerable constituents.  In The Obamas and Chicago Politics: A Guide to Wisdom, we explore Barack Obama’s Chicago career in three chapters:

1) The University of Chicago and the Obamas – Coming Soon

2) The Obama-Rezko Property Transactions, Part I – Now Available, see October postings.

3) The Obama-Rezko Property Transactions, Part II – Coming Soon

© 2012 JT Galt Omega.

This article may not be republished or retransmitted without the express written consent of the author.


The Obama-Rezko Transactions, Part I

The story about President 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 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 Barack Obama about these transactions and his relationship to Tony Rezko, who was convicted of fraud, money laundering, and aiding and abetting bribery for government business in 2008.  Obama held press conferences, insisting that he did not coordinate his purchase with Rezko in any manner whatsoever:

“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, Chicago and mainstream journalists accepted Obama’s explanations of events, but their acquiescence was based upon substantial factual errors and omissions.  There is considerable proof that Obama and Rezko coordinated their transactions, explaining how the Obamas purchased their house at such a large discount and why they purchased the buffer lot between the properties.

While the Obamas would have eventually been able to buy the house without assistance, their financial resources were considerably smaller in early 2005.  As Barack Obama noted, the house purchase was “already a stretch”, which is why they did not try to buy the adjacent lot.  They needed to purchase the house at the lowest possible price and to defer as many costs as possible into the future.  By the end of that year, they knew that their financial situation would significantly improve after they received additional funds from his book royalties and from Michelle’s substantial salary increase at the University of Chicago.  Nonetheless, they wanted the house and they moved forward with the transaction.

Journalists might have been a bit more suspicious if they had accurately reported the sellers’ property history.  While the Obamas purchased the house for the same price that the sellers paid five years earlier, Rezko paid 51% percent more for the adjacent lot after roughly the same period of time, a fact that has never been properly reported.  Rezko’s substantial premium made the deal possible.  The sellers were barely profitable on the combined sales, after adjusting for the purchase costs and expenses.  Accurate reports would have also noted that the Sellers did not sell the same lot that they purchased, even though it appears to be the same piece of land.  The lot was sold with a different set of property rights that significantly affected its value.

In real estate, the value of a property is equal to the total value of its bundle of individual rights, and any one of those rights can be removed and sold separately from the rest.  In fact, creative businessmen have historically manipulated individual property rights to create wealth for society, developing the concepts of condos, coops, mortgage back securities, and many other real estate-backed investments.  In the new Dallas television series, Southfork’s mineral rights were an issue because the land rights were sold separately from the oil rights.  While JR Ewing was able to trick his brother Bobby into selling him the ranch, Bobby discovered that the mineral rights were owned by a separate trust.  So JR owned the ranch but he could not drill for the oil.  Bobby still controlled those rights.

While most people do not encounter such complex issues in the sale of their homes, the Obama-Rezko transactions involved the unusual separation of the vacant lot’s public zoning rights from the vacant lot itself.  These zoning rights were then sold separately from the vacant lot.  Even more unusual, these transactions occurred in a landmark district.  While the Chicago zoning code guarantees certain uses in a particular zoning classification, the landmark commission can essentially override those rights.  In order to understand zoning rights in this context, non-real estate professionals should view superior zoning rights as gold rights.  If you own these rights, you can mine for the gold (i.e., build more units).  However, your neighbor might not want a goldmine (i.e., a multifamily development) next to his expensive house.  Meanwhile, the Environmental Protection Agency (i.e., the landmark commission) might not let you build a mine, even if other government agencies might permit such development.

As a broad overview, Obama and Rezko manipulated private zoning rights, as controlled by a restrictive covenant, increasing the zoning on the lot from single-family to multifamily.  By transferring control of these rights from the house to the lot, Obama was able to purchase his home at a substantially lower price.  However, he was clearly concerned about a multifamily development next to his high priced mansion.  In order to resolve this drawback, Obama subsequently purchased part of Rezko’s lot when he had additional financial resources.  He was attempting to protect the resale value of his home by creating a larger buffer lot between the properties, fully explaining his willingness to complete the transaction despite widespread reports that Rezko was under federal grand jury scrutiny.

Meanwhile, Rezko significantly overpaid for these rights, which were never appraised, and he failed to take any reasonable precautions to make sure that he could actually use them.  In fact, a Chicago official resisted at least one reported attempt to use these rights, clearly noting the property’s landmark status.  Rezko further hurt his multifamily zoning rights by selling the buffer lot to Obama, reducing his design flexibility that might have addressed landmark concerns.  Even worse, Rezko evidently tried to avoid ownership of the lot altogether, attempting, prior to his closing, to sell his rights in the land without the enhanced zoning rights.  If successful, Rezko could have privately sold his equitable rights (i.e., his contract rights) in the property, even at a loss, and Obama would not have needed to purchase the buffer lot.  Rezko’s actions clearly demonstrate that he did not have a real financial interest in the vacant lot, other than the benefits that he could provide to the Obamas.

In order to understand the details of these transactions, it is imperative to understand how the Wondisfords, the sellers, bought the house and the adjacent lot.  On July 19, 2000, Frederick Wondisford and Sally Radovick, husband and wife, purchased the house for $1,650,000 (Cook County Recorder of Deeds #00661600).  Contrary to media reports, they did not buy the adjacent lot and they did not intend to buy it.  They were worried, however, about the developer’s future plans for the property, which is actually zoned multifamily.  As a condition of the purchase, the Wondisfords received an additional property right in the form of a restrictive covenant, guaranteeing them that the lot would only be developed as a single-family home (CCRD #00603539).  After closing on the house, the Wondisfords changed their minds.  They decided to purchase the zoning restricted lot for $415,000 in an entirely separate transaction on August 16, 2000 (CCRD #00650070).  They agreed to pay approximately 25% of the sales price of their home, indicating they purchased the lot at a fair market price based on its value as a single-family development site.  Due to this unusual series of events, the original sales prices for these properties reflected their fair market values with the house, not the lot, owning the lot’s multifamily zoning rights.

Almost five years later, the Wondisfords sold the house for the exact same price but they sold the land for $625,000, or a 50.6% increase in value.  As noted, the Sellers would have been barely profitable on a cost basis, adjusting the combined sales price by the purchase costs, commissions, transfer taxes and other expenses.  If the restrictive covenant remained in place, the single-family development site should have appreciated at roughly the same rate as the adjacent mansion.  Based upon the combined 2005 sales price of $2,275,000 and a consistent rate of appreciation, the house and the land should have sold for approximately $1,817,797 and $457,203, respectively.  The Sellers listed the house at $1,950,000 based upon similar reasoning.  The disproportionate change in the land and house values can be completely attributed to the release of the restrictive covenant, which transferred the multifamily zoning rights back to the lot.  By comparing the difference between the actual sales price of $625,000 for the multifamily site and the anticipated value of $457,203 for a single-family site, Rezko’s costs for the zoning rights can be roughly estimated at approximately $167,797.

With an accurate property history, Barack Obama’s statements about the transactions can be compared to the actually series of events.  Based upon information that he provided to the media, Barack and Michelle negotiated with the Wondisfords through their agent between January 15 and January 23, 2005.  They agreed to a sales price on January 23 with a mortgage contingency date of February 17.  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.”

Here is the actual series of events after Rezko and Obama reportedly entered their contracts.  On January 19, 2005, the vacant lot was listed for the first time on the Multiple Listing Service (MLS) for $625,000, even though Rezko would have already been under contract (MLS #05014547).  Prior to this date, the land was never actually offered for sale on the MLS.  Reporters simply misread the listing sheet and assumed that Rezko paid the full listing price.

More importantly, the listing had nothing to do with the R5, multifamily, lot that Rezko eventually purchased.  Instead, Rezko was trying to immediately resell the lot that he had just contracted to purchase, although he was attempting to sell it as single-family development site with the zoning restriction in place.  The zoning field on the MLS listing sheet was marked as R1, single-family, and the property remarks section clearly specified that the property was a single-family development site.  Furthermore, the listing only ran from the time that Rezko went under contract through the end of the Obamas’ mortgage contingency period.  Then, the listing was cancelled.

The MLS listing is consistent with an attempt to find an alternate buyer who might purchase the land with the restrictive covenant in place and for an amount close to the $625,000 price.  However, the lot was significantly overpriced as a single-family lot based upon nearby house values, and they did not get an acceptable offer.  If they could have found a buyer for a single-family lot at a reasonable price, Rezko could have then transferred equitable title in the property (i.e., his contract rights on the land) at a loss without taking actual title of the property.  Subsequently, the Obamas would not have needed to purchase the buffer lot between the properties.  Without an alternate buyer, the Obamas and the Rezkos moved forward with the transactions as planned.

On April 1, 2005, the Wondisfords executed an Abrogation Agreement, effectively releasing the restrictive covenant on the land (CCRD #0510503131).  Beyond simply transferring the multifamily zoning rights back to the vacant lot, the Abrogation Agreement proves that the Obamas were fully aware of the restrictive covenant and its effects on the property values.  After they executed their contract, the Wondisfords could not have transferred the zoning rights back to the land without the Obamas’ knowledge and consent.  According to the terms of the restrictive covenant, the Obamas, as the equitable owners of the house, would have been entitled to the restricted zoning rights that ran with the land unless they had agreed otherwise.

Equally important, the Wondisfords would not have executed these transactions unless Obama and Rezko were coordinating their activities.  Assume for a moment that the Wondisfords would actually be willing to sell the land first with no restrictions on the multifamily rights, as Obama suggested.  The Wondisfords would have been extremely worried about selling the house.  Even at a discount, many people may not have wanted to buy a $1,650,000 house next to a potential multifamily building, reducing their total number of potential buyers.  The Wondisfords actually required the covenant as a part of their original purchase to avoid this problem.  Moreover, they would be limiting their potential options.  A house buyer, for example, might also want to buy the lot, resolving all of their concerns.  Since the house represented the larger portion of their investment, and they were moving to another city, they would have wanted to sell the house first and then move forward on land.

As it turns out, this is exactly why Wondisfords held off on selling the lot to the original developer, who instead waited with a reported option, and why they did not separately list the land on the MLS.  In his press conferences, Obama stated that Rezko paid $625,000 because the original developer’s option was at that price and Rezko could not purchase the lot for less.  However, if the original developer were actually willing to pay $625,000 for a single-family lot, the Wondisfords would have already closed on that deal.  They would have made a 51% profit on the land and they would have permanently resolved the zoning concerns for any new homeowner.  Obama clearly misled reporters into believing that price was the only issue.  The Wondisfords and the developer did not attempt to close on the deal because he was a rational developer seeking a profit.  He would have only paid that price if he owned the multifamily rights and, equally important, he knew the extent to which he could actual use them.

Rezko, however, was willing to purchase the multifamily rights with no assurances as to the number of units that he would actually be able to build.  Since the property is located in a landmark district, normal zoning rights are not guaranteed.  While a developer would have been interested in the multifamily rights, he would have insisted on a due diligence period to determine its true potential.  He would have prepared initial plans and approached the local alderman and the landmark commission, gauging their level of support.  If they were resistant to his plans, the developer might not be able to build as many units and, consequently, he would not want to pay as much money for the land.  In any such scenario, the sales price for the house would need to be sufficient to offset the possibility that the developer would not be able to exploit the rights as much as anticipated.  The Wondisfords were likely facing that problem with the original developer, who was really an option for them.  While he offered them an opportunity to make additional money, they obviously believed that there were downsides to the deal and they wanted to see what happened with the house first.

Rezko was willing to forgo these typical precautions and to coordinate the closing dates.  While the land had significant potential value with the enhanced zoning rights, the Wondisfords would not have agreed sell the house at such a steep discount unless Rezko was willing to unconditionally purchase the land at the specified premium.  This is why they required Obama and Rezko to close on the same date.  It is also one of the reasons why the original developer would not have wanted to move forward with the transaction.

Equally important, Rezko was willing to harm the value of his multifamily zoning rights by selling part of his side lot to the Obamas, which another developer would not have been willing to do.  By diminishing the lot size, Rezko lost substantial design flexibility that he might have needed to address the aesthetic concerns of the alderman, the landmark commission, and local preservation groups.  Parking configuration on the property would also be more difficult.  Barack Obama, however, shared the Wondisfords’ concerns about a multifamily development next to his high priced mansion and Rezko wanted to offer a solution, even if it was against his own best interests.

Ultimately, Barack Obama purchased the buffer lot between their properties as an alternate solution to the restrictive covenant.  By January 2006, he had substantially more resources and he felt compelled to move forward with his original plans to put some distance between his house and a potential multifamily development.  In essence, Obama wanted to protect the resale value of his house, explaining why he moved forward with this transaction despite widespread reports that Rezko was under federal grand jury scrutiny.  While it was still uncertain what might be built on the lot, Obama did not want to take a chance with an unknown developer.

Rezko’s troubles did motivate Obama to pay more for the buffer lot than its appraised value of $40,500.  However, it does not explain Rezko’s apparent willingness to actually sell the strip of land for that amount.  The appraisal failed to account for the property’s landmark status and the disproportionate effect that the diminished lot size might have on its development potential.  More importantly, if Rezko were truly motivated to develop the property for a profit, he would have simply held off on any potential sale to Obama until he had the necessary approvals for a multifamily development from the alderman and the landmark commission.

Obama’s early statements about the side lot purchase betrayed his knowledge of the restrictive covenant while his future statements demonstrated how he actively deceived reporters.  In November 2006, Obama indicated to journalists that he purchased the side lot “to preserve the aesthetic balance” between the properties, which would have been entirely consistent with the specific zoning issues at play in these deals.  By 2008, he shrewdly modified his story, claiming that he purchased the side lot so his daughters would have a bigger yard.  Reporters did not notice the subtle but important change in his response.

As it turned out, Rezko’s failure to properly assess the value of the multifamily rights has become an actual problem.  Local officials have used the property’s landmark status to stop at least one attempt to build a multifamily development on the site.  After Tony Rezko started having legal troubles, Michael Screenan, Rezko’s former business lawyer, bought the land from Rita Rezko in December 2006.  He then tried to use the zoning rights that Rezko purchased, submitting plans to local officials.  Alderman Toni Preckwinkle and The Kenwood Open House Committee objected to his development plans.  Preservation Beat, a local community group, reported in its online journal that Screenan’s plans “to build 6 condo units next to Sen. Obama’s home…raises ire.”  Preservation Beat further noted that “Ald Preckwinkle has objected to the designs and possibly in principal to 6 units in a landmark district based on hundred year old single family mansions.”  If Rezko had asked for a due diligence period, Screenan would have already known the total number of possible units.  If Rezko had retained the side lot, Screenan would have been in a better position to address the design concerns.

Screenan’s inability to develop the land as a six flat illustrates how Tony Rezko worked against his own interests to help Barack Obama purchase his house at a steep discount.  However, some fact check organizations have argued that Rezko’s land purchase was ultimately profitable, justifying his actions.  They note that the Screenan paid Rita Rezko $575,000 for the remaining lot, and that he subsequently sold the property to John and Majorie Poulos for $675,000 in March 2008.  Such arguments fail to account for the costs associated with real estate transactions or to consider the relationship between the parties.  Furthermore, retroactive property appraisal relies on facts in existence at a given time, and the future deals were unquestionably tied to a property with a newfound notoriety.  As for John and Majorie Poulos, it is worth noting that they still have not built a home on the lot.  Meanwhile, local developers have indicated that the property is being quietly marketed as a potential single-family or multifamily development site.  Ultimately, the historical facts are straightforward and they prove that Rezko substantially overpaid for multifamily zoning rights that even his own attorney was unable to use as intended.

As an ancillary story, it is interesting to note that Michelle Obama was on the landmark commission until she resigned her position in May 2005, just prior to the closings on these properties.  Reasonable minds might assume that she resigned her position to avoid public scrutiny.  As an active member of the commission, she would have drawn attention to herself and her husband when Rezko presented the committee any proposals for the vacant lot.  As an ex-member of the commission, she was in a better position to exploit her political connections with the board and to help Rezko get approval for any potential development.

In fact, Michelle eventually contacted commission members to expedite approval of a $14,300 iron fence between the properties, which was completely paid for by Tony Rezko.  When reporters asked if the fence constituted a gift from Rezko to the Obamas, Barack Obama cited section 7-28 of the Chicago Municipal code and Rezko’s responsibility to put a fence between their properties.  In reality, section 7-28 covers health nuisances, and the vacant lot has never actually been in compliance with the regulation.  When a vacant lot does not have a resident owner, the code specifically requires the property to be surrounded by a non-combustible screened fence, attempting to make sure that the property is not only secure but also fully visible by police, fire and other emergency services.  If Rezko wanted to be in compliance with the code, he would have removed the continuous row of trees along the outer fence.  Even now, those trees continue to act as an illegal interior fence, completely blocking a view of the property from the street.  Moreover, the fence simply needs to surround the property, which Rezko could have accomplished on his own land.  Michelle Obama had no reason to be involved in the matter whatsoever, and, to the extent that the fence actually sits on the property line, Rezko unnecessarily gave the Obamas partial ownership rights in his fence.

Amazingly, mainstream media outlets intensely covered this story.  If journalists had carefully documented and then reviewed the property history, they would have avoided significant factual errors in their reporting and they would have understood how Obama and Rezko coordinated their transactions.  They would have also recognized that Barack Obama was intentionally lying to them when he said the “lot had nothing to do with the sale of the house” or “there was simply no connection between our purchase of the house, the price of the house and the purchase of the lot.”  Barack Obama and Tony Rezko used the restrictive covenant and the abrogation agreement to manipulate the relative prices of the two properties.  Rezko only entered this transaction as a political favor to Barack Obama, helping him purchase a house that he could not yet afford.  More importantly, if journalists had understood the extent of the coordination, they may have taken a closer look at the financing.  No one has ever asked any questions about the University of Chicago’s financial interests in these properties or its connections to Tony Rezko through certain non-profit agencies.  There is a legitimate basis for asking if these two properties were part of a larger, structured transaction involving four properties, including the sale of the Obamas’ previous condo.  Luckily for Barack Obama, our nation’s reporters are not well versed in basic property rights or how such rights can be manipulated in real estate transactions.  Unluckily for the American people, they ignored their common sense about these transactions, which highlight troubling ethical and legal indiscretions.

© 2012 JT Galt Omega.

This article may not be republished or retransmitted without the express written consent of the author.

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