When Cleveland lawyer Frank Chapman decided to go after a big HUD contract, his firm had little or no experience in the job the agency needed done: managing and marketing Federal Housing Administration-insured single-family properties. But he did have one thing going for him: His firm was a small business, and HUD had decided only small firms would be allowed to compete for the job.
In addition to the Chapman Law Firm, he owned a title company and a small mortgage brokerage, according to the Cleveland Plain Dealer. The newspaper reported that Chapman described the HUD contract as his chance to create a “baby Halliburton,” referring to one of the biggest contractors for rebuilding Iraq. As for expertise, Chapman said he’d simply hire trained property managers and marketers.
Chapman had competition from other small firms and had to fight for the contract in court, but he eventually prevailed and on April 19, 2007, HUD informed the single family loan servicing managers for all approved mortgagees that Chapman Law Firm was handling all marketing and management of all properties in Michigan and Ohio.
The initial contract is listed in the federal procurement database at a value of $34.7 million, but that might be for an initial phase.
Chapman is one of the many firms that has increased its sales and revenue dramatically thanks to preferences for small business in general, particularly small disadvantaged businesses.
While Chapman faced competitive bidding, his case also demonstrates how HUD’s approach to contracting can yield questionable results. HUD initially rejected Chapman in favor of another company, but Chapman shot down the winner by successfully seeking a ruling that it was not in fact a small business. HUD then tried to reopen the competition, and even though his capabilities had been questioned, Chapman won the argument that as the sole remaining small business among the original bidders, he should get the contract.
Politics has surfaced as a possible factor in several contracting cases. One of those is the case of National Housing Group Corp., based in Miami. It has won total contract dollars from HUD of $50.3 million from 2003 to 2006. Of that amount, only $2.3 million came through full and open competition.
Started in 1997, this real estate management company has 10 employees and annual sales of $490,000, according to Dun and Bradstreet. It is certified as a Sec. 8(a) firm but it also enjoys preferences that HUD provides for firms located in Historically Underutilized Business Zones (HUBZones).
The president is Maggie Pedraza. From 2003 to 2005, according to the Federal Election Commission’s (FEC) online database, she contributed close to $13,000 to Republicans: $2,000 to George W. Bush’s re-election campaign, $3,000 to former HUD Secretary and now-Sen. Mel Martinez’s campaign, and $7,750 to the Republican National Committee (RNC). Employee Edgardo Jorge-Ortiz gave $1,000 to then-Gov. George W. Bush’s presidential campaign in 1999, and $2,000 to Bush’s re-election campaign in 2004. National Housing Group’s Vice President Oria de Armos contributed $2,000 to Bush’s 2004 re-election campaign, as did employee Cynthia Doval.
The firm has seen its volume of HUD contracts decline yearly since it was awarded $30.6 million in fiscal 2003. Officials in New York City say the company did a poor job managing properties insured under Sec. 203(k) that went into foreclosure. Nonetheless, the firm got $2.3 million in contracts from HUD in 2006.
One of the firms that is most adept at getting sole-source HUD contracts is Michaelson, Connor & Boul, Inc., which is a woman-owned small business but not a Sec. 8(a) firm.
Based in Huntington Beach, Calif., the firm received $82 million in HUD contracts in fiscal 2006, but only $28.5 million was the result of full and open competition. In fiscal 2005, it received contracts worth $86.7 million, but only $16.9 million of that was in full and open competition. Overall, the firm has received 101 contracts from HUD between 2001 and 2006, totaling $385,934,688. Most of the contracts involve management and marketing of HUD’s foreclosed single-family homes.
The firm’s secretary/treasurer is Firmin Boul, who donated $2,000 in 2003 to Sen. Christopher Bond, then chair of the Senate HUD Appropriations Subcommittee, according to FEC data, which shows no other political contributions from Michaelson employees.
The case of DTM Corp. of Washington, D.C., illustrates how a Sec. 8(a) firm can prevail even when it doesn’t really have the resources to do the job. The HUD Inspector General’s report on political influence in HUD contracting quotes a witness as saying that HUD Secretary Alphonso Jackson directed that HUD “debundle” the contract for security at the HUD headquarters building from contracts for maintenance, groundskeeping, cleaning, and other functions that had been part of an overall building management contract.
IG testimony stated that a company that Jackson used for security when he ran the Washington, D.C., housing authority wanted to get the security contract but was advised it was too small. That firm merged with another to create DTM, which was certified as Sec. 8(a) as well as being in a HUBZone, according to the testimony.
HUD used competitive bidding for this award, and narrowed the competition down to two firms, DTM and another firm that was not 8(a) or located in a HUBZone. For that reason, HUD added 20 percent to the other firm’s bid, in order to give DTM an advantage.
DTM got $4.8 million in contracts in fiscal 2005 and 2006. Jackson denied to the IG that he had any role in disaggregating the contract for security or in steering the contract toward the person he’d worked with previously.
Sec. 8(a) Classification
To become eligible for the Sec. 8(a) program, a small business must be considered socially and economically disadvantaged. Next, it must fall within the Small Business Administration’s size standard as a small business. According to the agency, a small business is independently owned and operated, is organized for profit, and is not dominant in its field. Depending on the industry, size standard eligibility is based on the average number of employees for the preceding 12 months or on sales volume averaged over a three-year period. For example, the average annual receipts of a nonresidential property management business may not exceed $2 million. The owner of the firm must be classified as socially and economically disadvantaged. Initially, the owner’s net worth must be less than $250,000, and may not increase above $750,000 for continued eligibility. The participant must own at least 51 percent of the company, and be engaged full-time in the daily operation and management of the business. Sec. 8(a) is a nine-year, nonrenewable certification.