Francisco Mendez moved into Highbridge Rehabs, a public housing building less than a mile from Yankee Stadium, when he was twelve-years-old.

“When we first moved in it was pretty good,” Mendez said. “The neighborhood was quiet....The building was nice — cleaned up.”

But over time federal funds for public housing shrunk. The city and state failed to make-up the difference. And the New York City Housing Authority, a behemoth organization known for being overly bureaucratic and inefficient, used the money for replacing roofs, pipes and building facades to run daily operations instead.

Today, Mendez is in his thirties. He lives with his wife and child in an apartment where a major water leak damaged his walls, his sink backs up and old windows don’t close properly. None of it has been fixed. He says he’s been complaining about the windows for years.

“They come by they say they’re good, they fixed them. But they’re never fixed,” he said. “It’s always cold in the house.”

The New York City Housing Authority owns the building but the Kraus Organization, a large family-owned real estate firm, has been managing it for 23 years. NYCHA says Kraus always scores high during inspections.

So last year, NYCHA selected the company and three other partners to become part owners of Mendez’s building and 14 others, despite a large red flag: According to the city’s Department of Finance, Kraus owes the city $148 million in unpaid property taxes.

Last year, the debt prompted the following headline from the Real Deal, a real estate news web site: "Dead Scofflaw still owes the city $100 million Plus", referring to Herman Kraus, the family patriarch, who died in 2002.

The news item was included in background reports by the city’s Department of Investigation or DOI, along with other negative press, including a report from tenants complaining about the conditions at Roosevelt Gardens, a Bronx building owned by Kraus. The reports also include Kraus’ own statement acknowledging a debt of $120 million and a claim that a tentative settlement on the arrears has been reached.

NYCHA received the background check in July of 2018 — six months after it announced that Kraus was awarded a contract, and three months before the contract was signed.  

“From the outside looking in, to any normal person, yes, if you’re owed $150 million, maybe we should think twice about whether we should be contracting with you,” said Brooklyn City Councilman Antonio Reynoso, a Democrat who represents the part of Williamsburg, Brooklyn, where the buildings in debt sit.

Reynoso knows Kraus well — he grew up in a Kraus building and says it was so well maintained he had no idea he was living in low-income housing.

“We had any issues they would get resolved the same day, worst case scenario the next day,” he said.  

So he’s not concerned about Kraus as a building manager. But he is bothered by the double standard between a large landlord who owes a huge debt versus a turnstile jumper who gets a summons and a fine.

 “Those folks are not going 10 years without having to resolve that, but a landlord does something wrong and owes the city money, they can go decades without having to deal with their problems,” he said.

Reynoso said the law department was trying to get Kraus to pay off their debt at the same time NYCHA was awarding Kraus a contract. The councilman said he’s been tracking negotiations because he doesn't want tenants to suffer.

“What they owe to the city of New York has to be paid back,” he said. “The city of New York is looking to help them get a loan, a low interest loan, to help them pay that back.”

In other words, if the deal goes through, the city will lend Kraus the money to pay off their property tax debt to the city. The potential deal does not stop there.

“They’re also looking to give them a tax break on the property because they are providing affordable housing,” said Reynoso.

The law department would not discuss the case with WNYC but said it’s trying to resolve the debt in a manner that’s in the city’s best interest.

Reynoso wants the deal to go through because he wants to make sure tenants in Williamsburg, a neighborhood that epitomizes gentrification, don’t get displaced.

“The faster we get this over with, the faster we can feel sure that their buildings are going to be affordable for a long time,” he said.  

Typically, according to the Department of Finance, once a debt reaches $1,000, landlords get a year to pay it off before it gets sold as a lien to a private debt collector.

Kraus says they are primarily negotiating over the large interest that’s accumulated over many years.  

“Kraus and the city are now nearing a final agreement that will resolve all open issues, protect the quality of life of tenants, preserve affordability of the apartments, and deliver substantial tax revenue to the city,” the company said in a statement to WNYC.

The Kraus History

The debt Kraus owes has a long history. In 1998, the New York Times ran a lengthy article about Herman Kraus. Back then, the company was under scrutiny for hiring its own companies at an expensive rate to do everything from maintenance to legal work and then requesting rent increases based on high operating costs. 

“But when he has not won rent increases, Mr. Kraus has simply stopped paying municipal taxes,” wrote the New York Times. At that point, Kraus owed $11 million.

In 2009, the city tried to foreclose on 12 Kraus properties for a failure to pay taxes. Court documents show Kraus blamed the city’s Department of Housing Preservation and Development for its financial troubles.

“Despite numerous negotiations and discussions between HPD and the owner regarding a method to redress the Project’s increased operating expenses and mounting arrears, the HPD failed to approve any rent increases for nearly 12 years,” wrote Kraus lawyers. The case was dismissed after the city failed to take any action.

Kraus is only one player in the team of private companies that have taken over Bronx public housing buildings. There’s also a large national firm, Gilbane, that’s currently building a luxury tower in Lower Manhattan, among other things. In the Bronx deal, its acting as developer and will oversee the renovations of buildings by the general contractor, APEX Building Group.

NYCHA approved APEX without seeing their record of violations. That’s because the DOI background check failed to include it. When WNYC pointed out the oversight, DOI blamed the problem on a database glitch and sent NYCHA the violation history — six months after the contract was signed.

The Pressure to Fix NYCHA

The housing authority has been under tremendous pressure to fix buildings after a federal lawsuit laid out the deplorable conditions inside the nation’s largest public housing system, which was once a national model. The de Blasio administration has announced that it intends to turn over one third of the city's public housing stock — about 62,000 apartments — to private companies.

It’s happening at a rapid pace, and it’s the new model for saving public housing. NYCHA retains ownership of the land, but the companies own part of the building. They borrow against it, make repairs and collect the rent. The contracts are supposed to ensure the developments remain low-income housing permanently.

The deals are often large, and NYCHA says that means companies must be large too, to handle the size of the job. But big companies make Manhattan Borough President, Gale Brewer nervous. She recently attended a meeting for businesses interested in bidding on public housing and was surprised to find so many people there.

“I was shocked when I walked in,” she said.

Brewer wants NYCHA to contract with more non-profit developers. She says they are more transparent because they are regulated by the state attorney general. Brewer believes commercial developers aren’t mission driven the way non-profits are, and aren’t as sensitive to tenants needs. She said one potential bidder at the meeting turned her off when he asked about crime.

“So he says, 'Uh, is it safe around here?’” she said. They were at 91st Street and Columbus in Manhattan.

“I was like, God. That wasn’t gonna work for me, as you can imagine,” she said. “It doesn’t engender respect for the residents, I’ll put it that way.”

NYCHA said it would be irresponsible to award a contract to a small development team that won’t be able to deliver for tenants.  But in a statement, a spokesperson said they are looking to create smaller contracts going forward to increase the “deal flow.”