State housing finance agency seeks two-year funding ban against Pinnacle

A top affordable housing developer in Florida won’t get the “death sentence” it feared, but Pinnacle Housing Group should still be banned for two years from applying for state funding, a state board decided Friday.

By a bare-majority vote after 90 minutes of deliberations, the Florida Housing Finance Corporation’s board of directors recommended the two-year ban and agreed to pursue a formal administrative complaint against Pinnacle’s principals for profiting from “inflated” costs on four projects, including two in Miami-Dade County and one in Broward.

Representatives for both Pinnacle and Florida Housing will now plead their case before a state administrative law judge, who will decide whether to endorse or reject the board’s recommended ban or suggest an alternative outcome. If the judge sides with the state agency, the board would have to vote again to approve a final penalty.

Members of the Florida Housing board cast four votes — weighing a range of potential penalties — before agreeing on their recommendation; most of the board rejected the agency staff’s recommendation of a five-year ban as too harsh.

“I find staff’s recommendation extreme,” said board member Natacha Bastian, a commercial builder from Miami. “I ‘inflate’ on a daily basis if we’re going to call it that. I’m in a for-profit business. … To me, a rule was not broken.”

(The board’s other Miami representative, Rene Diaz de la Portilla — whose brother, Miguel, is registered to lobby for Pinnacle in Miami-Dade County — did not attend Friday’s meeting.)

Other board members and the agency’s own staff disagree; they believe agency rules were broken and wrongdoing occurred, which is why they want to impose the ban on Pinnacle.

“If we do not institute a tough penalty here today, the flood gates will be open. All of the boundaries will be pushed going forward,” board chairman Barney Smith said, drawing a vocal scoff from Pinnacle principal David Deutch. (Only Smith and Julie Dennis, the board representative from the Florida Department of Economic Opportunity, favored the full five-year ban.)

Pinnacle recently agreed to pay $5.2 million to the federal government — $4.2 million in profits derived from the principals’ set-up plus a $1 million penalty — after federal prosecutors found Pinnacle’s affiliated subcontractor, DAXC, submitted inflated costs to the state to qualify for higher federal subsidies to build the shell concrete work for four low-income housing projects.

DAXC violated the law when it kept the millions in excess federal grants and inflated development and construction fees while performing work actually done by another Pinnacle subcontractor, prosecutors said. The surplus federal money benefited Deutch, fellow Pinnacle partners Louis Wolfson III, Mitchell Friedman and Michael Wohl, and a fifth DAXC principal, Felix Braverman. Only DAXC — owned by Pinnacle’s partners and Braverman — was charged with theft of government funds.

By Pinnacle agreeing to pay the $5.2 million as part of a deferred prosecution agreement, federal prosecutors will eventually dismiss the case against the company. But Florida Housing is still able to pursue its own penalties against Pinnacle.

“Don’t you think Florida Housing could have used this $3 million of excess federal funds to provide more affordable housing in Miami?” Smith asked the three Pinnacle principals who were in attendance: Deutch, Wolfson and Friedman.

Deutch told the Florida Housing board on Friday that he and the other principals of Pinnacle made “no admission of guilt” in signing the agreement with federal prosecutors. “It cut to the chase of what was important … no criminality, repayment of money, resolution of the matter, move on in life,” he said.

He advocated against the proposed five-year ban, calling it a “death sentence” for Pinnacle.

“It’s humiliating, it’s embarrassing and it has a chilling effect” on affordable housing developers, said Deutch, who declined to comment to the Herald/Times after the meeting. “It’s inconceivable.”

He defended Pinnacle’s set-up of DAXC, calling it a “normal business condition” that made “perfect business sense,” because it gave the principals greater “control” over a sub-sub-contractor that they had reservations about, he said.

Deutch posed the question to himself of why Pinnacle’s principals didn’t simply return the profit when they came out ahead. “I guess in the private sector, I always think that if we take the risk and we sign personally, and we engage in an activity and we deliver value — that we’re entitled to a profit,” he said. He added that the principals “volunteered” to pay the money back when Florida Housing considered the profit a problem.

Deutch disputed the use of the word “inflate” in the deferred prosecution agreement, which had troubled Florida Housing board members and staff. “I’m sorry the word ‘inflate’ is so inflammatory but, Florida Housing, we do it. We just call it a different thing — we don’t call it an inflated cost, we call it a ‘profit,’ a ‘general contractor fee,’ ” he said.

Deutch said that Florida Housing’s rules at the time did not prevent Pinnacle from using an affiliated subcontractor; the agency is considering a rule change this year that would prohibit the practice.

“We played by your rules,” Deutch argued.

With only the two-year ban now recommended, Pinnacle was also spared another penalty staff had wanted: Cutting the company off from potential funding for five pending projects that have yet to begin construction, including three in South Florida. Those, as well as five other projects already underway, remain unaffected.

In mulling alternative penalties to recommend against Pinnacle, the board struggled for several minutes to find agreement. Had they not taken action, there would have been no state penalty against Pinnacle.

At one point during the discussion, Smith suggested Bastian tweak her previous recommendation and he drew some chuckles from the audience when he joked she could “throw in a free dinner, maybe.”

“Sir, this is my life — not dinner,” Deutch interjected.

Herald staff writer David Smiley contributed to this story.