Straight and Real Estate Deals
Turning a Million Dollar Investment into $80K
(c) 2000 by Wesley Fager

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References:  (a) $100,000,000 Charity for White Kids Only

Rent.  According to the analysis presented in reference (a) from 1983 to 1995 Straight, Inc. and Straight Foundation, Inc. claimed to have paid total rentals of $10,765,918 [$10,765,918 = $10,633,280 + $132,127 + $511]. However, starting in 1985 Straight, Inc. paid $4,354,800 of this amount to Straight Foundation, Inc. for rent. That is the foundation was renting the property back to Straight, Inc. Thus actual rent paid to any entities outside of Straight was $6,411,118. [$6,411,118 = $10,765,918 - $4,354,800]. The foundation claimed operating expenses of $4,358,938 in order to receive the $4,354,800 from Straight, Inc. for a net loss of $4,138 to collect over $4 million in rent! [Note: Straight Foundation, Inc. tax returns report rental income as net rental income (gross rent minus rental expense) which is the proper way to report rental income (or loss) on IRS Form 990. My Tables 1 - 3 of reference (a) do not report it this way. Gross rent is reported as income and rental expense is reported as expenses.]

And what was the $6.4 million in outside rent for? Straight Foundation rented properties back to Straight--Orlando, Straight--Saint Petersburg, Straight--Atlanta and Straight--Cincinnati. The properties had been purchased from funds generated by fund-raising drives run by Straight parents. For example, Straight fund raisers raised $1.3 million to build the Straight facility in the Cincinnati area. Straight had paid no rent at all in its original facility, a small, two-story wooden building at 700 43rd St. S in Saint Petersburg. That facility had been donated by Ted M. Anderson. Other Straight treatment camps rented warehouses from sources other than Straight Foundation, Inc. as did the 14 or so family service centers. Also, a bingo hall in Saint Petersburg was rented twice a week. Straight parents furnished the labor and funds necessary to refurbish the warehouses. Take, for example, the rented warehouse for Straight-DC. In the early 1980s Straight had told its parents who commuted monthly to Florida from the Washington, DC area that they would need $400,000 and 100 clients in order to rent a facility near DC. You have to understand the austere layout of a Straight treatment compound. Basically it is a large room the size of a small gymnasium with bare walls where the kids sit all day. Another large, but smaller room, is used to seat the parents two evenings a week. Other than this there are a few small offices and two lavatories. There is usually some sort of kitchen which is not a critical component as Straight usually does not provide meals. There is no outside recreational area as Straight kids are not allowed outside the building. The only furnishings were 200 plastic, straight-back chairs, 3 stools, and 10 inexpensive desks. The budget figures for StraightĖDC for the period ending 9-30-1989 gives an annual rental expense of $41,248.96. So why would Straight say it needed almost a half million dollars to refurbish a warehouse when the labor, for the most part, was free? According to an article in the Washington Post by Molly Moore, Straight officials said that it would cost about $80,000 to refurbish the Springfield warehouse. During deposition for the Fred Collinís trial, Straightís Dr. Mel Riddile stated that about $300,000 had been raised. [Riddileís deposition for Fred Collinís trial, 1-18-83, p. 83.]

Since Straight, Inc. was paying Straight Foundation, Inc. rent (after October 1, 1985) the combined figures for the two in Table 1 of reference (a) shows $0 for rental income [e.g. a wash or $4.4 million paid by Straight, Inc. to Straight Foundation, Inc.], $6,411,118 for rent paid and $4,358,938 for rental expenses.

Depreciation and property. What did Straight own to depreciate? In their 1985 tax filling Straight, Inc. claimed  depreciation on furniture and fixtures costing $351,372, office equipment costing $282,878, other equipment costing $266,758, leasehold improvements of $29,445 and automobiles of $12,410. Or a total cost of $942,863. Straight Foundation, Inc. listed the following assets: land $309,118, buildings $3,193,508, equipment $1,593, and leasehold improvements of $301,021 or total assets of $3,805,240. A full discussion of Straightís real estate holdings follows.

Straight Properties. Straight, Inc.ís 1984 tax return shows total assets of $5,175,666 with $3,441,408 of that being in land, buildings and equipment. On September 26, 1985 Straight, Inc. filed an amendment to its articles of incorporation giving itself a new mission to educate the public on the dangers of illegal drug use and declaring its new name to be Straight Foundation, Inc. [Straight Foundationís tax records show the conversion date to be October 1, 1985 (recall that Straightís fiscal year goes from October 1 to September 30)]. A brand new organization was then formed which would treat chemically dependent children. For lack of a better name this brand new organization was called Straight, Inc. The foundation kept ALL of the money and ALL accumulated assets including properties. The foundation then rented the properties the parents had raised the funds for back to Straight, Inc. (See Piercing the Corporate Veil.)

Seven years later, in an amazing sworn and notarized affidavit by Straight Foundationís Executive Vice President, Joseph Garcia, himself a professional real estate attorney, Mr. Garcia stated that the cost of land and buildings, including improvements to have been $3,665,749.20. And then he proceeded to explain why, based on his many years of experience in the practice of transactional real estate law, that even though the economy may be in a "recession", real estate is most definitely in a "depression". He claimed that the unique nature of the use put to Straightís holdings made it such that the buildings themselves cannot reasonably be adapted to serve any purpose (e.g. office building or convenience store) other than as a drug treatment facility. [Author: Let's look at the Straight facility in Springfield, Virginia of which I am familiar. Before Straight it had been a sporting goods warehouse. After Straight it became a plumbing warehouse with a front-end showroom. All a Straight needs is a large room for 75 to 300 kids to sit in plastic chairs and another 500 chairs for parents to face Group on Open Meeting nights. Another large, but smaller room is required for parents to conduct their own meetings on Monday and Friday nights. And then small cubicles or offices are needed for administrative staff and for parent training. Warehouses with their large open areas for storage (and cheap costs) are ideal. Art Barker once used the hanger for the Good Year blimp as treatment facility! Just what special designs was Mr. Garcia referring to when he said that the facilities could not be reasonably be adaptive to any other purpose other than being a drug rehab facility? Even that seems ludicrous to me. Straight is like no other rehab program out there. Other rehabs are not specially designed to use Straight facilities any more than a warehouse or super market is.]

Next Mr. Garcia explained that Straight building holdings are really only worth 45.91% of their net book value (original cost minus accumulated depreciation). This assumption, he explained, was based on Straightís experience in trying to sell their property in Cincinnati. The following table is based on Exhibit C to Vice President Garciaís affidavit.

 

Building

size (sq/ft)

Cost of land and buildings, including improvements

Net book value after accumulated depreciations

Estimated appraisal value on 11-30-90 (based on Garciaís 45.91% rule)

National corporate off. 3001 Gandy Blvd, St. Petersburg, Fl

5,000

$338,709.32

$280,355.32

$128,711.13

Straight, Inc.-- Tampa Bay 3001 Gandy Blvd St. Petersburg, Fl

17,000

$552,970.82

$406,987.82

$186,848.11

Straight, Inc.--Orlando 2400 Silver star Rd Orlando, Fl

12,000

$565,972.27

$490,459.27

$225,169.85

Straight, Inc.--Atlanta 2221 Austel Rd.  Marietta, Ga.

20,000

$814,931.79

$528,814.79

$242,778.87

Straight, Inc. Cincinnati  6074 Branch Hill-Guienea Pike Milford, Oh.

22,500

$1,393,165

$1,198,062

$550,000

TOTALS

$3,665,749.20

$2,904,679.20

$1,333.507.96

 

The great Cincinnati land deal.  After Straight, Inc. was run out of Ohio for abusing kids there, Straight Foundation tried to sale the Cincinnati property. But a group of concerned parents and local companies generally known as the Greater Cincinnati Area Straight Chapter had raised $1.5 million to bring Straight to Cincinnati and they felt that any money made from the sale of the property should stay in the Cincinnati area to help drug addicted kids in that area. Consequently local citizens Donald Bell, Anthony Celebrezze (Attorney General for the state of Ohio), J. Thomas Markham, Samuel B. Thompson, Jr., Nick J. Pishotti, Richard Tarvin, James M. VanBuren, Jr., The Greater Cincinnati Foundation, The Kroger Company and The Proctor & Gamble Company filed a class action suit against Straight in the US District Court in Cincinnati claiming that "at least $1.3 million" of the funds they had raised had been used to purchase the Straight-Cincinnati facility and that any money recovered form the sale of the property should remain in the Cincinnati area [Case # C-1-88-760]. Furthermore they wanted another $62,000 in legal fees they said they had spent trying to keep Straight from walking off with the money.

According to Exhibit A to Garciaís affidavit, in May 1988 Straight Foundation had received a verbal appraisal from Strickland & Wright for approximately $550,000. Furthermore, the exhibit states that Mr. Wright had been instructed by Straight not to provide a written appraisal. Since Straight claimed the depreciated value of the facility in 1990 to be $1,098,062, and since Straight claimed that it had a verbal appraisal (presumably there is no written confirmation of this appraisal) for only $550,000 or 45.91% of the depreciated value, Mr. Garcia reasoned that all Straight holdings could reasonably be sold for just 45.91% of its depreciated value. He made this claim in spite of the fact that he acknowledges that Faith Tabernacle Church had put down a $15,000 deposit in an effort to buy the property early-on for $650,000 but was unable to raise the money and so Straight Foundation pocketed that $15,000.

According to the settlement agreement approved by the court on September 29, 1989 Straight Foundation and the plaintiffs would split 50-50 on proceeds from the sale of the property, and the plaintiffs would pay their legal fees from their half of the pie. I donít have complete records of what happened after the 1989 settlement agreement but the best I can piece together from the court docket sheet is that on July 1, 1993 there was a Motion to Intervene by a Tri-State Drug Rehabilitation from across the river in Hebron Kentucky. And on July 2 a hearing was held on a motion to approve the sale and attorney fees. Then, according to Kentucky Post, on July 22, 1993 Tri-State Drug Rehab was the highest bidder on the property. The bid being $301,000. [Kentucky Post, 10/9/93]

The depreciated value of the facility was $1 million. If Straight got a million for it, it would have to give the Cincinnati folks a half million dollars. Even if Straight sold it for just $650,000 they would have to give the Cincinnati folks over $300,000. As it is the building sold for just $301,000 (or 54% of the 45.91% value) and the Cincinnati folks got just $150,500. An affidavit by the plaintiffs dated 9-27-89 shows their legal fees to be $66,345.50. Because of further court actions, I assume their legal fees to have been $70,000 by the time of sale, thus the Cincinnati fathers had managed to recover just $80,000 from their $1,393,165 investment!

Garcia had said that about the only organization that would buy one of their facilities would almost have to be another drug rehab program (as in fat chance of that happening), but that is exactly what did happen. And what is Tri-State Drug Rehab? Its treatment program was formerly called Kids Helping Kids of Hebron and now called Kids Helping Kids of Cincinnati. Kids Helping Kids of Hebron was created, in part, by Straightís former national training director--Dr. George Ross. The therapeutic program is based almost exclusively on the Straight therapeutic model. At least two program employees have come from Straight. Ruth P. Thomas, first clinical director at KHKs, studied Rational Behavior Training at the University of Kentucky with Dr. Maxie C. Maultsby, as did Dr. Ross. On page 7 of his PhD thesis on Straight, Dr. Newton writes that Straight is "Kids Helping Kids." He went on to call his own Straight-like program Kids of Bergen County. Newtonís thesis was finished in 1981 and Kids Helping Kids of Hebron was founded on July 15, 1981.

The timing of the sale of the Cincinnati facility is worth mentioning. Later you will learn that in 1989 when Dr. Newtonís Kids of Southern California closed failing to get a license, that Straight moved into that very facility and took over the Kidsí clientele. When Straight-Orlando closed on August 14, 1992, Michael Scaletta, Straightís former director at Straight-Orlando, opened up SAFE, Inc. out of the same facility using the same clients. Straight-Detroit closed in 1993. On June 18, 1993, former Straight official Helen Gowanny helped found Pathway Family Center 15 miles from the old Straight camp. Three days later on June 21, 1993, Kathleen M. Cone, formerly the registered agent for Straight, Inc. in Atlanta opened Phoenix Institute for Adolescents just miles from Straight-Atlanta. Ten days later on July 1, 1993 Straight-Atlanta, the last Straight treatment facility closed. On that very day in Cincinnati Kids Helping Kids filed a Motion to Intervene in federal court. A hearing was IMMEDIATELY held the next day for a motion to approve the sale and attorney fees. The property was sold 20 days later for a fraction of its value and the people who had raised the money got a return of just $70,000 out of a $1.3 million investment. Next youíll see that exactly one week later, when Straight didnít have to share anything with anyone, the Saint Petersburg properties sold for more than what they had been purchased for.

So real estate attorney Joseph Garcia gets a big fat F when selling Straight properties in the Cincinnati case. Unless, of course, Straight had no intention of giving the Cincinnati folks a half million dollars. If that were the case then Mr. Garcia would get an A+. So what about real estate transactions where Straight would not have to split with anyone. Letís look at the sale of the Tampa Bay holdings next.

Sale of the Saint Petersburg Properties. The treatment camp in Saint Petersburg closed on April 26, 1993 and the remaining clients were transferred to Straight-Atlanta which continued to operate until July 1. The national corporate office continued to operate for a while also. In early July the Pinellas Park Wesleyan Church learned that the two buildings in Saint Petersburg were for sale and bought them on July 29. Garcia had said that it would be hard to sell the properties, but almost as soon as the properties became available there was a serious buyer. Garcia had said that because of the buildings designs almost no one but the limited market of another drug rehab program would be interested in buying the buildings. He wrote this knowing full-well that a church had already tried to buy the Cincinnati facility. And now the Saint Petersburg properties had been sold to a church. He wrote that the buildings were really only worth 49.91% of their depreciated values. Straight paid $891,680.14 for the two properties. Their combined depreciated value was $687,343.14, and 49.91% of the depreciated value was $315,559.24. Real estate attorney Garcia would have us believe, for some reason, that these properties were worth less than 50% of their reduced (depreciated) values. But nobody told the Wesleyan Church that. They paid almost 300% more than what Mr. Garcia had stated they were worth. Straight had paid $891,680.14 for them and sold them quickly to a church for $895,000. [SPT, 8-5-93, City Edition, Pinellas Park, p. 1]

According to their 1995 tax returns, the total foundationís total assets were down to $1,163,203 of which only $703,926 was in land, buildings, and equipment.

The Devani and Anderson Properties. Straight had paid no rent at all in its original facility, a small, two-story wooden building at 700 43rd St. S in Saint Petersburg. That facility had been donated by one Ted M. Anderson in 1976. I do not know the final disposition of this property.

In August 1979 one Saul Devani donated a property off State Road 600 to Straight, Inc. On April 1, 1993 Straight Foundation, Inc. sold the property to Frank and Meredith Wilmath, for $200,000 on the following terms. The Wilmathís were to pay the foundation $2,202.18 a month from May 1, 1993 to April 1, 1995 at which time the entire unpaid principal balance plus interest was to be paid. Thatís another $52,852.32. Thus foundation got $250,000 from that donation. (See Devani-Affidavit-and-page-3 and  Devani page 1.  )

So the Garcia affidavit is an astonishing document because it alerts anyone interested in suing Straight  that there is really no money to be got from foundation assets. He claims that because of the designs of the facilities almost no one but a drug rehab would be interested in buying, yet churches and a drug rehab were interested in buying. He says they would be hard to sale and yet the Saint Petersburg facility sold almost immediately. He said that the properties would reasonably sell for less than 50% of their depreciated values  and yet the Saint Petersburg facilities had sold for more than what the Straight parents had paid for them. And he had failed to mention the Devani property altogether. But that is not unusual for Straight officials. During testimony during the Fred Collinís trial Straightís executive director Bill Oliver testified to Straightís land holdings but failed to mention the Devani property [p. 226]. If Oliver  and Garcia had not known or had forgotten about the quarter of a million dollars sitting in the Devani property, how many other properties might they have forgotten?