RECALL THE STORY that opened this book, of Dennis Hastert's $10 million gain during his speakership. Unlike many of his colleagues, Hastert was never much of a stock trader. So how exactly did he do it?
By following George Washington Plunkitt's lead, in the form of a land deal. For Plunkitt, this entailed buying up land that he knew the government would need to purchase in the not too distant future and then selling it to the government for a healthy profit. Today, such a blatant move would appear too crude. Yet the land deal survives in disguised form. The Permanent Political Class has become more sophisticated in how it enriches itself by mixing real estate investments with taxpayer money. It is completely legal. Indeed, congressional ethics committees have even deemed it "ethical." And land deals are easier to camouflage than stock transactions. You can be fuzzy about the location of the property, and since there is no set price for the land, as there is for shares of stock, you can mask your profits more easily.
In 2002, Hastert bought a 195-acre farm on Little Rock Creek, in Kendall County, Illinois. He purchased it in July, just before the state's transportation secretary, Kirk Brown, approved the design of a land corridor for a road called the Prairie Parkway, on July 31. The farm was just 2.4 miles from the parkway corridor and 5 miles from the nearest proposed highway interchange. In February 2004, Hastert and two partners made a second land purchase. They formed a trust and bought another 69 acres right by the interchange in Plano, Illinois. They paid $15,000 an acre. Hastert reported this on his financial disclosure form, but his name does not appear on real estate records. Instead, Kendall County public records show that a Little Rock Trust #225 acquired the property. On his disclosure form, Hastert listed the investment simply as "¼ share in 69 acres (Plano, IL.)," giving no address or parcel number, as he is required to do by House rules.
Plano is smack dab in the middle of farm country. It is the birthplace of the mechanical reaper. It boasts a population of about 5,000. It's also the town where Hastert has maintained his residence. As farmland those 69 acres were of some value. But as a possible residential site, where the land could be split up and developed, the sky was the limit. And that's what was intended: the Robert Arthur Land Company, through an entity called RALC Plano, was developing a residential community called North County, which would include more than 1,600 acres of land (including Hastert's acreage) as well as 33 acres of commercial enterprises and retail shops. In addition, 18 acres were set aside for a public school.
To create such a large residential community in a rural area, you need roads. Wide roads. The Kendall County Board had already approved the construction of an interchange on nearby Glena Road. But someone had to pay for it.
WE BUILD THE SPEAKER OF THE HOUSE A ROAD
Two months after Speaker Hastert purchased his share in the land, the most powerful man in Congress inserted a $207 million earmark into the federal highway bill to begin building on the Prairie Parkway. An earmark is a way for members of Congress to get money for specific, often local projects. In the words of the White House Office of Management and Budget, it's a way that "circumvents otherwise applicable merit-based or competitive allocation processes" to make favored projects happen.1
Apparently not content with just a quarter share of 69 acres, a few months later (May 2, 2005) Hastert and his wife transferred an additional 69 acres of land to the Little Rock Trust. Seven months after that (December 7, 2005), a little more than a year after he made the first Plano land purchase, and with the Prairie Parkway in the works, the land was sold for $4.9 million. Land that had been purchased for $15,000 per acre was now sold for $36,000 a acre—a 140% profit.
According to Hastert's personal financial disclosure, these sales amounted to transactions of between $2 million and $10 million for his personal stake. Not a bad return for a short-term investment.2
You and I as taxpayers helped Hastert become wealthy. Involuntarily, of course.
Imagine for a moment that Hastert was not a member of the political class but instead was a corporate executive or a school superintendent. What would happen if he used corporate or county assets in a way that would personally benefit his real estate holdings? If discovered, he would at a minimum get fired. He might even be sued, or charged with criminal fraud. But what Hastert did as a politician is common among the political class.
Members of Congress have used federal earmarks to enhance the value of their own real estate holdings in several ways: by extending a light rail mass transit line near their property, by expanding an airport, or by cleaning up a nearby shoreline. Federal funds have been used to build roads, beautify land, and upgrade neighborhoods near commercial and residential real estate owned by legislators, substantially increasing values and the net worth of our elected officials, courtesy of taxpayer money. Not only is this legal—by the bizarre standards of the Permanent Political Class—it's also deemed "ethical." Congressional ethics rules simply say that as long as a member can demonstrate that at least one other person will benefit from an earmark, that earmark is in the "public interest." Try out that ethical standard at your job and see how it works for you.
Dennis Hastert represented a rural district in Illinois. The Speaker of the House who followed him, Nancy Pelosi, represents urban San Francisco. Unlike Hastert, Pelosi and her husband have a large stock portfolio. But they also have extensive commercial real estate holdings. And like Hastert, Nancy Pelosi has used federal taxpayer money through earmarks to substantially increase the value of those investments.
For years, Nancy Pelosi has pushed for earmarks to construct and ultimately extend San Francisco's so-called Third Street Light Rail Project. In 2004, she boasted to her constituents that she had secured more than $120 million in federal money for the project. Third Street is one of the most expensive light rail projects ever, costing $660 million for just a six-mile route. The light rail system includes distinctive marquee poles with sculptures and mobiles, and new street lighting. The rail line is designed to generate a green light at every intersection so trains can travel smoothly from station to station, stopping traffic along the way.
Phase I of the project was heavily funded by the Federal Transit Administration's New Starts program. Pelosi helped secure the funding, to the tune of $532 million, to get the project under way, and another $200 million to continue construction and begin planning for phase two of the project. For the initial $532 million, she actually secured "cost-effectiveness exemptions" from the federal government to make the deal possible. In 2008, she got an additional $11.7 million to help finance Phase II, and over the course of three years she set aside $28 million more for it.3
The new transit line serves as a "key infrastructure improvement to help support revitalization of communities along the corridor," in the words of the San Francisco metro authority. Interestingly enough, that happens to include one of Nancy Pelosi's most valuable real estate assets.4
Pelosi and her husband own a four-story office building at 45 Belden Place. The building is worth between $1 million and $5 million, according to their financial disclosure. Paul Pelosi receives a management fee for handling the property (which he is not required to disclose) on top of net rent of between $100,000 and $1 million per year.
Phase II of the Third Street project runs just two blocks from the Pelosis' commercial buildings. Two stops on the line—Chinatown and Union Square/Market Square—are three blocks from the Pelosis' buildings. Why does this matter? Realtors have a name for it: "transit premium." The National Association of Realtors says that high-quality mass transit (like this project) can increase property values by "over 150 percent." A $3 million commercial building can become a $7 million building practically overnight.
According to a study by the association, location is key: you don't want the metro stop to be too close or too far. There's a sweet spot for obtaining the maximum transit premium: two to four blocks away is ideal.5
Another study by two academics found that a light rail system in Santa Clara County, California, boosted commercial real estate values by 120%.6
WE BUILD ANOTHER SPEAKER A LIGHT RAIL SYSTEM
Nancy Pelosi seems to have a history of advancing earmarks that are near her family's commercial real estate. (Actually, Pelosi doesn't like to use the word "earmark." At a 2007 press conference she said, "Why don't we leave here today forgetting the word earmark?" She suggested the phrase "legislative directive" instead.) In 2005, Pelosi pushed for another $20 million earmark, for waterfront redevelopment only two blocks away from the Belden Street property. The earmark was killed in July of that year. The Pelosis increased their financial stake in the property, and the next year Pelosi asked for the earmark again, and this time she succeeded.7 On another occasion she secured $12 million for the beautification of Geary Boulevard in San Francisco, which happens to abut an investment property the Pelosis own on Point Lobos Avenue.
Nancy Pelosi is not the only elected official who earmarked a mass transit project that was in close proximity to real estate holdings and apparently profited handsomely from it. Congresswoman Carolyn Maloney represents parts of Queens and Manhattan, including the Upper East Side "silk stocking district." A former member of the New York City Council, Maloney was first elected to Congress in 1992. For many years she was married to an investment banker, Clifton Maloney, until he passed away in 2009.
In 2007, Congresswoman Maloney, together with New York Senators Charles Schumer and Hillary Clinton, secured an earmark of $167 million for a new MTA subway line. In 2009, she helped obtain another $277 million for the project. In 2010, a third earmark, for $197 million, was approved. The long-sought-after Second Avenue subway, running up the East Side of Manhattan, could finally begin construction. It will likely take years to complete, at a cost running well over $10 billion.
Maloney owns a building at 409 East 92nd Street, valued at between $5 million and $25 million. On her personal financial disclosure, she lists it as a "rental property & residence." Plans for the new subway line feature a stop that happens to be three blocks away from her building—again, right in the "sweet spot."
Congressman Bennie Thompson of Mississippi inserted into the 2010 federal budget an earmark to expand a small regional airport.8 The airport was not in his district. It was not in the state of Mississippi. Indeed, it wasn't even in the South. Thompson's earmark was for $800,000 to upgrade the Napa Valley, California, airport—specifically, for a "runway 36L glidescope."
Why would a congressman from Mississippi put in an earmark for an airport dubbed "Skyport to Wine Country"? Perhaps the answer lies in the fact that Nancy Pelosi had contributed to his rise to the chairmanship of the House Committee on Homeland Security. The Pelosis own a vineyard and home in St. Helena, California, worth between $5 million and $25 million, and another property nearby. They also own a stake in an exclusive resort called Auberge du Soleil in Rutherford, worth between $1 million and $5 million. All of these properties are north of the airport, sitting beneath what had been the flight path for planes coming in to land. But with the new glideslope, according to the airport, more planes would be able to approach from the south. The Pelosi properties would be spared from overhead noise.9
Funding for the expansion of the Napa Valley airport by a congressman from Mississippi is not the only earmark that has benefited Pelosi's personal investments. Also in 2008, an earmark was inserted in the federal highway bill to widen and improve an exit ramp on California's historic Highway 101. That might not strike anyone as unusual, except for the fact that the interchange is next to a shopping mall owned by Pelosi and her husband. According to her financial disclosure forms, that mall brings in between $100,000 and $1 million a year in net income.
So why did legislators do Pelosi a favor? She is the most powerful Democrat in the House. If you want to get something done, it needs to go through her.
The earmark game is bipartisan. Republican Senator Judd Gregg of New Hampshire, whose father, Hugh Gregg, served as governor and was long active in the New Hampshire Republican Party, has spent the bulk of his adult life in political office. Judd was first elected to Congress in 1980, elected governor in 1988, and to the U.S. Senate in 1992. A little more than a decade after joining the Senate, he became chairman of the powerful Budget Committee. In a show of bipartisanship, President Obama tried to nominate Gregg to be his secretary of commerce in 2009. Gregg first accepted, then withdrew, deciding instead to stay in the Senate. He retired in 2010.
Judd Gregg had a reputation as a fiscal conservative, but he was always fond of earmarks. He obtained $266 million in research and development money for the University of New Hampshire, for example, and the school generously named its new technology center Gregg Hall.10
While he served as chairman of the powerful Senate Budget Committee, Gregg earmarked some $66 million in taxpayer money to transform Pease Air Force Base in Portsmouth, New Hampshire, into a business park. He managed to secure $24.8 million for a new federal building there, and at least $24.5 million for New Hampshire National Guard projects at the base, including a new fire and crash rescue station. In addition, he garnered almost $9 million for a new wing headquarters, and $8 million to transform the base from military to civilian use, including buying snow-removal equipment and building a parking lot. For good measure, he was able to pull down $475,000 for structures to shield office buildings at the base from airplane and other noises.
Did I mention that Senator Gregg's brother, Cyrus, happened to be the developer of the air base? Or that Senator Gregg himself had invested between $450,000 and $1 million of his own money in what is now called the Pease International Tradeport? Along the way, the senator has collected between $240,000 and $650,000 on his investment. (Curiously, like Hastert, Gregg did not list all of the real estate addresses on his financial disclosure forms.)11
Before he secured the earmarks, Gregg invested through several partnerships, including 222 International Drive, LLP, and Say Pease, LLC. The former, for the development of a commercial building, was valued at around $11 million.12
When President Obama announced then-Senator Gregg as his choice for commerce secretary in 2009, Gregg was asked about the earmarks and how he profited from them. "I am absolutely sure that in every way I've complied with the ethics rules of the Senate both literally and in their spirit relative to any investment that I've made anywhere," he stated to the press. Unfortunately, he is correct—and that, of course, is the problem: this stuff is completely legal and, according to Senate rules, ethical. When he made that statement, he should have stopped right there. Instead, he continued: "These earmarks do not benefit me in any way, shape, or manner financially, personally or in any other manner other than the fact that I'm a citizen of New Hampshire."13 Yeah, sure.
Redeveloping a military base using taxpayer money to boost your investment is of course a benefit, personal and financial: Gregg was able to put his thumb on the scale of fair-market reward for his investment. The former senator now works for Goldman Sachs as a consultant, where he provides "strategic advice" and assists "in business development initiatives."14
These kinds of deals are not at all uncommon. Congressman Ken Calvert of California is a Republican member of the powerful Appropriations Committee and was first elected to Congress in 1992. His background is in real estate, and through a real estate firm he partly owns, run by his brother Quint, he is still an active investor.
In 2005, Calvert and a partner paid $550,000 for a 4.3-acre parcel of land just south of March Air Reserve Base in Southern California. Shortly afterward, he secured $1.5 million in taxpayer money to support commercial development around the base. Less than a year after the earmark, Calvert and his partner sold the land (without having made any improvements) for $985,000—a 79% profit. Not bad!
In the early summer of 2005, Calvert's real estate firm brokered a sale involving a property at 20330 Temescal Canyon Road, in Corona, California, which was a few blocks from a proposed interchange for Interstate 15. Calvert then helped secure an earmark to build the interchange. Within six months, the property was sold at a nearly $500,000 profit. Calvert's firm received a commission on both transactions. Good work if you can get it.
Calvert was careful: he sent both of these earmarks to the House Ethics Committee for approval, because he stood to benefit personally from them. The committee, in a letter signed by Congresswoman Stephanie Tubbs Jones and Congressman Alcee Hastings, said the use of taxpayer money was fine because any profits "resulting from the earmark would be incremental and indirect and would be experienced as a member of a class of landholders." In other words, Calvert was not the sole beneficiary, and the earmarked funds were not paid directly to him. 15
Congressman David Hobson of Ohio helped obtain federal earmarks to build a freight transfer center at the Columbus airport to help ship goods to and from central Ohio. The trouble is that Hobson co-owned an office building near the project, and his tenants included freight companies such as FedEx that would use the freight center. He'd bought the building in 2001, and over the next seven years secured $30 million in federal transportation money to build the freight terminal, which was part of the conversion of old Rickenbacker Air Force Base outside Columbus. On another occasion, in 2004, Hobson worked to get nearly $2 million in taxpayer money to widen a road near Dayton, which happened to run right in front of a condominium development in which he was an investor. He had bought into the project only one year earlier.
Hobson retired from office in 2008. The House Ethics Committee, at the time chaired by Congresswoman Stephanie Tubbs Jones, again said that the earmarks were acceptable because they were only an indirect benefit to Hobson and the airport investment was "speculative."
Congressman Heath Shuler of North Carolina is relatively new to Congress, but he quickly demonstrated his understanding that the power of his position could be helpful in a real estate transaction—particularly if it involved a deal with a government agency that he helped oversee.
First elected in 2006 in a western North Carolina district, Shuler had been a star quarterback at the University of Tennessee who'd had a brief stint in the NFL before becoming a real estate investor. One of his largest holdings in 2007 was in a real estate entity called the Cove at Blackberry Ridge, whose investors owned a large plot of land. According to Shuler's financial disclosures, his stake in the Cove was worth between $5 million and $25 million at the time. The investors planned to turn their land into a residential development. But there was one problem: they didn't have water access rights.
That seemed to be fixed in August 2008 when the Tennessee Valley Authority (TVA) announced a new water access deal for the investment group, providing 145 feet of frontage along the shoreline of the Watts Bar Reservoir in exchange for water access rights the group held in a neighboring county. What makes this so interesting is that at the time Shuler sat on the congressional subcommittee that had oversight of the TVA. When the deal was announced, eyebrows were raised. TVA employees first claimed they did not know Congressman Shuler was involved in the project. For his part, Shuler denied having any contact with the government agency. But later, he admitted that he had indeed picked up the phone and called TVA President Tom Kilgore in 2007 about getting the land-swap deal done. A TVA inspector general's report noted that there was an "inherent conflict of interest" in the swap. The report also said that Shuler's deal "created the appearance of preferential treatment." However, the report was quick to beg off any condemnation. "We make no judgment as to whether Congressman Shuler's actions connected to the Blackberry Cove matter violate any ethical standard." For its part, the House Ethics Committee again found nothing wrong.16
Congressman Bennie Thompson, when he is not inserting earmarks for Napa Valley, California, has done so for tiny Bolton, Mississippi, population 600. One earmark was for a museum project; another, for $500,000, was to help improve the infrastructure of the Bolton Industrial Park. What Thompson hopes we don't notice is that he owns commercial real estate in the town, including lots 1, 3, and 31 on L. C. Turner Circle and what he describes as "2 acres of unimproved land in Bolton, Mississippi." It so happens that the earmarked projects are very near his investment properties.
Representative Maurice Hinchey of New York has the honor of being one of the fastest climbers in Congress in terms of net worth. In 2004, his net assets, based on his personal financial disclosure forms, totaled around $74,000. In 2008, he reported an average net worth of $727,000.17 That's an 800% increase in just four years. How did he do it?
Much of it came through his sponsorship of an earmark for $800,000 to the Department of the Interior for water and wastewater infrastructure improvements in the Hudson Valley town of Saugerties. Specifically, it was for upgrades to Partition Street. In a press release, Hinchey took credit for bringing money to the town: "Congressman Used Position on House Appropriations Subcommittee on Interior to Obtain Funds, Which Will Help Promote Economic Growth in the Village," it read. In the release he boasted that "a second portion of the sanitary system on Route 9W or Partition Street is in the center of the business district of the Village of Saugerties."
What Hinchey didn't mention was that he owned a quarter of the land that sits under the Partition Street project, which calls for the development of a three-story, thirty-room boutique hotel with a restaurant and catering hall.
Hinchey had bought two lots there in 2004 for a combined value of between $30,000 and $100,000. As the earmarked project got under way, the value of his properties surged to more than five times their original value. By the time of his 2009 financial disclosure, he listed their value as between $250,000 and $500,000. Incredulously, when asked about the project and the earmark, Hinchey said it was not a conflict of interest. He merely owns the land, he said, and has no direct involvement in the development of the property.18 Okay. That explains it.
Sometimes members of the Permanent Political Class can enhance the value of their real estate by using a third party. Congressman Jerry Lewis of California has served in the House since 1979, representing three different Southern California districts in the course of three decades (thanks to redistricting). The Republican was chairman of the House Appropriations Committee and is now a senior member of that committee.
Over the past ten years, Lewis has pushed earmarks for a private company called Environmental Systems Research Institute, to the tune of tens of millions of dollars. The firm is based in Redlands, California, and was founded by Jack and Laura Dangermond, who are campaign contributors of Lewis's. In 2001, after receiving the benefits of numerous earmarks from Lewis, the Dangermonds decided to donate 41 pristine acres of land directly across from Lewis's house as part of a scenic canyon. The donation was made to the city of Redlands, and was contingent on its never being developed. Naturally, that gift increased the property value of Lewis's home.19 In another instance, Lewis secured a $500,000 earmark to upgrade the Barracks Row section of Capitol Hill in Washington. (Some of that money was used to plant flowers.) On the House floor, Lewis explained that he was a firm supporter of beautifying that area. What he never mentioned was that he and his wife owned a $1 million house four blocks away.20
Another one of those politicians who has seen his wealth rise in recent years is Senate Majority Leader Harry Reid of Nevada. Reid doesn't trade a lot of stocks, but he does buy and trade land. And he is often able to boost the profits from his investments by the use of the power of his office. In 2005, Senator Reid sponsored an $18 million earmark to build a bridge over the Colorado River to connect Laughlin, Nevada, with Bullhead City, Arizona. (There was already one bridge connecting the two places.) Neighboring Arizona's two senators denounced the earmark as pork, and a completely unnecessary expenditure.
As it happened, a few miles from the proposed bridge there was a 160-acre parcel of land owned by, well, Harry Reid. Local officials predicted that the bridge would "undoubtedly hike land values in an already-booming commuter town, where speculators are snapping up undeveloped land for housing developments and other projects." Reid's office insisted that "Senator Reid's support for the bridge had absolutely nothing to do with property he owns."21 Of course.
LOCATION, LOCATION, LOCATION
Reid has done very well with land deals over the years. In 1998, he bought undeveloped residential property just outside Las Vegas for about $400,000. In 2001, he sold it to a friend (Jay Brown, a longtime casino lawyer) for a stake in a limited liability company that held the property. Reid never reported the transaction on his financial disclosure form. By moving the property to the LLC, he could effectively shield it from future disclosures, because now the LLC was technically the owner, not him. All he had to disclose was that he had a stake in the company.
The LLC tried to get the land rezoned from residential to commercial, which would make it far more valuable, submitting its request to the appropriate subcommittee of the Clark County Zoning Commission. The answer was no: rezoning would be "inconsistent" with the Clark County Master Development Plan. (The subcommittee's no vote was 4 to 1.) Brown and Reid then took it to the full Clark County Commission. Reid's name even came up at the hearings. "Mr. Brown's partner is Harry Reid," commissioners were told.
Did I mention that at this time Clark County commissioners were trying to obtain federal earmarks for a variety of projects through Harry Reid's office? Or that Reid had funneled tens of millions of dollars in earmarks to Clark County over the years?
The commission granted the rezoning. Shortly thereafter, Reid and Brown sold the land to a shopping center developer for $1.6 million. Reid's personal take was $1.1 million.22
Leveraging your power for a land deal is one of the best paths to honest graft. It's difficult to determine the actual market price of most properties, so disclosure statements can be murky. And when an earmarked project improves the value of the property, it can be hard to calculate just how much that new road, transit stop, or beautification added to it. But there can be little doubt that the political class is the only group of people in America who can get away with using taxpayer money to increase the value of their real estate, while declaring they are doing it in the public's interest.