Photos by Stephanie Klein-Davis | The Roanoke Times

Blue Ridge Housing Development Corp. is caught in the housing slowdown.

Blue Ridge is suffering a cash-flow problem as it awaits the sale of properties in Roanoke.

A nonprofit housing operation may have violated federal guidelines by not returning more than $300,000 in profits to Roanoke -- incurring a debt that could take years to repay.

The money owed by Blue Ridge Housing Development Corp. is the latest sign of financial trouble for the well-known community development group, which until last month was headed by Roanoke City Council member Alvin Nash.

In a Dec. 17 letter to Nash, the city estimated that Blue Ridge could owe up to $333,329.75.

The money at issue stems from federal grants that have for years gone toward Blue Ridge's mission of providing homes for low-income families, either by building houses or renovating old ones.

Funded by the U.S. Department of Housing and Urban Development, the grants are administered by the city. That means that when the grants generate revenue, which usually happens when Blue Ridge sells a home, the extra money is supposed to be returned to the city, which maintains the funds in an account for future programs.

But Blue Ridge kept the money "without the prior consent of the city, which is a violation of the contract and HUD rules," city budget team leader Frank Baratta wrote in the letter to Nash, which was obtained this week through open-records laws.

Toni Schmiegelow, an operations specialist for HUD, said Friday that the agency plans to review the case. HUD agrees in principle with the city that Blue Ridge violated federal guidelines, Schmiegelow said, but can't say for sure until the review is completed.

Nash, who resigned as Blue Ridge's president Dec. 19, could not be reached for comment Friday.

Other Blue Ridge officials acknowledged that money is owed to the city and pledged to repay it as the nonprofit works through its financial difficulties.

"Things are starting to look up, and I really do feel the city is going to have no problems getting their money back," said Cindy Hebblethwaite, Blue Ridge's chief financial officer.

While city officials have known for some time of the money owed by Blue Ridge, members of the city council did not -- even as they appointed the agency's president, Nash, to fill a vacant seat on the council in April, and as Blue Ridge board members later asked the city for more than $1 million to help make ends meet.

City Manager Darlene Burcham let council in the loop only after The Roanoke Times made a Freedom of Information Act request for records that detailed the issue, according to Vice Mayor Sherman Lea.

"This is no reflection on Alvin, but I feel that it's information that we should have been told about," Lea said.

"We want to make sure that everything is on the table, and it appears to a degree that it was not. And that's troublesome."

Brian Townsend, the city's assistant city manager for community development, said his office does not routinely share with council the results of administrative functions, such as monitoring grant compliance by nonprofits such as Blue Ridge. And it was not until August -- months after Nash's appointment to the council -- that the city learned just how much money Blue Ridge owed, he said.

As for Blue Ridge's plea for city funds in November, Townsend said he was not aware of that request, which came as the city and Blue Ridge were still trying to determine just how much was owed.

But when a nonprofit that owes the city money wants even more, that's something that council members should be aware of, Lea said.

"We should know more, and we should demand more from the administration on these kinds of issues," he said. "It looks like a red flag should have gone up somewhere."

News of the debt is the latest blow for Blue Ridge, one of the city's leading community development groups.

Blue Ridge has built or renovated about 40 homes, mostly in inner-city neighborhoods, since 2000. Its work has generated a $4.8 million increase in property values.

But the national housing crisis brought hard times to Blue Ridge. The group was forced to suspend some of its operations while cutting staff to three employees, who are working for no pay.

While officials admit they can't pay the $333,000-plus owed to the city right away, they hope to over time.

"I'm extremely confident at this time," Hebblethwaite said. "One of the reasons that we are still working here with no pay is that we do see this turning around. We're not ready to walk away from this."

City officials have come up with a proposal for Blue Ridge to pay the sum over five years in monthly installments, starting with about $26,000 this year and ending with about $77,000 in 2013.

At one point, Blue Ridge had asked the city to approach HUD about forgiving the sum. "This is not acceptable," the city responded. Another idea floated by Blue Ridge -- to renegotiate the contract -- was also rejected as "inappropriate" and "indefensible to the public and HUD," Baratta wrote.

Although the money is due to the city, it's not city funds. As the conduit for federal grant money that goes to community development, the city is responsible for maintaining those funds.

That includes collecting any program income, such as that generated by Blue Ridge, and cycling the money back into other projects.

The money that Blue Ridge owes came mostly from Community Development Block Grants and HOME Investment Partnerships Program subgrants.

After Nash was appointed to the city council in April, Blue Ridge decided to forego those grants to avoid a conflict of interest.

Blue Ridge officials have said that decision was not the cause of the group's financial woes. The current cash-flow problems have more to do with Blue Ridge's failure to sell three properties that have been on the market for months, they said.

Baratta, the city's budget team leader, said Blue Ridge officials have told the city that they used the income from previous home sales to keep the operation going.

"I can't validate that at this point," Baratta said. "All I can say is that we've got a figure of what should have come back to the city, and it hasn't."

Craig Balzer, who took over as president of Blue Ridge after Nash resigned, said the group met with city officials last week and agreed to turn over documents that will clarify some things, such as the reference to HUD violations in Baratta's Dec. 17 letter.

"If someone were to read that letter, they would say: 'Holy cow -- what's going on?' " Balzer said.

Balzer said he believes that Blue Ridge was using the funds appropriately "as a bridge toward getting everything paid off and taken care of."

Although Nash could not be reached for comment Friday, he wrote in a Dec. 3 letter to Baratta that Blue Ridge remains solvent, and that he expects the group to recover from its current crisis.

But considering the city's entanglement with Blue Ridge, at least one member of council says those recovery efforts were simplified when Nash decided to leave the nonprofit.

"Alvin is a very valuable member of council, and I think a lot of Alvin," Lea said.

"But I think as far as Blue Ridge is concerned, now that he has stepped down, I think that eliminates some of the perceptions and concerns about a conflict of interest that may arise as we deliberate and make decisions about Blue Ridge."

Staff writer Mason Adams contributed to this report