A deal to turn over one of the city’s worst housing projects to a team of small landlords and tenants is on the rocks this week after federal housing officials alleged the plan would bail out the politically connected and wealthy current owners with taxpayers’ cash.

Longtime investors in the troubled, drug-plagued project, including billionaire Loews Corporation co-owners Bob and Larry Tisch, would have been left unscathed if the deal had gone through.

The bailout plan, detailed in the November issue of City Limits on newsstands next week, would have taken the Jose De Diego Beekman Houses in the South Bronx away from Continental Wingate–a Boston-based company owned by Gerald Schuster, a key Democratic party fundraiser. Control over the project would have been ceded to a management team of local landlords and a nonprofit run by Beekman tenant leaders.

Tenants and HUD officials have accused Continental Wingate of blatantly mismanaging the 1,238-unit project over the last decade. Yet under the terms of the doomed deal, the company would not have faced HUD foreclosure proceedings, saving Schuster, the Tisches and others millions of dollars in possible litigation and tax liabilities. Taxpayers would be expected to foot the bill for restoring the Beekmans.

“The plan is a poor deal for HUD and the taxpayers,” says an internal memo prepared by the HUD Inspector General and obtained by City Limits. “The plan rewards a landlord who may bear responsibility for the deplorable condition of the projects.”

But Beekman resident leader Wilma Johnson, who backed the deal, wonders how HUD–which presided over the year-and-a-half of negotiations that produced the plan–could pull the plug. Johnson says she and others pressed to have Continental Wingate and the investors put millions into the rehab of the 38-building project. She said tenants were willing to accept the settlement, which would have cost Wingate and the investors only $1 million, because the tenants had been given assurances of control over Beekman’s future.

A senior HUD official close to the current negotiations concedes that HUD’s New York office was intimately involved in structuring the deal and that the agency’s staff remains impressed by the tenants and Diversified Management, the proposed new owners. But HUD’s Washington staff was apparently “appalled” by what the deal would give away to the owners and investors, especially in light of HUD Secretary Andrew Cuomo’s highly publicized campaign against slum profiteers.

“Can we accommodate the good elements of the plan but, at the same time, eliminate the fraud, waste and abuse?” the senior official asks.