AUDIT REPORT
NEIGHBORHOOD COMMONS COOPERATIVE
AUDIT OF PROJECT OPERATIONS
CHICAGO, ILLINOIS
00-CH-212-1004
AUGUST 8, 2000
OFFICE OF AUDIT, MIDWEST
CHICAGO, ILLINOIS
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Issue Date
August 8, 2000
Audit Case Number
00-CH-212-1004
TO: Edward J. Hinsberger, Director, Chicago Multifamily Hub
FROM: Dale L. Chouteau, District Inspector General for Audit, Midwest
SUBJECT: Neighborhood Commons Cooperative
Multifamily Rental Housing
Audit of Project Operations
Chicago, Illinois
We completed an audit of the project operations at Neighborhood Commons Cooperative. The audit
was conducted in response to a request from the Chicago Multifamily Hub to assess HUD’s concerns
about: (1) management and operational problems at the complex, and (2) a change in management
agents. The objective of the audit was to determine whether project funds were used in compliance
with the Regulatory and other agreements, and applicable HUD policies and procedures.
We found that the former management agent failed to adequately collect monthly rent payments because
it did not take corrective actions in a timely manner to uniformly apply the HUD-approved rent
schedule, and did not maintain accurate books and records. We also found that the former Board
abused its authority and undermined the management agent by taking control of the Cooperative’s daily
operations. In addition, the Board ignored HUD directives and took various actions that benefited
some Board members, their relatives and friends.
Within 60 days, please provide us, for each recommendation made in this report, a status report on: (1)
the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why action is considered unnecessary. Also, please provide us copies of any correspondence or
directives issued because of the audit.
Should you or your staff have any questions, please contact me at (312) 353-7832.
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Executive Summary
We completed an audit of Neighborhood Commons Cooperative, a HUD-insured multifamily property
in Chicago, Illinois. The audit resulted from a request by the Director, Multifamily Hub, in the Illinois
State Office. HUD performed a Management Review of the Cooperative in January 1999 that resulted
in a number of concerns, including excessive tenants accounts receivable and inadequate collection
efforts by the management agent; ineligible expenses charged to the project; actions by the former
Board of Directors that exceeded its authority; and the granting of rent-free units without HUD
approval. Our audit objective was to determine whether project funds were used in compliance with
the Regulatory and other agreements, and applicable HUD policies and procedures.
We found that the former management agent failed to adequately collect monthly rent payments because
it did not take corrective actions in a timely manner to uniformly apply the HUD-approved rent
schedule, and did not maintain accurate books and records. As a result, the Cooperative’s ability to
make its mortgage payments may have been impacted, and there is an increased risk that a claim may
be paid from HUD’s insurance fund.
We also found that the former Board abused its authority and undermined the management agent by
taking control of the Cooperative’s daily operations. In addition, the Board ignored HUD directives
and took various actions that benefited some Board members, their relatives and friends. The result
was that program requirements were not met, applicable regulations were not followed and project
resources may have been used for ineligible or inappropriate purposes. The Board also exercised
excessive control over the new member selection process by not selecting applicants from the waiting
list in sequential order. Consequently, the Board may have discriminated against citizens of the
surrounding community in violation of equal housing opportunity laws.
Unpaid rents of current tenants living in the 168-unit
The State Did
Excessive NotAccounts
Tenant Ensure Cooperative exceeded $270,000 as of May 1999. The unpaid
That Units Met
Receivable Its
Balance balance would have been significantly higher if the Cooperative
Standards After Housing had not received excess subsidies from the Chicago Housing
Authority. The former property management agent did not
adequately collect monthly rent payments because it did not
adhere to the HUD-approved rent schedule. The agent claimed
that delinquencies were high because records of unpaid
balances received from the previous management agent were
confusing, and that subsidy payments from the Chicago Housing
Authority were not received for a nine-month period.
The former Board of Directors abused its authority and
The Board of Directors mismanaged the Cooperative by undermining the management
Abused Its Authority agent and taking control of the daily operations of the property.
The former Board President hired a close personal associate to
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Executive Summary
serve as on-site manager, who took instructions from the Board
President rather than the management agent. In addition, the
on-site manager was provided with a rent-free unit, an action
that HUD did not approve and, therefore, violated the
Regulatory Agreement.
The former Board President, a Section 8 rent assistance
recipient, was hired by the management agent and paid from
non-project funds for a three-month period to reconcile the
tenant accounts receivable. We also determined that she was
employed at a temporary employment service, but that she
failed to report her income from both sources to HUD. As a
result, she received excess rent subsidies to which she was not
entitled.
The Cooperative failed to provide an equal opportunity to
The Cooperative Failed to
housing when it filled vacant units with relatives and friends of
Provide Equal Housing
preferred Cooperative members. An agreement between the
Opportunity
Cooperative and the Leadership Council for Metropolitan
Open Communities required the Cooperative to offer vacant
units to displaced residents of the Cabrini Green housing
project, a neighboring public housing site that was slated for
demolition. Cabrini residents were to be selected on an
alternating basis with other applicants whose names were
placed on a waiting list. The Cooperative Board did not take
sufficient action to fulfill this commitment.
A lengthy waiting list that existed prior to formation of the
Cooperative in November 1996 was not used properly to
select new members for available units. When selections from
the list were made, they were done so on a non-sequential
basis. The former Board President controlled the member
selection process despite the formation of a Member Selection
Committee. The management agent was not informed in
advance of several tenant move-ins, and could not, therefore,
evaluate the selection criteria used for compliance with the
selection policy.
We recommend that the Director, Chicago Multifamily Hub,
Recommendations
ensures that the new management agent collects all outstanding
rent payments, initiates reasonable payment plans, or evicts
tenants as appropriate; ensures that all Section 8 subsidies
received by the Cooperative are based on the correct rent
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Executive Summary
schedule; assesses the former management agent’s maintenance
of tenant records when conducting management reviews of
other projects managed by the agent; initiates proceedings to
debar the former Board President from participation in all
Federal programs; initiates proceedings to debar the former
Board President’s personal associate from participation in all
Federal programs; provides technical assistance to the current
Board stressing how much authority it has and the rules it must
adhere to while the Cooperative’s mortgage is insured by HUD;
performs a follow-up management review at the Cooperative to
ensure that adequate policies and procedures are being
followed; sanctions members of the current Board if they
interfere with the daily operations of the property and violate
applicable agreements; declares a technical default of the
Regulatory Agreement and initiates foreclosure proceedings if
such interference does occur; refers the issue concerning equal
housing opportunity to the Office of Fair Housing and Equal
Opportunity to determine whether any laws were violated;
ensures that the current management agent assumes control
over the tenant selection process; ensures that terms of the
Leadership Council agreement are adhered to; ensures that the
Cooperative makes a reasonable effort to determine whether
persons on the waiting list are still interested in units; and
ensures that control measures are implemented to prevent the
Board from circumventing the waiting list.
We presented our draft findings to the Board of the
Cooperative during the course of the audit. We held an exit
conference with the Board on July 3, 2000. The Board, former
management agent, and former Board President provided
comments to our draft findings, which are included in their
entirety as Appendices to this report. Excerpts of the comments
are included with each finding. Where appropriate, changes
were made to the draft findings to reflect additional information
or clarification resulting from the exit conference and auditee
comments.
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Table Of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1 Excessive Tenant Accounts Receivable Balance 3
2 The Board of Directors Abused Its Authority 11
3 The Cooperative Failed to Provide Equal
Opportunity in Housing 19
Management Controls 26
Follow Up On Prior Audits 28
Appendices
A Neighborhood Commons Response to Draft Findings 29
B Diversified Realty Response to Draft Findings 33
C Former Board President Response to Draft Findings 38
D Distribution 43
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Introduction
Neighborhood Commons Cooperative is a 168-unit apartment complex that was originally constructed
in 1974. The Cooperative was legally formed by the tenants in October 1996 following foreclosure by
HUD against the previous owners. HUD sold the property to the Cooperative for one dollar and
provided a grant and a HUD-insured mortgage under Section 221 (d) (4) of the National Housing Act
to finance rehabilitation of the units. At the time of the sale, many of the tenants were receiving project-
based Section 8 subsidies whereby HUD paid the subsidy directly to the property management
company. When the Cooperative was formed, however, HUD converted the Section 8 subsidy to a
tenant-based voucher administered by the Chicago Housing Authority. The property is designated in
HUD records as Project Number 071-35634, and is located at 1600 North Vine Street, Chicago,
Illinois.
Since inception of the Cooperative, HUD periodically monitored activities at the complex by performing
management reviews. In the course of the reviews, HUD identified various deficiencies that impacted
both the fiscal and operational management of the property. The review completed by HUD in January
1999 resulted in an overall rating of “Unsatisfactory”, primarily attributed to violations of the Regulatory
Agreement, Cooperative By-laws, Management Certification, Management Agreement and Occupancy
Agreements. Also cited were policies and procedures that were ineffective or lacking that resulted in
frequent adverse findings and a general failure to comply with HUD’s requirements. HUD expressed
particular concern about the former management agent’s inability to collect delinquent carrying charges
(rent payments) from 74 tenants, three of whom were members of the Cooperative’s Board of
Directors.
The findings cited above, aggravated by a growing tension between Board members and the former
management agent, prompted HUD to request an OIG audit in January 1999.
Our audit objective was to determine whether Project funds
Audit Objective were used in compliance with the Regulatory and other
agreements, and applicable HUD policies and procedures.
The audit covered the period November 1996 to April 1999.
Audit Scope And We performed our on-site audit work between April 1999 and
Methodology July 1999. We conducted the audit in accordance with
generally accepted government auditing standards at the on-site
management office of Neighborhood Commons Cooperative,
and at the offices of the former and current management agents.
To determine the status of tenant accounts receivable balances,
we reviewed all tenant rent payments by examining copies of
bank deposit slips and supporting checks or money orders for
the period noted above. These were compared to individual
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Introduction
Occupancy Agreements to ascertain whether tenants paid the
correct amount of rent in accordance with the HUD-approved
rent schedule. We obtained tenant accounts receivable
balances from HUD and the former and current management
agents to determine the correct amount of funds in arrears owed
by each Cooperative member. Since the amounts obtained
from each of these sources differed, we re-calculated the
delinquent amounts based on manual entries made on tenant
ledger cards maintained by the former management agent
compared to Occupancy Agreements and subsidy data
obtained from the Chicago Housing Authority. This re-
calculation, conducted as of May 30, 1999, was accomplished
by subtracting the total of payments made by the tenant,
Chicago Housing Authority and HUD from the total rents
collected by the Cooperative. This process resulted in an
outstanding receivable balance of $270,049.
To determine whether project funds were properly used, we
reviewed the small amount of records that were available from
the former management agent. However, as indicated later in
this report, due to poor recordkeeping, we were unable to rely
on the validity of that information. The remaining audit work
was conducted through interviews with Board members,
tenants, personnel employed by the former and current
management agents, the Cooperative’s legal counsel, and
Chicago Housing Authority and HUD personnel.
We provided a copy of this report to the current Board
President of the Cooperative.
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Finding 1
Excessive Tenant Accounts Receivable Balance
As of May 1999, the unpaid rents of current tenants living in the 168-unit Cooperative exceeded
$270,000, and would have been significantly higher if the Cooperative had not received excess
subsidies from the Chicago Housing Authority. The former management agent failed to adequately
collect monthly rent payments because it did not take corrective actions in a timely manner to uniformly
apply the HUD-approved rent schedule, resolve voucher subsidy problems and maintain accurate
books and records. The failure to collect rents may seriously impact the Cooperative’s ability to make
its mortgage payments and maintain the property in a safe and sanitary condition. In addition, there is an
increased risk that a claim will be paid from HUD’s insurance fund.
The Regulatory Agreement stipulates that:
Regulations Mandated By
FHA Program
“The Mortgagor shall establish and collect monthly carrying
charges pursuant to the conditions set forth [in the Regulatory
Agreement]”.
“Mortgagor shall not permit occupancy of its accommodations
except in accordance with a schedule of charges approved by
the Commissioner and such schedule shall not be changed
except with the written approval of the Commissioner.”
“The books and accounts of the Mortgagor shall be kept in
accordance with the uniform system of accounting prescribed
by the Commissioner.”
Background on Rental At the start of the audit, HUD asked us to reconcile the tenant
Assistance and Maintenance accounts receivable balance. Due to poor record keeping by
of Records the previous management agent, the Independent Public
Accountant could not verify the receivable balance during the
1997 and 1998 audits, resulting in a qualified opinion. Thus,
HUD had little confidence in the records maintained by the
management agent.
Management Agent Failed As of May 1999, the balance of delinquent rents owed by the
To Collect Monthly Rent current tenants to the Cooperative exceeded $270,000, which
Payments would have been significantly higher if the Cooperative had not
received excess subsidies from the Chicago Housing Authority.
We verified the balance by identifying payments received from
tenants and from the Chicago Housing Authority that were
deposited into the project accounts. The management agent
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Finding 1
failed to collect monthly rent payments because it did not take
corrective actions in a timely manner to uniformly apply the
HUD-approved rent schedule, resolve voucher subsidy
problems and maintain accurate books and records. Due to the
Board’s substantial influence over management, we questioned
whether it exacerbated the problems since many members
financially benefited by not paying their full rental commitment or
by receiving excessive subsidies.
The owner of Diversified Realty Group, the Cooperative’s
former management agent, told us that it never had a handle on
the tenant accounts receivable balance primarily because they
had difficulty getting beginning balances from the prior
management agent, ARCO Management, and because it took
nine months to get subsidy payments from the Chicago Housing
Authority after HUD dropped the tenant-based subsidies.
According to several members of the Board, the Board
attempted to inform HUD and Diversified of the correct rents
but Diversified did not adhere to the rents.
The environment at the property was unstable and confusing.
During its tenure, Diversified went through a succession of five
on-site managers and as many as ten different people may have
worked on the manual rental payment ledger cards.
Additionally, the agent had difficulty obtaining information from
the Housing Authority and the tenants, and the Authority
refused to make subsidy payments for units being rehabilitated
because they failed to meet housing quality standards.
Diversified did not uniformly apply the HUD-approved rent
HUD-Approved Rent
schedule. Consequently, the management agent did not always
Schedule Not Uniformly
collect the correct amounts from the tenants or the Housing
Applied
Authority that administered the Section 8 subsidy payments.
Diversified’s owner told us that there was much confusion at the
time the Cooperative was formed over the correct rent
schedule.
As a condition of participating in the program, HUD controls
the per-unit rent that the Cooperative can charge its members.
Since the Board is comprised of members of the Cooperative, it
would not be prudent for the Board to set rent levels that might
serve their self-interests and increase HUD’s risk. HUD
communicated the rent schedule in the initial closing documents
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Finding 1
and foreclosure prospectus, as well as in subsequent letters and
meetings. We were unable to determine why management did
not uniformly apply the correct rents from inception of the
Cooperative.
The tenant accounts receivable balance would have been
Wrong Rents Reported To
significantly higher if the Housing Authority had not paid excess
CHA Resulted In Over-
subsidies to the Cooperative. The Housing Authority paid
Subsidies
excess subsidies because of the previously cited confusion over
the correct rents. When HUD learned about the over-
subsidies it notified the Authority to correct the problem the
next time the tenants were re-certified. Since HUD permitted
the continuance of the overpayments, we did not quantify the
total excess subsidies. The overpayments significantly reduced
many tenants’ past due balance, and, as of May 1999, the
Cooperative had collected over $28,000 in payments higher
than the tenants’ true obligations.
It appears that most of the vouchers are now based on the
correct rents. We provided the Authority with a list of
members receiving subsidies along with the current rent
schedule so it could be certain that the rents for all over-
subsidized tenants were calculated correctly during the tenants
last re-certification.
In April 1998, Diversified requested that HUD approve the
Write-Off Of Current
write-off of a large portion of the then $242,407 tenant
Tenants’ Delinquencies
accounts receivable balance. HUD responded to Diversified
that it could write-off back rents related only to non-payment
by the Housing Authority that were due to units failing to meet
housing quality standards. The management agent planned to
reduce the tenant accounts receivable balance by over
$200,000, accounting for the total receivable due from the
Housing Authority. Because the management agent did not
differentiate in its proposed write-off plan between
delinquencies attributed to violations of the standards and those
resulting from other reasons, HUD withheld approval for the
write-off until it could examine Diversified’s proposal in more
detail. Thus, the delinquencies remained outstanding.
The Board recently requested that HUD forgive the entire past
due balance. We believe that HUD should only approve the
write-off of delinquencies caused by the Housing Authority’s
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Finding 1
inability to inspect or pass units not in conformance with
Housing Quality Standards. HUD agreed, and on March 22,
2000, it authorized the reversal of tenant accounts receivable
totaling $94,513. The write-off represented payments that the
Housing Authority did not make because units were not ready
for inspection.
We provided the current management agent, Professional
New Management Agent
Property Services, with a draft schedule showing our derivation
Significantly Improved
of the outstanding tenant accounts receivable balances for
Rental Collections
current tenants. Based on this information the agent sent notices
to tenants initiating collection procedures, significantly improving
the monthly collections and resulting in the eviction of two
tenants. Furthermore, for tenants with large past due amounts,
the new agent is in the process of categorizing them by the
circumstances that caused their delinquency. Only those
amounts meeting HUD’s approval will be written-off. The
agent should continue collecting past due amounts or completing
corrective actions for delinquencies not meeting HUD’s criteria.
Excerpts from the Cooperative’s comments on our draft finding
The Cooperative’s
follow. Appendix A, Pages 29 to 32, contains the complete
Comments text of the comments:
To the degree that we have knowledge, our research indicates
your assumptions and comments fairly and appropriately state
the facts. We agree that our new management agent has
significantly improved the rental collections at Neighborhood
Commons Cooperative, however, please note that their
directions were approved and supported by the Board of
Directors.
OIG Evaluation of The Cooperative agreed with Recommendations 1A and 1B.
The Cooperative’s
Comments
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Finding 1
Diversified’s Excerpts from Diversified Realty Group’s comments on our
draft finding follow. Appendix B, Pages 33 to 37, contains the
Comments
complete text of the comments:
Diversified Realty Group disagrees with the statement
referenced in Finding 1 that the management agent “failed to
adequately collect monthly rent payments...because it did not
take corrective actions in a timely manner...”. As early as
2/24/97, Diversified sent a letter to the Director of Multifamily
Housing at HUD advising that the Section 8 rent receivables
were $116,000 in arrears as of the date of the letter. At that
time, Diversified requested clarification on the rent schedule due
to the fact that the schedule received in November of 1996
(with the closing documents) listed a Rent Schedule based on
the old “236” program, which cited both Basic and Market
rents. Unfortunately, when Neighborhood Commons
Cooperative became a cooperative in November of 1996, the
cooperative no longer fell within the 236 program and only
Market rents could be considered. It should also be noted that,
when Diversified made its request, Diversified stressed that the
review was urgent, advising that the viability of the project could
come into jeopardy without subsidies.
Diversified disagrees with the portion of the finding which states,
“As of May 1999, the balance of the delinquent rents...was
about $270,000.” A meeting was held between Diversified and
HUD on April 15, 1998. At that meeting Diversified presented
HUD with a list of write-offs for unpaid Chicago Housing
Authority monies in the amount of $200,088.59, which had
been on record for almost a year. HUD advised that it would
follow-up and respond in writing and on April 24, 1998, HUD
directed Diversified to write-off back rents which related to
non-payments by Chicago Housing Authority resultant of the
units failure to meet Housing Quality Standards. As of 4/15/98,
more than $200,000 remained outstanding and the Certification
process was still incomplete, thus Diversified had no way of
knowing that the arrears were related to anything other than
“failing to meet housing quality standards” and wrote them off
accordingly.
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Finding 1
HUD approved and communicated the rent schedule at the time
OIG Evaluation of the sale was closed. Regardless of whether the initial rent
Diversified’s schedule was based on the Section 236 program, it contained
Comments the official rental rates that should have been used by the
management agent until May 1, 1998, the effective date of the
HUD-approved rent increase. Our audit determined that when
Diversified ceased managing the property in May 1999, there
were still many tenants who were not paying the correct rent
amounts.
Diversified had a responsibility to ascertain the amount and
nature of each tenant’s delinquency before proceeding with the
write-off. We determined that many of the tenants’ rents were
in arrears for reasons other than the units failing to meet housing
quality standards. We disregarded Diversified’s proposed
write-off because less than 50 percent of the amount met
HUD’s criterion related to the standards.
Former
Auditee Board
Comments Excerpts from the former Board President’s comments on our
President’s draft finding follow. Appendix C, Pages 38 to 41, contains the
Comments complete text of the comments:
This writer makes note that the IG must be very careful that it
distinguishes the time frame in which activities took place. The
problems outlined in the audit began under a different
Cooperative President. It should also be noted that during the
period of time mentioned [the writer] was not even a member of
the Board of Directors. Certain mismanagement by Diversified
Realty Group occurred under a different regime.
OIG Evaluation of The draft finding contained no reference to any of the
Former Board Cooperative Presidents, past or present. While it is true that
President’s the problem of rent delinquencies initially began during the term
Comments of an earlier president, the audit disclosed that delinquencies
grew substantially during the period reviewed. In a letter dated
April 24, 1998, addressed to the then-president of the
Cooperative, HUD expressed concern about the “...high
amount of tenant accounts receivable due from members (in
excess of $13,000)...”. This is contrasted with the significantly
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Finding 1
higher level of $270,000 cited in the draft finding that existed 13
months later when the audit began in May 1999.
Recommendations We recommend that the Director, Multifamily Hub:
1.A. Ensures that the management agent collects all
outstanding payments, initiates reasonable payment
plans, or evicts tenants as appropriate; and
1.B. Ensures that all Section 8 subsidies received by the
Cooperative are based on the correct rent schedule.
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Finding 1
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Finding 2
The Board of Directors Abused Its Authority
The Neighborhood Commons Board of Directors abused its authority and mismanaged the Cooperative
by undermining the management agent; taking control of the daily operations of the property; ignoring
directives from HUD; and taking actions which benefited members of the Board, their relatives and
friends. The Regulatory Agreement stipulates that the mortgagor shall provide for the management of
the project in a manner satisfactory to the Commissioner. The Board members acted in a questionable
manner by ignoring various directives communicated by HUD. Consequently, program requirements
were not met, applicable regulations were not followed, and project resources may have been used for
ineligible or inappropriate purposes.
The Regulatory Agreement stipulates that:
Controls And Regulations
Mandated for HUD Insured
“The mortgagor shall provide for the management of the project
Properties
in a manner satisfactory to the Commissioner.”
“The mortgagor shall not without prior approval of the
Commissioner, given in writing,
• permit the occupancy of any of the dwelling
accommodations … except at the charges fixed by
the schedule of charges;
• enter into any contract or contracts for supervisory
or managerial services.”
The Project Owner’s & Management Agent’s Certification
further stipulates that:
“I, the Owner, agree to submit a new Management Certification
to HUD before taking any of the following actions:
• Changing the expiration date of the Management
Agreement;
• Renewing the Management Certification;
• Permitting a new Agent to operate the project; and
• Undertaking self-management of the project.”
Although many of the issues described in this finding were
Background On Fiscal
already identified by HUD, abuses by the former Board
Management Of
President, with the endorsement of the rest of the Board, were
Cooperative
the root cause of the Cooperative’s problems and need to be
resolved before present conditions can be corrected. The
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Finding 2
Board of Directors was controlled by the former Board
President for most of the period under review. Since inception
of the Cooperative in November 1996, the development has
failed to establish an acceptable level of fiscal management.
There was a continual struggle between the Board and the
management agent over who controlled the daily operations of
the Cooperative. Diversified Realty Group, the first
management agent hired by the Board, entered into a contract
to manage the property for two years. The Board initially
wanted to hire the Board President to be the on-site manager
but HUD did not approve that action. The Board then
requested that Diversified hire a gentleman as the on-site
manager with whom the Board President had a close personal
association. Diversified briefly employed the Board President’s
associate, but terminated him after a background check found
major discrepancies in his employment history and education
credentials. Additionally, the agent had problems with the on-
site manager because he was taking directions from the Board
President rather than the agent’s property managers.
Tension grew between the Board and Diversified over the
staffing of on-site personnel. We learned through interviews that
the Board intimidated the agent by threatening to terminate its
contract if the agent did not capitulate to the Board’s staffing
preferences. The Board carried through with its threat and sent
a notice of termination to Diversified on February 27, 1997.
The next day, the agent’s staff was locked out of the
management office. The Board’s primary justifications for the
termination were the discharge of the Board President’s
associate and the hiring of personnel by the agent without the
Board’s approval. The Board hired another agent to manage
the property, at which time the Board President’s associate was
temporarily rehired.
HUD has established procedures for approving and terminating
management agents. The property owner is required to give
HUD 30 days notice when it intends to terminate an agent. The
successor agent must submit to HUD, Form 2530, Previous
Participation Certification, which HUD must review and
approve before the property owner can hire the new agent.
The Cooperative did not follow these procedures. Thus, HUD
procedures were violated when the Board contracted for
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Finding 2
management services without asking the new agent to submit
the required form for HUD approval. HUD informed the
Cooperative that the Board needed to remove itself from the
daily management of the property. Diversified was rehired to
manage the property and it agreed to hire a new on-site
manager within two weeks.
The members elected a new president who presided for about a
year until the previous president was re-elected in May 1998.
Thereafter, the Board resumed undermining the management
agent. The Board notified HUD that all correspondence was to
be sent directly to the Board President. HUD indicated,
however, that all routine correspondence would continue to be
sent to the agent. The owner of Diversified told us that the
Board withheld material information, thus reducing the agent’s
ability to effectively manage the property.
The Management Agreement between the owners and the
Board Took Control Of
management agent expired on September 30, 1998. A
Daily Management
modified Management Agreement created by Diversified Realty
Group with input from the Board President granted authority to
the Board to hire on-site supervisory personnel. This agreement
was not required to be approved by HUD. The agent agreed to
the arrangement to keep from losing the contract with the
Cooperative. The Board President then rehired her associate
to manage the property and hired another personal friend to
supervise the maintenance staff. When the Board President’s
associate returned as on-site manager, Diversified lost control
over the daily operations of the property because the manager
took direction from the Board President rather than from
Diversified. The Board President’s associates were offered
compensation and benefits significantly higher than previous
supervisors, including rent free apartment units. Although the
Board approved the hiring of the personnel, they were
technically employees of the management agent.
Both the Regulatory Agreement and Management Agent
Certification require the property owners to provide a level of
management acceptable to HUD. At no time was the Board
approved by HUD to manage the property even when
Diversified began to lose control. Furthermore, the Board
violated the Regulatory Agreement when it approved two rent-
free units without HUD approval.
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Finding 2
The Board President financially benefited when Diversified’s
Board President Received owner agreed to pay her $450 a month from non-project funds.
Questionable Payments The payments began the same month the modified Management
From Agent And Failed To Agreement became effective and ended three months later,
Report Income several days before HUD began its management review of the
Cooperative. The Board President received a total of $1,350
from the agent. Diversified told us the payments were made to
her for reconciling the tenant accounts receivable balance, but
were stopped when Diversified realized that she had not
accomplished the task.
The payments, equaling approximately 10 percent of the
October 1998 management fee, were suspect because they
were paid from the agent’s funds rather than from project funds.
The payments appeared to be a fee splitting arrangement.
The Board President, whose rent was almost fully subsidized
under Section 8, failed to report to the Chicago Housing
Authority the income she earned both from Diversified and from
her current employer, Kelly Services, where she has been
employed since May 1999. At the time of our audit, over 11
months of income was unreported. As a result, the Board
President received excess rent subsidies to which she was not
entitled.
HUD performed a management review on January 14, 1999, to
HUD Identified Various assess the extent of the project’s problems. The property was
Management Deficiencies rated “Unsatisfactory” because it violated the Regulatory
Agreement, Cooperative By-laws, Management Certification,
Management Agreement and Occupancy Agreements, and had
ineffective or non-existent policies and procedures.
Deficiencies identified by HUD during its management review
included:
• Project funds were used to pay the former Board
President’s personal telephone bills;
• Project funds were used to send several Board Members
and some of their family members to a conference at the
Disney Coronado Springs resort;
• Several Board members had delinquent carrying charges;
• Management was ineffective in attempting to collect
delinquent rents;
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Finding 2
• The rent collection policy was not uniformly applied --
some tenants were charged late fees while others were not;
• The Board, rather than the management agent, controlled
the process of selecting tenants for new units and issuing
Section 8 vouchers;
• Considerably higher rents were reported to the Chicago
Housing Authority resulting in the Cooperative receiving
excess subsidies;
• The Board approved non-revenue producing units without
prior HUD approval; and
• Employees were hired by the Board at significantly higher
compensation levels compared to other properties in the
area.
The Board of Directors currently has new directors and a new
New Agent Has Made president. The new management agent, Professional Property
Improvements Services, began managing the property on May 1, 1999, and
has made substantial strides in correcting the fiscal management
of the Cooperative. The new agent informed us that it has
taken a tough stance to keep the Board from overstepping its
authority, and as a result, the Board threatened to terminate the
agent’s contract on several occasions. The Board cannot
terminate the agent’s contract. HUD will only initiate
termination procedures for just cause.
Excerpts from the Cooperative’s comments on our draft finding
The Cooperative’s
follow. Appendix A, Pages 29 to 32, contains the complete
Comments text of the comments:
To our knowledge, we believe some of your assumptions and
comments are fair and appropriately state the facts with the
following comments: (1) the Cooperative has a new President
and new officers; (2) the person discussed in your findings no
longer holds a position of authority; (3) the plan under the new
Board and Management is to continue our efforts to establish
more than an acceptable level of fiscal management; and (4) our
legal counsel was not aware nor did he participate in any way in
the creation of a management agreement between Diversified
and Neighborhood Commons Cooperative.
We recommend there be clarification on the Cooperative
Housing trip that was taken to Florida. Other Board Members
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Finding 2
from other cooperatives attend educational conferences such as
this.
We ask that your report be more specific in describing board
positions as they relate to your report. There is currently a new
Cooperative President and there is also one other ex-President.
The By-laws identify this position as the Cooperative President.
There is no position known as “Board President”.
The draft finding was modified to remove the reference to the
OIG Evaluation of
Cooperative’s attorney, and to indicate that some, but not all, of
The Cooperative’s the Board members or their families attended the Florida
Comments conference.
The terms “Cooperative President” and “Board President” are
used interchangeably by HUD. We elected to use “Board
President” in a conventional sense to identify the person having
executive authority over the Board of Directors.
Excerpts from Diversified’s comments on our draft finding
Diversified’s
follow. Appendix B, Pages 33 to 37, contains the full text of
Comments the comments, except for exhibits that were omitted due to
space considerations:
Because Diversified realized that the ultimate responsibility for
reconciling the books and records would fall within their
purview, Diversified made the decision to absorb the cost of
resolving the books. Because [the former Board President] had
a good working relationship with Chicago Housing Authority,
Diversified contracted [the former Board President] on a
temporary basis for the exclusive task of reconciling the tenant
receivables. Once it became apparent (three months later) that
[the former Board President] could not accomplish this goal, the
project was terminated. Diversified hired an independent
contractor whom it believed possessed the requisite skill to
assist with its endeavors [to] reconcile the accounts and collect
rents. She was ineffective and Diversified terminated her
services. Nothing more, nothing less.
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Finding 2
Prior to hiring the former Board President to perform the
OIG Evaluation of
reconciliation task, Diversified was aware that a conflict of
Diversified’s interest existed. The president served as a paid consultant to
Comments the project before the sale transaction, then resigned her
position to apply for the on-site manager position. At the time,
HUD indicated it would not permit her to serve in that capacity
as a conflict of interest would be created. In view of the
substantial increase in tenant receivables during this Board
President’s tenure, as discussed in Finding 1, Diversified, having
been made aware of HUD’s concern about the potential
conflict, should not have engaged her for the reconciliation task.
Former Board This writer suggests that [the debarment] action is not necessary
because the previous President is no longer President, the ex-
President’s
manager is no longer manager, and a new management agent is
Comments
in place. Further, no Federal laws relating to the operation of
the property were violated.
OIG Evaluation of In assessing the conditions of the Cooperative during the tenure
of the former Board President, we concluded that her actions
Former Board
caused the problems cited in this report to worsen. HUD
President’s
indicated to us that in performing many management functions,
Comments she acted against the Regulatory Agreement requirement that
the property owner provide management acceptable to HUD.
The former Board President was never approved by HUD to
manage the property. In addition, her failure to report the
sources and amounts of outside income constituted a false
certification for purposes of receiving rent subsidies.
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Finding 2
Recommendations We recommend that the Director, Multifamily Hub:
2.A. Initiates proceedings to debar the former Board
President from all Federal programs;
2.B. Initiates proceedings to debar the former Board
President’s associate from all Federal programs;
2.C. Provides technical assistance to the Board stressing
how much authority it has and the rules it must adhere
to while the Cooperative’s mortgage is insured by
HUD;
2.D. Performs management reviews of other HUD-insured
properties managed by Diversified to ensure they have
a reliable level of management;
2.E. Performs a follow-up management review at the
Cooperative to ensure that adequate policies and
procedures have been implemented and are being
followed;
2.F. Sanctions members of the current Board if they interfere
in the daily operations of the property and violate
applicable agreements; and
2.G. If sanctioning the Board members is ineffective,
declares a technical default of the Regulatory
Agreement and initiates foreclosure procedures.
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Finding 3
The Cooperative Failed to Provide Equal
Opportunity in Housing
Management failed to provide an equal opportunity to housing at the Cooperative when it filled vacant
units with relatives and friends of preferred Cooperative members. The Regulatory Agreement requires
full compliance with HUD rules regarding nondiscrimination and equal opportunity in housing. The
Cooperative Board exercised excessive control over the new member selection process to benefit a
limited number of members. Additionally, Section 8 vouchers intended for members already residing at
the Cooperative instead were improperly awarded to family members of Cooperative tenants.
Consequently, the Board discriminated against citizens of the surrounding community when providing
housing, and against other Cooperative members when providing subsidies.
The Regulatory Agreement stipulates that :
Regulations Mandated By
FHA Program
“The Mortgagor agrees to adhere to the priorities and
preferences for membership and occupancy by families
displaced from an urban renewal area or as a result of
governmental action…”; and, “Mortgagor agrees that there shall
be full compliance with the provisions of (1) any laws
prohibiting discrimination in housing on the basis of race, color,
creed, or national origin, and (2) with the Regulations of the
Federal Housing Administration providing for nondiscrimination
and equal opportunity in housing.”
Some of the regulations pertaining to the Federal Housing
Administration program are communicated in HUD’s
Handbook 4350.3 CHG-27. One of the requirements is that
management create and properly maintain a waiting list of
potential occupants.
The Gautreaux Agreement As a condition of selling the foreclosed property to the
Cooperative, HUD inserted a rider in the Sales Contract which
required the Cooperative to execute an agreement with the
Leadership Council for Metropolitan Open Communities in
order to implement the Gautreaux decree. This decree gives
federal preference, as stipulated in the Regulatory Agreement,
to residents of Cabrini Green Apartments, a Chicago public
housing site, because its residents are in the process of being
displaced by a government action to demolish Cabrini Green
and other public housing sites.
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Finding 3
The Cooperative executed a Memorandum of Understanding
with the Leadership Council on October 28, 1996, in which the
Board agreed to alternately fill vacancies with Cabrini Green
residents as units became available until 20 displaced residents
were housed. The Cooperative is an ideal location for Cabrini
Green residents because it is located several blocks away from
the public housing site.
The Board did not take sufficient action to fulfill this
commitment. At the time of our audit, 25 vacant units had been
filled but not one displaced Cabrini Green resident was given an
opportunity to live at the Cooperative.
Waiting List Not Used to When the Cooperative was formed in November 1996, there
Fill Vacancies was a pre-existing waiting list containing 469 names. We
determined that this waiting list was not used properly when
vacant units were filled. At the time of our review, management
had filled 25 units with members’ children or with people
personally approved by the Board President. Half of the new
tenants’ names were on the pre-existing list, however, most of
them were lower on the list and had hundreds of names ahead
of them. We discovered that the on-site management office had
a second shorter list, titled Internal Transfer List, with 21 of the
25 new tenants on it. The short list, however, appeared to have
been created sometime after the pre-existing list. We regard
the second internal waiting list as a conflict of interest and not in
compliance with the intent of HUD Handbook 4350.3 because
occupancy was offered preferentially to related parties rather
than to persons on the pre-existing waiting list.
HUD and the Cooperative’s management received complaints
from people who wanted an opportunity to move into the
project. As one example, an individual complained that she first
requested to be put on the waiting list in 1991. She repeatedly
called the management office and was told that her name was
still on the waiting list, but in 1994 she was told that her
application was lost, and she was instructed to fill out another
one. Subsequently, she was told that the waiting list, and her
new application, were again lost. We confirmed that the
person’s name was on the pre-existing waiting list. However,
six people lower on the list, and 12 others who were not on the
list, obtained housing at the Cooperative before this individual
who had been waiting for seven years. Professional Property
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Finding 3
Services, the current management agent, is now using the
original pre-existing waiting list at HUD’s request.
In January 1997, HUD became concerned about potential
HUD Directives Ignored
charges of housing discrimination. To avoid possible conflicts
of interest, HUD strongly recommended that the Cooperative
either create a membership committee or delegate the
responsibility to the management agent. The Board chose to
form a member selection committee.
Initially, some members wanted to be transferred into larger
units because of their family size. HUD agreed that if a family
size qualified for a larger unit, it could be moved if such a unit
was available. The Board stated in an April 1998
correspondence to HUD that it would accommodate move-ins
of all current members in need of transfer, and so-called “split
member families” before it would accommodate all others. Split
families are households with teenagers or young adults who
wish to live in two separate units. HUD disapproved of giving a
family two separate units and told the Board that the same
requirements that apply to any other prospective member also
apply to “split” families. HUD reiterated that vacancies should
be alternately filled by Cabrini Green tenants and people from
the regular waiting list.
The Cooperative’s attorney recommended in May 1998 that
management draft membership selection standards, policies and
procedures for HUD’s review. Policies and procedures were
drafted by the Board. According to a key provision of the
Member Selection Policy, first priority was to be given to
current residents of the Cooperative in good standing. The
Board’s actions indicated that it used this provision to justify
ignoring normal waiting list requirements when providing housing
to “split” family members. HUD informed us that it received a
draft copy of the Member Selection Policy, but did not formally
approve the policy. We found no evidence that the
Cooperative implemented the policy.
The Board ignored HUD’s directives. Twenty of the 25 new
move-ins were children of current members or “split” families.
A former Board member told us that some of the 25 new
occupants were not even living on the property. In order to
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Finding 3
justify getting a new unit, children temporarily moved back in
with their parents to claim “split” family status.
Although a Member Selection Committee was established, the
Board President Controlled Board President prevented the committee from functioning in its
Member Selection Process full capacity. The former chairman of the selection committee
told us that the Board President withheld the waiting list from
the committee and the number of units that were available. The
former chairman also claimed that the Board President
threatened to dismiss committee members if they disagreed with
her decisions and instructed the committee not to make units
available to Cabrini Green residents because there were not
enough apartments for them.
The Board President by-passed the tenant selection process by
granting subsidized housing to her personal associates. Although
the selection committee was supposed to interview all of the
prospective tenants, it did not learn about some move-ins until
after the Board President allowed new tenants to move in. In
addition, three vacant units were provided to associates of the
Board President who were hired to work on-site (as discussed
in Finding 2), two of whom were provided rent-free units.
Diversified’s control over move-in activities was weak. It did
not get involved with the member selection process until after
some move-ins occurred, at which time it would process the
applicants’ paperwork. Diversified had a responsibility to
ensure that tenant selection policies and procedures were
established and adhered to by the on-site manager. When the
agent learned that people were moving into the property, it had
a duty to determine how the members were selected, evaluate
the selection criteria used by the Board, and report abuses to
HUD in a timely manner.
As part of the HUD agreement to sell the property to the
Vouchers Issued To Cooperative, and in order to facilitate the change from a
Tenants’ Children project-based subsidy to a tenant-based subsidy, HUD set
aside 112 Section 8 vouchers for Cooperative members.
These vouchers were intended for members who were
previously subsidized or who would have a hardship paying the
market rates set by HUD. Thirteen Section 8 vouchers were
provided by the Chicago Housing Authority to members’
children before existing members had an opportunity to use
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Finding 3
them. The members’ children were not previously receiving
subsidies and were living either with their parents or off-site.
The children were not members of the Cooperative at the time
of the sale and were not the intended recipients of the rental
assistance set aside by HUD. Issuing vouchers to members’
children was a conflict of interest and may have denied rental
assistance to other members who needed it.
The Board has requested 30 additional vouchers for eligible
tenants needing assistance but who failed to get vouchers for
whatever reason. Unfortunately, all of the vouchers have been
issued, according to HUD. Remaining members who qualify for
assistance will have to go through the same process as every
other family in Chicago seeking vouchers.
Excerpts from the Cooperative’s comments on our draft finding
The Cooperative’s
follow. Appendix A, Pages 29 to 32, contains the full text of
Comments the comments.
We find it necessary to deny that any of the conduct described
in this finding, in any way, constitutes a violation of the Fair
Housing Laws of either the United States, State of Illinois or
City of Chicago. In addition, we advise you that our current
management agent informed the Board that: (a) they had a
difficult time locating the appropriate people to contact now that
Gautreaux no longer exists; (b) the contacts they have been
working with have now been able to produce two recent
Cabrini Green applicants in all the time it has been working with
the Cooperative; (c) this Board intends to honor and implement
the Leadership Council Memorandum of Agreement, which
was entered at the time of the Cooperative’s taking title to the
property.
The practice of allocating scarce Federally funded resources to
OIG Evaluation of
family members or other related parties is not in keeping with
The Cooperative’s the spirit of Fair Housing and Equal Opportunity laws. The
Comments clear intent of those laws is to promote and protect the right of
equal housing opportunity against discriminatory practices.
Selecting applicants from a waiting list in non-sequential order,
maintaining a second waiting list separate from the main list, and
offering available units to related parties on a preferential basis,
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Finding 3
may be construed as discriminatory practices.
Recommendation 3A below, if implemented, will determine
whether such practices existed.
With respect to the Cooperative’s statement that the Gautreaux
Decree no longer exists, HUD’s Office of Assistant General
Counsel advised OIG that legal proceedings giving rise to the
decree in the case of Gautreaux v. Landrieu have not been fully
settled. However, the Cooperative entered into a
Memorandum of Understanding with the Leadership Council
for Metropolitan Open Communities on October 28, 1996.
This agreement obligated the Cooperative to provide housing
for 20 residents displaced from the Cabrini Green public
housing site on an alternating basis with other persons on the
Cooperative’s waiting list. The terms of the Memorandum of
Understanding exist independently of the Gautreaux Decree and
remain in force, according to HUD.
Excerpts from Diversified’s comments to our draft finding
Diversified’s
follow. Appendix B, Pages 33 to 37, contain the full text of the
Comments comments.
The substantial number of move-ins (approximately 25), which
were afforded to friends and family members of [the former
Board President], occurred between November and December
of 1998. By the very nature of the job description and
responsibilities of an on-site manager, one has great latitude in
controlling the day to day activities of the property. In this
instance, the on-site manager moved these individuals into the
apartments and neither forwarded the corresponding
paperwork concerning the move-ins nor reported the move-ins
to the Property Supervisor. Thus, Diversified did not become
aware of the on-site manager’s practices regarding move-ins for
two months. Unfortunately, this practice is far too common in
the “rental world”. Once Diversified became apprised of the
situation, they responded.
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Finding 3
As the employer of the on-site manager, Diversified had a duty
OIG Evaluation of
to closely monitor the manager’s actions to ensure that
Diversified’s established policies and procedures were followed. Diversified
Comments assured HUD that constant supervisory oversight was being
provided at the property that should have detected the absent
paperwork before a two-month period elapsed.
The record and evidence will show that all current members
The Former Board
already residing at the Cooperative had the opportunity to be
President’s certified to receive vouchers. Because there were vouchers
Comments allocated to the Cooperative that had not been used even after
all current, eligible households had been served, the Chicago
Housing Authority allowed the distribution of the remaining
vouchers to adult members of households that had already
received vouchers. No rental assistance was “denied” existing
members who were eligible to receive it.
From interviews we conducted with tenants, we concluded that
OIG Evaluation of some members were under the mistaken belief that they only
Former Board had to pay a portion of their rent and the Cooperative would
President’s take care of the balance. Due to poor communication by the
management agent, members who could not afford to pay
Comments
market rates were not informed that they needed vouchers to
meet their rent obligations.
We recommend that the Director, Multifamily Hub:
Recommendations
3A. Refers this matter to the Office of Fair Housing and
Equal Opportunity to determine whether any laws were
violated and, if so, ensures that appropriate actions are
taken;
3B. Ensures that the new management agent assumes
control of the tenant selection process from the Board;
3C. Ensures that residents of Cabrini Green are provided
housing opportunities at the Cooperative consistent with
the intent of the Gautreaux Agreement;
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Finding 3
3D. Ensures that the Cooperative makes a reasonable effort
to determine whether persons on the prior waiting list
are still interested in units;
3E. Ensures that control measures are implemented to
prevent the Board from circumventing the waiting list.
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Management Controls
In planning and performing our audit, we considered the management controls of Neighborhood
Commons Cooperative and Diversified Realty Group in order to determine our auditing procedures, not
to provide assurance on the controls. Management controls include the plan of the organization,
methods and procedures adopted by management to ensure that its goals are met. Management
controls include the processes for planning, organizing, directing and controlling program operations.
They include the systems for measuring, reporting and monitoring program performance.
We determined the following management controls were
Relevant Management relevant to our audit objectives:
Controls
• Program Operations - Policies and procedures that
management has implemented to reasonably ensure that a
program meets its objectives.
• Validity and Reliability of Data - Policies and procedures
that management has implemented to reasonably ensure that
valid and reliable data are obtained, maintained, and fairly
disclosed in reports.
• Safeguarding Resources - Policies and procedures that
management has implemented to reasonably ensure that
resources are safeguarded against waste, loss and misuse.
We assessed all of the relevant controls identified above.
It is a significant weakness if management controls do not
provide reasonable assurance that the process for planning,
organizing, directing and controlling program operations will
meet an organization’s objectives.
Based on our review, we believe the following items are
Significant Weaknesses
significant weaknesses:
• Program Operations
The Cooperative’s and management agent’s controls did not
ensure that the property operated according to program
requirements. HUD found that management did not: adhere to
the HUD-approved budget; attempt to obtain goods and
services at competitive prices; submit monthly reports; ensure
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Management Controls
that funds were used for eligible expenses only; collect monthly
rents; obtain authorization for non-revenue producing units;
apply eviction and fee procedures in a consistent manner;
prevent the owners from overstepping their authority; have a
written tenant selection policy; fill 21 units in accordance with
waiting list procedures; and adhere to its agreement with the
Leadership Council to alternately fill 20 units with displaced
Cabrini Green residents. Due to the weak control environment,
numerous control weaknesses identified by HUD, and the
transition of management agents, we did not rely on any
controls relating to program operations when planning our
survey and audit work.
• Validity and Reliability of Data
The Cooperative’s and management agent’s controls did not
ensure that rental receipt information was accurate. We noted
differences in rent data between the manual payment history
cards and the computerized rent ledgers because management
did not perform routine reconciliations of the records. Due to
the weak control environment, numerous control weaknesses
identified by HUD, and the fact that the Independent Public
Accountant issued two qualified opinions because of the tenant
accounts receivable problem discussed in Finding 1, we did not
rely on any controls relating to the validity and reliability of data
when planning our survey and audit work.
• Safeguarding Resources
The Cooperative’s and management agent’s controls did not
ensure that only eligible expenses were paid with project funds.
The management agent approved questionable payments to
pay personal expenses of some Board members. Bank
deposits were not routinely made every day, and when receipts
were left in the office overnight, they were not secured in a
locked container. Due to the weak control environment cited
above, we did not rely on any controls related to the
safeguarding of resources when planning our survey and audit
work.
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Follow Up On Prior Audits
This is the first audit of Neighborhood Commons Cooperative by HUD’s Office of Inspector General.
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Appendix A
May 30, 2000
Mr. Ronald F. Huritz
Assistant District Inspector General for Audit
Department of Housing and Urban Development
77 West Jackson Boulevard
Suite 2646
Chicago, Illinois 60604-3507
Re: Response to Audit Findings
Neighborhood Commons Cooperative
Dear Mr. Huritz:
This letter acknowledges receipt of the audit findings for Neighborhood Commons. The Board of
Directors has met and discussed these findings and our responses are attached.
Please note that the current Board of Neighborhood Commons has three new members who, along with
the pre-existing Board Members, have positively impacted the overall performance of the Board of
Directors.
We make use of our legal counsel for advice and counsel. We have new and capable management
which has been helpful to us in facing many of the existing problems the newly constituted Board faced.
Our Board has grown and is learning more about its roles, responsibilities and limits and we intend to
make further improvements in our performance.
Please feel free to contact me if I can answer any questions. We look forward to the audit meeting.
Sincerely,
Shirley Hardiman
President
Neighborhood Commons Cooperative
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Appendix A
RESPONSES TO AUDIT REPORT
INSPECTOR GENERAL REPORT
MAY, 2000
Finding 1. Tenant Accounts Receivable Balance
To the degree that we have knowledge, our research indicates your assumptions and comments fairly
and appropriately state the facts. We agree that our new management agent has significantly improved
the rental collections at NCC, however, please note that their directions were approved and supported
by the Board of Directors. With respect to Section 3 and 4, we refer you to Ms. Avraham’s response.
Recommendations:
1.A We agree.
1.B We agree.
1.C This finding has no relationship to NCC’s current situation. We have no comment.
Finding 2. Abuse of Board of Director’s Authority
To our knowledge, we believe some of your assumptions and comments are fair and appropriately state
the facts with the following comments: (1) the Cooperative has a new President and new officers; (2)
the person discussed in your findings no longer holds a position of authority; (3) the plan under the new
Board and Management is to continue our efforts to establish more than an acceptable level of fiscal
management; and (4) our legal counsel was not aware nor did he participate in any way in the creation
of a management agreement between Diversified and NCC.
We recognize that in order for our current Management Agent to fulfill their responsibilities as
Management Agent, it was necessary for them to take a strong position on some issues. This may have
caused some misunderstandings between the Board and Management. We also acknowledge and
understand that in order to cancel the Management Agreement for “cause”, the reasons should be
clearly stated and a new agent be HUD approved.
We recommend there be clarification on the Cooperative Housing trip that was taken to Florida. Other
Board Members from other cooperatives attend educational conferences such as this. However, we
specially call your attention to these facts: (a) Mr. Gideon Adjetey and Ms. Denise Threatt did not
attend that conference. Ms. Jean Mays did attend, however, she paid her own air fare. We refer you
to Ms. Avraham’s response.
Recommendations:
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Appendix A
2.A All findings and required responses to issues regarding Jesse Avraham must be
responded to by Ms. Avraham. We have no comment.
2.B We have no response or comments regarding Ms. Avraham and/or Warren Jones.
We ask that your report be more specific in describing board positions as they relate to your report.
There is currently a new Cooperative President and there is also one other ex-President besides Ms.
Avraham. The By-Laws identify this position as the Cooperative President. There is no position
known as “Board President”.
2.C We accept whatever technical assistance provided.
2.D Not applicable. We have no comment.
2.E This is acceptable to the Board and Management.
2.F The Board takes your comments under advisement and understands the recommendation.
However, it is the Board’s position that recommending such action is not necessary. This Board will
work to see that this not be a scenario for NCC. There also needs to be an understanding on HUD’s
part that the Board has a right to re-direct Management when Management may become inconsistent
with legitimate Board established policy.
2.G The Board does not expect such sanctions to be necessary.
Finding 3 Failing to Provide Equal Opportunity in Housing
We respond to this Finding with the advice of our legal counsel. We find it necessary to deny that any
of the conduct described in this Finding, in any way, constitutes a violation of the Fair Housing Laws of
either the United States, State of Illinois or City of Chicago. In addition, we advise you that our current
management informed the Board that: (a) they had a difficult time locating the appropriate people to
contact now that Gautreaux no longer exists: (b) the contacts they have been working with have now
been able to produce two recent Cabrini Green applicants in all the time it has been working with the
Cooperative; (c) this Board intends to honor and implement the Leadership Council Memorandum of
Agreement, which was entered at the time the Cooperative’s taking title to the property. These two
applicants’ processing is being assisted in every way and we anticipate approval and occupancy to take
place shortly.
We accept the facts presented regarding the Regulations mandated by FHA Programs and the
Gautreaux Agreement.
Considering the limited knowledge the current Board has, with respect to past management practices,
we are unable to dispute or confirm the facts outlined in your report regarding the previous use of the
waiting list and the ignoring of HUD’s directives to the previous Board and Committee.
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Appendix A
The current Board does not dispute your description of the actions of the previous President or
Committee. Due to a lack of knowledge we (a) have no comment and (b) suggest that responses
regarding the past president be responded to by the past president.
Recommendations:
3.A We disagree with this recommendation for reasons outlined above.
3.B The Management Agent is now in control of the official waiting list.
3.C Gautreaux no longer exists. However, due to our new management agent’s efforts an
appropriate contact has been made and a working relationship established with two applicants moving
through our selection system.
3.D This is currently part of our selection process. Our list is maintained in chronological order and
applicants are notified from that list, except for Cabrini Green applicants who go to the top of the list in
this manner: (1) the next three available units to catch up for the time we were not able to institute this
program and (2) then every other new applicant will be from the Cabrini Green list.
3.E It is the goal of our current Board to ensure that the waiting list is appropriately managed by
management, in accordance with the selection criteria established by the Board of Directors.
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Appendix B
May 31, 2000
Ronald F. Huritz
Assistant District Inspector General for Audit
U.S. Department of Housing and Urban Development
Office of Inspector General for Audit, Midwest
Ralph H. Metcalfe Federal Building
77 West Jackson Boulevard, Suite 2646
Chicago, IL 60604-3507
SENT VIA HAND DELIVERY
RE: Inspector General Audit “Draft” of May 5, 2000
Dear Mr. Huritz:
Following this page, please find Diversified Realty Group, LLC’s Responses to the three draft audit
findings made by the HUD Office of Inspector General.
It is our understanding that DRG’s comments will be included verbatim in the final report.
It is further our understanding the draft findings are subject to revision.
We look forward to the conclusion of this matter.
Very truly yours,
BOBBY L. WARE AND ASSOCIATES, LLC
Bobby L. Ware
Attorney-at-Law
BW:ce
cc: Debra Hunter
enclosures (omitted for brevity)
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Appendix B
Responses of Diversified Realty Group, LLC
RE: Inspector General Audit “Draft” of May 5, 2000
IG FINDING #1:
“As of May 1999, the unpaid rents of current tenants living in the 168-unit Cooperative exceeded
$270,000, and would have been significantly higher if the Cooperative had not received excess
subsidies from the Chicago Housing Authority. Management failed to adequately collect monthly rent
payments because it did not take corrective actions in a timely manner to uniformly apply the HUD-
approved rent schedule, resolve voucher subsidy problems and maintain accurate books and records.
The failure to collect rents seriously impacts the Cooperative’s ability to make its mortgage payments
and maintain the property in a safe and sanitary condition. In addition, there is an increased risk that a
claim will be paid from HUD’s insurance fund.”
ISSUE A: Whether management “failed to adequately collect monthly rent
payments...because it did not take corrective actions in a timely
manner....”
DRG RESPONSE: DRG disagrees with the statement above referenced in Finding #1. As
early as 2/24/97, Diversified Realty Group, LLC (hereinafter referred to
as DRG) sent a letter to the Director of Multifamily Housing at the U.S.
Department of Housing and Urban Development, hereinafter referred to
as “HUD”, advising Mr. Edward J. Hinsberger that the Section 8
(CHAC) rent receivables were $116,000 in arrears as of the date of
the letter. At that time, DRG requested clarification on the rent
schedule due to the fact that the schedule received in November of
1996 (with the Closing documents) listed a Rent Schedule based on the
old “236” program, which cited both Basic and Market rents.
Unfortunately, when NCC became a cooperative in November of
1996, the cooperative no longer fell within the 236 program and only
Market rents could be considered. It should also be noted that, when
DRG made its request, DRG stressed that the review was urgent,
advising that the viability of the project could come into jeopardy
without subsidies.
While HUD eventually tendered correspondence to the Chicago
Housing Authority, (hereinafter referred to as “CHAC”), requesting the
release of funds, the matter of clarification still remained unresolved. In
fact, it was not until April 24, 1998, more than 18 months after the
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Appendix B
project opened and 14 months subsequent to DRG’s initial request, that
DRG and CHAC were provided with information from HUD about the
official rent rates.
ISSUE B: DRG disagrees with the portion of finding #2 which states, “As of May
1999, the balance of the delinquent rents...was about $270,000.”
DRG RESPONSE: A meeting was held between DRG and HUD on April 15, 1998. At
that meeting DRG presented HUD with a list of write-offs for unpaid
CHAC monies in the amount of $200,088.59, which had been on
record for almost a year. HUD advised that it would follow-up and
respond in writing and on April 24, 1998, HUD (in the monthly
Accounting Report) directed DRG to write-off back rents which related
to non-payments by CHAC resultant of the units failure to meet
Housing Quality Standards. As of 4/15/98, more than $200,000
remained outstanding and the Certification process was still incomplete,
thus DRG had no way of knowing that the arrears were related to
anything other than “failing to meet housing quality standards” and wrote
them off accordingly.
CONCLUSION: The requested clarification on the Rent Schedule would have
tremendously assisted the remedial process of reconciling the accounts.
RECOMMENDATIONS: 1.A. DRG has no objection to the IG’s recommendation.
1.B. DRG has no objection to the IG’s recommendation.
1.C. DRG has no objection to the IG’s recommendation.
IG FINDING #2:
“The Neighborhood Commons Board of Directors abused its authority and mismanaged the
Cooperative by undermining the management agent; taking control of the daily operations of the
property; ignoring directives from HUD; and taking actions which benefited members of the Board, their
relatives and friends. The Regulatory Agreement stipulates that the mortgagor shall provide for the
management of the project in a manner satisfactory to the Commissioner. In our opinion, the Board
members lacked integrity and conducted themselves as though they were above the rules and
regulations communicated to HUD. Consequently, program requirements were not met, applicable
regulations were not followed, and project resources were used for ineligible or inappropriate
purposes.”
ISSUE: Whether fees were improperly paid to Board President by the
Managing Agency.
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Appendix B
DRG RESPONSE: Because DRG realized that the ultimate responsibility for reconciling the
books and records would fall within their purview, notwithstanding
extenuating circumstances, DRG made the decision to absorb the cost
of resolving the books. Because Ms. Avraham had a good working
relationship with CHAC, DRG contracted Ms. Avraham on a
temporary basis for the exclusive task of reconciling the tenant
receivables with CHAC. She was paid Ten Dollars per hour ($10.00)
for Ten hours a week for a total monthly payment of approximately
$450.00. Once it became apparent 3 months later that Ms. Avraham
could not accomplish this goal, the project was terminated. DRG then
hired Account temps in an effort to complete the task.
CONCLUSION: Diversified hired an independent contractor, whom it believed,
possessed the requisite skill to assist with its endeavors [to] reconcile
the accounts and collect rents, she was ineffective, DRG terminated her
services. Nothing more, nothing less.
RECOMMENDATIONS: 2.A. DRG has no objection to the IG’s recommendation.
2.B. DRG has no objection to the IG’s recommendation.
2.C. DRG has no objection to the IG’s recommendation.
2.D. DRG has no objection to the IG’s recommendation.
2.E. DRG has no objection to the IG’s recommendation.
2.F. DRG has no objection to the IG’s recommendation.
2.G. DRG has no objection to the IG’s recommendation.
IG FINDING #3:
“Management failed to provide an equal opportunity to housing at the Cooperative when it filled vacant
units with relatives and friends of preferred Cooperative members. The Regulatory Agreement requires
full compliance with HUD rules regarding nondiscrimination and equal opportunity in housing. The
Cooperative Board exercised excessive control over the new member selection process to benefit a
limited number of members. Additionally, Section 8 vouchers intended for members already residing at
the Cooperative instead were improperly awarded to family members of Cooperative tenants.
Consequently, the Board discriminated against citizens of the surrounding community when providing
housing, and against other Cooperative members when providing subsidies.”
ISSUE: Whether the Managing Agent was “negligent when it failed to ensure the
adequate tenant selection policies and procedures were established...
DRG RESPONSE: The substantial number of move-ins [approximately Twenty-Five (25)],
which were afforded to friends and family members of Ms. Avraham,
occurred between November and December of 1998. By the very
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Appendix B
nature of the job description and responsibilities of an on-site manager,
one has great latitude in controlling the day to day activities of the
property. In this instance, the on-site manager moved these individuals
into the apartments and neither forwarded the corresponding
paperwork concerning the move-ins nor reported the move-ins to the
Property Supervisor. Thus, DRG did not become aware of the on-site
Manager’s practices regarding move-ins for two months.
Unfortunately, this practice is far too common in the “rental world”.
Once DRG became apprised of the situation, they responded.
CONCLUSION: DRG was precluded by NCC from resolving the outstanding matter
with regard to the move-in list because of the timing. DRG is an equal
opportunity employer and has consistently subscribed to all aspects of
Fair Housing.
RECOMMENDATIONS: 3.A. DRG has no objection to the IG’s recommendation.
3.B. DRG has no objection to the IG’s recommendation.
3.C. DRG has no objection to the IG’s recommendation.
3.D. DRG has no objection to the IG’s recommendation.
3.E. DRG has no objection to the IG’s recommendation.
SUMMARY:
In January of 2000, DRG placed Dale Randle as its Controller, not only to ensure that the Accounting
Department of DRG remains fluent, but also to assist with potentially volatile situations which may occur
in new or less sophisticated start-up entities requiring management. DRG believes that this was a major
step to ensure that it maintains and provides an affluent accounting to its clients. Mr. Randle brings
more than 17 years of experience to DRG.
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Appendix C
May 30, 2000
Mr. Ronald F. Huritz
Assistant District Inspector General for Audit
U.S. Department of Housing & Urban Development
Office of Inspector General for Audit, Midwest
77 West Jackson Blvd. Suite 2646
Chicago, IL 60604-3507
RE: Your May 4, 2000 Audit Findings Letter with Attachments to Shirley Hardiman, President,
Neighborhood Commons Cooperative
Dear Mr. Huritz:
ATTACHMENT TO MAY 30, 2000 LETTER TO RONALD HURITZ FROM NCC
Re: Response to Audit Findings – Neighborhood Commons Cooperative
As indicated in the Board of Directors’ May 30th “Response to Audit Findings”, this attachment is
hereby submitted. The following overall comments are also offered.
1. Three Board members from the former Board (Erma Woodley, Deborah Joyner, Jean Mays (also
current) who were in office and responsible for the decisions made by the Board of Directors entity
were not interviewed or questioned in reference to the Audit Findings as were all other former
Board members.
2. Warren Jones was not interviewed, questioned, nor given an opportunity to respond in
reference to the Audit Findings.
3. The draft Findings misrepresent the relationship between Warren Jones and Jessie Avraham.
Warren Jones is not the “ex-husband” of Jessie Avraham and should not be represented as such.
Finding 1 - Excessive Tenant Accounts Receivable Balance
IG Recommendation: (See Board of Directors response dated May 30th)
The following comments of this writer are made to clarify, correct, and otherwise offer information that
will make the official final report more accurate and free of bias.
Comment 3 - “Management Agent Failed to Collect Monthly Rent Payments”
The statements made in this section are clear as to the reasons the management agent failed to collect
correct monthly rent payments, including the statement from the owner of Diversified Realty Group
regarding difficulties. However, even with this clear-cut evidence which can be verified, the IG
comments “due to the Board’s substantial influence over management discussed in Finding 2, we
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Appendix C
question whether it exacerbated the problems...” casts responsibility and blame on the Board of
Directors.
Finding 2 neither proves nor substantiates that the Board had substantial influence over the day to day
operations of Diversified Realty Group, its policies, procedures, or its main office operations, including
accounting and record keeping. The Board had nothing to do with the fact that DRG did not change the
rent structure and did not implement the correct rent structure from the beginning of its tenure. The
Board had nothing to do with the fact that CHAC paid excessive subsidies.
This writer makes note that the IG must be very careful that it distinguishes the time frame in which
activities took place. The problems outlined in the audit began under a different Cooperative President.
It should also be noted that during the period of time mentioned that Ms. Avraham was not even a
member of the Board of Directors. Certain mismanagement by Diversified Realty Group occurred
under a different regime.
It is a spurious accusation and overly exaggerated that both Boards of NCC or its Presidents (former
and past) could possibly be responsible for the Standard Operating Procedures of DRG and the main
office of that company, since all accounting and accounts receivable matters are inevitably and rightly the
responsibility of the Management Agent.
This writer questions the IG interpretation and submits that the Board of Directors in no way coerced or
influenced the routine and standardized management protocol of Diversified Realty Group.
Comment 4 - “HUD-Approved Rent Schedule Not Uniformly Applied”
Again, the IG appears to making every effort to include the Board as a reason for Diversified’s
ineptness. To say that “The Cooperative did not uniformly apply the HUD-approved rent schedule” is,
to say the least, evading the reality. The Management Agent had full control of administering the rent
schedule. As a matter of fact and record which the IG has apparently overlooked, the two Managers
responsible, along with the Management Agent, for applying the incorrect rents were hand-picked by
Diversified. One of those managers was responsible for applying the incorrect rents from the beginning
that led to the problems that plague the property to this day.
Also, the IG failed to indicate that these issues began during Diversified’s initial tenure under a previous
Cooperative President, not Ms. Avraham. The implications of the IG’s statements are far-reaching and
potentially libelous.
Again, to make an official statement based on what “Diversified’s owner told us...” could be considered
irresponsible in an official report that is supposed to be factual and not supplanted with comments from
the entity that caused the problem and who is looking for someone else to blame.
Finding 2 - The Board of Directors Abused Its Authority
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Appendix C
IG Recommendations: (See Board of Directors response dated May 30th)
2.A. This writer disagrees with this recommendation and suggests that “to debar the Board President
from all Federal programs” is excessive.
2.B. This writer disagrees with this recommendation and based on my knowledge of the situation
suggests that “to debar the ex-manager from all Federal programs” is excessive.
This writer suggests that this action is not necessary because the previous President is no longer
President, the ex-manager is no longer manager, and a new management agent is in place. Further, no
Federal laws relating to the operation of the property were violated. If this suggestion is not acceptable,
it is hopeful that an alternative action can be mutually agreed upon at the exit interview.
Since this writer is not an attorney, it is not possible to address the misleading and inaccurate statements
throughout Finding 2. At the least, this writer was stunned that an official IG report would contain so
much bias and an obvious attempt to defame and discredit. Finding 2 is entitled “The Board of
Directors Abused Its Authority”. However, the entire body of the report is profuse with personal and
defamatory statements directed at this writer. Because of the implications of the recommendation, it is
believed that it will be in the best interest of all involved if I accede to legal advice and confront my
accusers at the proper forum. This, I hope, will be the exit interview. I am hopeful that all significant
persons, including Deborah Hunter, President of DRG, will be invited to the exit interview. This will
allow all parties to voice their opinions and comments before the IG concludes its final
recommendations.
As I mentioned to Mr. Mike Chacone during the brief interview he had with me on November 9 of
1999, his questions were not conducive to the audit report or the initial findings. While I was
determined to focus on the issues of the initial findings as outlined by Edward Hinsberger’s office and
the Board’s response to those findings, Mr. Chacone insisted on asking personal and inappropriate
questions. My belief at that time was that I was being personally attacked and defamed and I relayed
my impressions to him at that time. My concerns have now proven to be well-founded.
I did not then, and do not now believe that my personal affairs violated anything that has to do with the
Operations, Management or Ownership of NCC. Neither the Cooperative nor the members were
affected by my personal affairs.
Finding 3 - The Cooperative Failed to Provide Equal Opportunity in Housing
IG Recommendations: (See Board of Directors response dated May 30th)
The following comments of this writer are made to clarify, correct, and otherwise offer information in an
effort to make the official final report more accurate and free of bias.
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Appendix C
The summary statement “Additionally, Section 8 vouchers intended for members already residing at the
Cooperative instead were improperly awarded to family members of Cooperative tenants...” should be
examined.
The record and evidence will show that all current members already residing at the Cooperative had the
opportunity to be certified to receive vouchers. Because there were vouchers allocated to NCC that
had not been used even after all current, eligible households had been served, CHAC allowed the
distribution of the remaining vouchers to adult members of households that had already received
vouchers. No rental assistance was “denied” existing members who were eligible to receive it. There
was no misappropriation of CHAC vouchers either by Management or the Board of Directors. This
statement is fact and is a matter of record.
Thank you for the opportunity to respond to the draft audit findings.
Respectfully Submitted,
Jessie B. Avraham
Board Member and Previous President
Neighborhood Commons Cooperative
cc: Board of Directors
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Appendix C
(THIS PAGE LEFT BLANK INTENTIONALLY)
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Appendix D
Distribution
Secretary’s Representative, Midwest (2)
Director, Chicago Multifamily Hub, Midwest
Deputy Secretary, SD (Room 10100)
Chief of Staff, S (Room 10000)
Special Assistant to the Deputy Secretary for Project Management, SD (Room 10100)
Assistant Secretary for Administration, A (Room 10110)
Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120)
Senior Advisor to the Secretary, Office of Public Affairs, W (Room 10132)
Director of Scheduling and Advance, AL (Room 10158)
Counselor to the Secretary, S (Room 10218)
Deputy Chief of Staff, S (Room 10226)
Deputy Chief of Staff for Operations, S (Room 10226)
Deputy Chief of Staff for Programs and Policy, S (Room 10226)
Deputy Assistant Secretary for Public Affairs, W (Room 10222)
Special Assistant for Inter-Faith Community Outreach, S (Room 10222)
Executive Officer for Administrative Operations and Management, S (Room 10220)
Senior Advisor to the Secretary for Pine Ridge Project, W (Room 10216)
General Counsel, C (Room 10214)
Director of Federal Housing Enterprise Oversight, 0 (9th Floor Mailroom)
Assistant Secretary for Housing-Federal Housing Commissioner, H (Room 9100)
Office of Policy Development and Research, R (Room 8100)
Assistant Secretary for Community Planning and Development, D (Room 7100)
Executive Vice President, Government National Mortgage Association, T (Room 6100)
Assistant Secretary for Fair Housing and Equal Opportunity, E (Room 5100)
Chief Procurement Officer, N (Room 5184)
Assistant Secretary for Public and Indian Housing, P (Room 4100)
Chief Information Officer, Q (Room 8206)
Director of Departmental Operations and Coordination, I (Room 2124)
Chief Financial Officer, F (Room 2202)
Deputy Chief Financial Officer for Finance, FF (Room 2202)
Director of Enforcement Center, V (200 Portals Building)
Director of Real Estate Assessment Center, V (1280 Maryland Avenue, SW, Suite 800)
Director of Multifamily Assistance Restructuring, Y (4000 Portals Building)
Assistant Deputy Secretary for Field Policy and Management, SDF (Room 7108)
Director of Budget, FO (Room 3270)
Internal Control and Audit Resolution Officer, 3AFI (2)
Special Adviser/Comptroller, D (Room 7228) (2)
Departmental Audit Liaison Officer, FM (Room 2206) (2)
Acquisitions Librarian, Library, AS (Room 8141)
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy &
Human Resources, B 373 Rayburn House Office Building, Washington DC 20515
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340
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Appendix D
Dirksen Senate Office Building, United States Senate, Washington DC 20510
The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs,
706 Hart Senate Office Building, United States Senate, Washington DC 20510
Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn
Building, United States House of Representatives, Washington DC 20515
Henry A. Waxman, Ranking Member, Committee on Government Reform, 2204 Rayburn
Building, United States House of Representatives, Washington DC 20515
Ms. Cindy Foglemen, Subcommittee on Oversight and Investigations, Room 212, O'Neil
House Office Building, Washington DC 20515
Director, Housing and Community Development Issue Area, United States General
Accounting Office, 441 G Street, N.W., Room 2474, Washington DC 20548 (Attention:
Judy England-Joseph)
Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street,
N.W., Room 9226, New Executive Office Building, Washington DC 20503
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Neighborhood Commons Cooperative, Multifamily Rental Housing, Audit of Project Operations, Chicago, Illinois
Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-08-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)