oversight

Review of Project Operations, Village 88 Apartments, Thornton, Colorado

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-07-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                    U.S. Department of Housing and Urban Development
                                 Office of Inspector General, Rocky Mountain
                                           633 17th Street, North Tower, 14th Floor
                                                  Denver, CO 80202-3607
                                                        (303) 672-5452
                                                     Fax (303) 672-5006

OFFICE OF INSPECTOR GENERAL FOR AUDIT
                                                                                   Audit Memorandum
                                                                                 No. 00-DE-212-1801

July 26, 2000

MEMORANDUM FOR: Larry Sidebottom, Director, Office of Multifamily Housing, 8AHMLA



FROM: Robert Gwin, District Inspector General for Audit, 8AGA


SUBJECT: Review of Project Operations
         Village 88 Apartments
         Thornton, Colorado

We have completed a review of the program operations for Village 88 Apartments. The objectives
were to evaluate the management controls for cash, residual receipts, occupancy, and Section 8
Housing Assistance Payments for Village 88 Apartments, and to evaluate compliance with HUD
requirements.

                                          BACKGROUND

Village 88 Apartments, located in Thornton, Colorado, was established in 1972 as a limited partnership
to obtain an interest in real property and to develop and operate 180 units under Section 236 of the
National Housing Act. Under Section 236, HUD provides subsidy to reduce mortgage interest
payments. In May 1995, Village 88 Apartments entered into a Preservation Recapitalization Use
Agreement with HUD, in which HUD agreed to provide certain initiatives in exchange for the Partners’
agreement to continue the low-income affordability restrictions on the Project for the remaining useful
life of the project. The Preservation Recapitalization subjects Village 88 Apartments to provisions of
Subtitle A of Title VI of the National Affordable Housing Act, the Low Income Housing Preservation
and Resident Homeownership Act of 1990 (LIHPRHA) with a Section 241 (f) loan. Village 88
Apartments receives a rental supplement from HUD. The owner agreed by executing two HAP
Contracts, contract number CO99M000077 and CO99L000017 for Section 8 Housing Assistance
Payments for a total of 180 units. Effective March 1, 2000, contract number CO99M000077 for 36
units became inactive, and contract number CO99L000017 was adjusted to cover all 180 units.
                                                                                       00-DE-212-1801


Village 88 Apartments is owned by Village 88, a Limited Partnership. The management agent, Hadley-
Mendel Management Company, is an identity of interest entity to Village 88, a Limited Partnership. The
accounting records and Section 8 Housing Assistance Payment records of Village 88 Apartments are
located at Hadley-Mendel Management Company. Village 88 Apartments maintains the resident files
onsite at the project.

                                       RESULTS OF REVIEW

To accomplish our objectives, we reviewed Village 88 Apartments procedures for cash receipts and
other income, petty cash, cash disbursements and allocations of costs, surplus cash and residual
receipts, occupancy, and Section 8 Housing Assistance Payments. We also interviewed Village 88
Apartments, Hadley-Mendel Management Company, and HUD’s Office of Multifamily Housing staff,
and examined accounting records and other documents of these organizations.

The original audit period was January 1, 1998 through December 31, 1999; however the audit period
was expanded to include the most current data available while performing the site work at the Project.
Therefore, where applicable the audit period was expanded to include current data through March 7,
2000. We conducted field work during March and April 2000. Our review was conducted in
accordance with generally accepted government auditing standards.

Overall, we noted the management controls of Village 88 Apartments were good. We determined that
the management controls over petty cash, cash disbursements and allocations of costs, surplus cash and
residual receipts, occupancy, and Section 8 Housing Assistance Payments were adequate. The
management controls over cash receipts were adequate, except for the controls over laundry revenue.
The finding for the laundry revenue is discussed below.



FINDING - LAUNDRY REVENUE IS NOT RECEIVED BY
VILLAGE 88 APARTMENTS
The Regulatory Agreement requires any income of any kind of the project to be deposited in the name
of the project. Therefore, revenue generated by the project’s laundry facilities is to be deposited into
the project account.

Revenue generated by the project’s laundry facilities is not deposited into the project bank account as
required. Instead laundry revenues are deposited into a non-project account titled “Village 88
Laundry”. The revenues and expenses associated with the laundry facilities are controlled by a separate
identity of interest partnership entity called “Village 88 Laundry”. However, Village 88 Laundry does
not pay the project for any rental of space for the laundry equipment, nor does Village 88 Laundry
reimburse the project for the utilities used for the laundry equipment.




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The identity of interest entity was established to provide the laundry machines and operate the laundry
facilities for the project, because the project was unable to afford the laundry equipment at the time the
project had the idea of having laundry facilities. The project officials stated that this arrangement has
been operating with the knowledge of HUD officials.

As a result, the project is granting free space for the laundry facilities and is paying for the laundry
utilities, but the project is not receiving any benefit from the laundry revenue. Approximately $12,000 of
laundry revenue is collected a year. In our opinion, the revenues from the operation of the laundry
facilities need to be received and deposited into the project’s operating account.


                                 The Regulatory Agreement requires that the owners shall not without
Laundry revenue is               the prior written approval of the Commissioner make, or receive and
required to be deposited         retain, any distribution of assets or any income of any kind of the
in the project account           project. All rents and other receipts of the project are required to be
                                 deposited in the name of the project in a bank. Such funds shall be
                                 withdrawn only in accordance with this agreement for expenses of the
                                 project, and for distributions of surplus cash as limited by the Use
                                 Agreement and Amendment of Existing Regulatory Agreement. Any
                                 owner receiving funds of the project other than by such distributions of
                                 surplus cash shall immediately deposit such funds in the project bank
                                 account.

                                 The Regulatory Agreement requires commercial facilities to be rented at
                                 not less than the rental approved by the Commissioner. The Use
                                 Agreement further requires that if there is any approved commercial
                                 space, the rents from the units receiving Section 8 assistance shall not
                                 be used to pay any expenses incurred with respect to the commercial
                                 use.

                                 Therefore, revenue generated by the project’s laundry facilities is to be
                                 received and deposited into the project’s bank account. If the project
                                 has commercial space, the commercial space must be approved by the
                                 Commissioner and rented at not less than the rental approved by the
                                 Commissioner. The rents from the units receiving Section 8 assistance
                                 shall not be used to pay any expenses incurred with respect to the
                                 commercial use.

                                 Revenue generated by the project’s laundry facilities is not deposited
Laundry revenue is not
                                 into the project bank account as required. Instead laundry revenues are
deposited into the project
                                 deposited into a non-project bank account titled “Village 88 Laundry”.
bank account




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                               The laundry equipment used at the project is owned by a separate
                               identity of interest partnership entity called “Village 88 Laundry”. Four
                               of the five partners of the Village 88 Laundry entity are also partners of
                               the project. Revenues generated from the laundry equipment are
                               deposited into a separate bank account controlled by the identity of
                               interest entity. Expenses in connection with the equipment are paid by
                               the entity from laundry revenues. Any profit from the Village 88
                               Laundry is distributed twice a year to the partners of Village 88
                               Laundry.

                               However, Village 88 Laundry does not pay the project for any rental of
The project is granting
                               space for the laundry equipment, nor does Village 88 Laundry
free space for the laundry
                               reimburse the project for the utilities used for the laundry equipment.
facilities and is paying for
                               As a result, the project is granting free space for the laundry facilities
the laundry utilities, but
                               and is paying for the laundry utilities, but the project is not receiving any
receives no benefit from
                               benefit from the laundry revenues.
the laundry revenues

                               The resident manager of Village 88 Apartments estimates that about
                               $1,000 is collected each month, or $12,000 annually, from the laundry
                               equipment. The balance in the Village 88 Laundry bank account as of
                               December 31, 1999, was $6,788.62. The operation of the laundry
                               facilities by Village 88 Laundry is made without the benefit of any
                               written contract with the project.

                               Project officials apprised us that when the idea of installing laundry
An identity of interest
                               equipment into the project was made, the project was unable to afford
entity provided the
                               the laundry equipment. As a result, the identity of interest entity was
laundry machines,
                               established to provide the laundry machines and operate the laundry
because the project was
                               facilities for the project. The project officials added that this
unable to afford them,
                               arrangement has been in existence for approximately twenty five years
and HUD was aware of
                               and has been operating with the knowledge of HUD officials. The
this arrangement
                               project officials also commented that information on the laundry facilities
                               was disclosed to HUD during the project’s Low Income Housing
                               Preservation and Resident Homeownership Act of 1990 application
                               process. HUD did not express any concern about the operation of the
                               project’s laundry facilities.

                               In our opinion, the revenues from the operation of the laundry facilities
Laundry operation
                               need to be received and deposited into the project’s operating account.
revenues need to be
                               Since the laundry equipment is not owned by the project, some contract
received and deposited
                               arrangement needs to be established for the equipment usage. Ideally,
into the project account
                               the project could procure for a fixed monthly fee, through open bidding,
                               the leasing of the project laundry facilities to an independent laundry




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                             service vendor. The vendor would be responsible for providing,
                             operating, and maintaining the laundry equipment. This would allow the
                             project to receive income from the laundry and to provide funds to pay
                             for the use of utilities by the laundry. Another option would be for the
                             project to purchase and maintain the laundry equipment.

                             In any case, specific instructions from HUD need to be provided to the
Specific instructions from
                             project on exactly how the laundry revenues are to be received by the
HUD need to be
                             project and reflected on the project’s books of account. Also,
provided to the project
                             instructions need to be given on the project’s recovery and recording of
                             the laundry monies that have been received and used by the identity of
                             interest partnership, Village 88 Laundry.

                             The owner does not believe that the net funds generated by the laundry
Auditee Comments
                             facilities are funds of the project. There were not sufficient funds
                             remaining after completion of the construction to complete and install a
                             laundry facility, and the partners of Village 88 Apartments chose not to
                             contribute additional capital for the purpose of the laundry facilities.
                             Village 88 Laundry, a separate entity, was formed to complete the
                             room, install equipment, and operate the laundry facilities.

                             The owner contends that the Village 88 Laundry entity has provided a
                             much needed amenity to the project’s tenants with no capital or other
                             operating cost to the project, in exchange for use of the laundry room
                             space and utilities. Under these terms, the rental of this commercial
                             space was orally approved by HUD in 1974 and reaffirmed in 1995.
                             The Auditee’s entire response is attached as Appendix 1.

                             We commend Village 88 Laundry for providing the laundry facilities for
Auditor’s Evaluation of
                             the residents of Village 88 Apartments. However, the commercial use
Auditee Comments
                             and the rental of the commercial space was not approved in writing by
                             HUD, as required by the Regulatory Agreement. Paragraph 6(h) of the
                             Regulatory Agreement requires the owners to obtain the prior written
                             approval of HUD to permit commercial use and paragraph 4(k)
                             requires commercial facilities to be rented at not less than the rental
                             approved by the Commissioner.

                             Furthermore, while Village 88 Apartments is paying the mortgage and
                             the utilities for the project, which includes the laundry facility, the project
                             is not receiving any income or rent from the laundry facility commercial
                             space. Section 3 of the Use Agreement further requires that if there is
                             any approved commercial space, the rents from the units receiving




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                                Section 8 assistance shall not be used to pay any expenses incurred
                                with respect to the commercial use.

Recommendations               We recommend that HUD’s Office of Multifamily Housing:
Recommendations

                                1A. Provide specific instructions to the Owner on exactly how the
                                    laundry revenues are to be received by the project and reflected
                                    on the project’s books of account.

                                1B. Provide instructions to the Owner on how the project will recover
                                    and record the laundry monies that have been received and used
                                    by the identity of interest partnership, Village 88 Laundry.

                                1C. Once the project has implemented recommendations 1A and 1B,
                                    review the project to ensure appropriate corrective action has
                                    been implemented and the project is properly receiving and
                                    recording laundry revenue in conformity with HUD requirements.


These recommendations will be controlled under the Departmental Automated Audit Management
System. Within 60 days please furnish to this office, for each recommendation 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 not necessary. Also, please furnish us copies of any
correspondence or directives issued because of the audit.

We appreciate the courtesies and assistance extended by the personnel of Village 88 Apartments,
Hadley-Mendel Management Company, and the HUD Office of Multifamily Housing. Should you have
any questions please contact Ernest Kite, Assistant District Inspector General for Audit, at (303) 672-
5452




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APPENDIX 1

Auditee Response




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00-DE-212-1801




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APPENDIX 2

Distribution
Secretary’s Representative, 8AS (2)
Director, Office of Multifamily Housing, 8AHMLA (2)
Deputy Secretary, SD, Room 10100
Chief of Staff, S, Room 10000
Special Assistant to the Deputy Secretary for Project Management, SD, Room 10100
Acting Assistant Secretary for Administration, S, Room 10110
Assistant Secretary for Congressional and Intergovernmental Relations, J, Room 10120
Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132
Director of Scheduling and Advance, AL, Room 10158
Counselor to the Secretary, S, Room 10234
Deputy Chief of Staff, S, Room 10226
Deputy Assistant Secretary for Public Affairs, W, Room 10222
Executive Officer for Administrative Operations and Management, S, Room 10220
General Counsel, C, Room 10214
Assistant Secretary for Housing/Federal Housing Commissioner, H, Room 9100
Office of Policy Development and Research, R, Room 8100
Inspector General, G, Room 8256
Chief Information Officer, Q, Room 3152
Director, Office of Departmental Operations and Coordination, I, Room 2124
Chief Financial Officer, F, Room 2202
Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108
Deputy Chief Financial Officer for Finance, FF, Room 2202
Departmental Audit Liaison Officer, FM, Room 2206 (2)
Headquarters Audit Liaison Officer, Housing, HF, Room 9116 (2)
Acquisitions Librarian, Library, AS, Room 8141
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 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 Governmental Reform, 2185 Rayburn Bldg.,
  House of Representatives, Washington, DC 20515
Henry A. Waxman, Ranking Member, Committee on Governmental Reform, 2204 Rayburn
  Bldg., House of Representatives, Washington, DC 20515
Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil
  House Office Building, Washington, DC 20515
Mr. Pete Sessions, Government Reform and Oversight Committee, Room 212, O’Neil House
  Office Building, Washington, DC 20515



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Director, Housing and Community Development Issue Area, United States General Accounting
  Office, 441 G Street, NW, Room 2474, Washington, DC 20548 (Attention: Judy England-
  Joseph )
Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street,
  NW., Room 9226, New Executive Office Building, Washington, DC 20503

Ms. Carol Hadley, President/Property Manager, Hadley-Mendel Management Company, 1165
 S. Pennsylvania Street, Suite 202, Denver, Colorado 80210
Mr. Lee Mendel, Owner, Hadley-Mendel Management Company, 1165 S. Pennsylvania
 Street, Suite 202, Denver, Colorado 80210




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