oversight

City and County of Denver's Housing Opportunity for Persons with AIDS Program Audit

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-02-25.

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

                            Audit Report
                            District Inspector General for Audit
                            Rocky Mountain District




                 City And County of
                 Denver, Colorado

     Housing Opportunity For
    Persons With AIDS Program

                            00-DE-259-1001
                            February 25, 2000



U.S. Department of Housing and Urban Development
District Inspector General for Audit
633 17th Street
14th Floor
Denver, CO 80202-3607
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                               Audit Report
                               District Inspector General for Audit
                               Rocky Mountain District
                               Report: 00-DE-259-1001                     Issued: February 25, 2000


TO: Guadeloupe Herrera, Director, Rocky Mountain District Office Of Community
                          Planning And Development, 8AD



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

SUBJECT: City and County of Denver’s Housing Opportunity for Persons with AIDS
           program Audit

We have concluded our audit of the City and County of Denver’s Housing Opportunity For Persons
With AIDS Program. The audit included six objectives to determine the effectiveness of the City
and County of Denver’s Program. Specifically: The objectives of the audit were to determine if the
City and County of Denver ensured that:

•   Project sponsors admit only eligible tenants and charge appropriate tenant rents according to the
    Housing Opportunity Program requirements including maximum allowable rents.
•   Project sponsors expended HUD funds for only eligible program activities.
•   Project sponsors complete rehabilitation of facilities prior to tenants moving into the units.
•   Projects sponsors maintain the dwelling units in a safe and sanitary condition.
•   Project income is appropriately accounted for and used for project related expenses.
•   Project sponsors, their officials and/or owners do not have a conflict of interest in the funded
    activities.

This report contains five findings related to our audit objectives and related recommendations for
improving the City and County of Denver’s Program.

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 unnecessary. Also, please furnish us copies of any correspondence
or directives issued because of the audit.

We appreciate the courtesies and assistance extended by the management and staff at the City and
County of Denver, its project sponsors and the Rocky Mountain District Office of Community
Planning and Development.

Should you have any questions, please call me or Ernest Kite, Assistant District Inspector General
for Audit, at (303) 672-5452.
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Executive Summary
We performed an audit of the City and County of Denver’s Housing Opportunity for
Persons with AIDS Program (herein referred to as the Housing Opportunity Program).
In addition, due to the overlapping of HUD funds (Housing Opportunity Program,
HOME, Rental Rehabilitation CDBG funds, etc.) we had to take into consideration
other various HUD funding programs in our review. Our Office also received two
complaints relating to the City and County of Denver’s Housing Opportunity Program.
We considered the complaints in developing our audit objectives and planning for the
audit.

Our review identified that the City and County of Denver needs to improve its oversight
and monitoring, and ensure that project sponsors comply with HUD requirements.


                            The City and County of Denver (City) began receiving Housing
 The City received about    Opportunity Program funding from HUD in 1992. Since that time
 $6.73 million              the City received a total of $6.73 million through the end of 1998.
                            Disbursements for Housing Opportunity Program for rental
                            assistance total approximately $2.46 million while the housing
                            development disbursements for Program’s community residences
                            total about $3.59 million as of November 1998.

                            HUD’s Housing Opportunity for Persons with AIDS Program
 HUD’s Housing              (hereinafter referred to the Housing Opportunity Program)
 Opportunity program        provides monies to be used to assist eligible persons with housing
                            assistance programs, including providing supportive services for
                            rental and mortgage assistance, that are designed to prevent
                            homelessness. Eligible persons are low income that also are
                            medically diagnosed with the acquired immunodeficiency syndrome
                            or infected with the human immunodeficiency virus. Rental
                            assistance may be used to pay monthly support for an eligible
                            person. Rent, mortgage, and utility payments to prevent
                            homelessness may not be disbursed to an individual over a period
                            of more than 21 weeks in any 52 week period. Program monies
                            may be used to acquire and rehabilitate multiunit residences
                            designed for eligible persons to provide a lower cost of care. Units
                            used to house program recipients must conform with the HUD’s
                            Minimum Property Standards.

                            The objectives of the audit were to determine if the City and
 Our audit objectives       County of Denver ensured that:

                            •   Project sponsors admit only eligible tenants and charge
                                appropriate tenant rents according to the Housing Opportunity
                                Program requirements including maximum allowable rents.
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                           •   Project sponsors expended HUD funds for only eligible
                               program activities.
                           •   Project sponsors complete rehabilitation of facilities prior to
                               tenants moving into the units.
                           •   Projects sponsors maintain the dwelling units in a safe and
                               sanitary condition.
                           •   Project income is appropriately accounted for and used for
                               project related expenses.
                           •   Project sponsors, their officials and/or owners do not have a
                               conflict of interest in the funded activities.

                           Our review identified that the City and County of Denver needs
                           to improve its oversight and monitoring, and ensure that project
                           sponsors comply with HUD requirements.

                           The City needs to improve its oversight and monitoring of its HUD
City needs to improve      funded projects to ensure that project sponsors carry out their
its oversight of project   project activities in conformity with the applicable HUD
sponsors                   requirements. This is particularly true since many of the sponsors
                           acquired and/or rehabilitated projects using more then one HUD
                           funded programs. Accordingly, units within each project may be
                           controlled by different HUD program requirements. Our review of
                           seven judgmentally selected projects identified that the program
                           sponsors were not fully complying with the appropriate HUD
                           funding program requirements. Improved City oversight and
                           monitoring is needed, if the City and HUD are to have assurances
                           that Federally funded projects are being properly administered. In
                           the past, the City relied primarily upon the project sponsors to
                           ensure compliance with specific HUD program requirements.
                           Also the City monitoring has been through informal contact with
                           project sponsors.

                           City officials also advised that they were in the process of updating
The City initiated
                           their monitoring procedures. According to the Director of the City
corrective actions
                           of Denver’s Community Development Agency, the Agency began
                           taking actions after our discussion of the tentative findings at the
                           completion of our on-site review. Specifically:

                           •   The Agency hired a consultant to integrate its various data
                               bases and set up a monitoring module to ensure programs and
                               projects receive appropriate monitoring.
                           •   The delayed project has received the additional funding and
                               should be in operation by the end of calendar year 2000.
                           •   The City is taking action to ensure the commercial rents from
                               the project are being used for that project and not other
                               projects.




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                          Four of the seven project sponsors reviewed charged contract
Four of the seven         rents in excess of the agreement with the City or other source of
project sponsors          assistance. As a result, program participants, other programs
charged excessive rents   and/or HUD programs pay excessive rent. The overcharging of
                          contract rents stemmed primarily from the project sponsors not
                          being fully knowledgeable of the various requirements and
                          restrictions applicable to the different funding sources or contract
                          restrictions applicable to their particular projects. In addition, the
                          City has not had effective monitoring procedures to ensure that
                          project sponsors charged appropriate contact rents.

                          According to the Director of the City of Denver’s Community
The City initiated
                          Development Agency, the Agency began taking actions after our
corrective actions
                          discussion of the tentative findings at the completion of our on-site
                          review. Specifically, the City is in the process of working with the
                          various project sponsors to ensure that appropriate rents are
                          charged based on the various funding sources for the projects.

                          Since May 1993, the City has provided to the Colorado AIDS
Colorado Aids Project     Project approximately $1.018 million in funds under the HUD
Improperly                Housing Opportunity for Persons with AIDS. At least $862,935 of
Administering HUD         this total was used to provide rental or mortgage assistance to 948
Program Funds             recipients. However, the Colorado AIDS Project has not properly
                          implemented the program in conformity with HUD requirements.

                          More specifically, the Colorado AIDS Project did not always
                          document the eligibility of the program participants , identify and
                          support the need for rental or mortgage assistance, nor ensure that
                          landlords received the assistance payments. As a result, neither
                          HUD nor the City have assurances that assistance was paid to
                          eligible participants. In addition, the Colorado AIDS Project
                          provided rental assistance in excess of the 21-week maximum
                          period a year specified by HUD regulation. Based upon our case
                          review sample of 74 out of the 948 recipients receiving assistance,
                          at least $37,857 was paid for ineligible assistance.

                          The Colorado AIDS Project failed to establish proper procedures
                          to ensure that assistance payments were made only in conformity
                          with HUD requirements. Also, the Project did not correctly verify
                          and document the eligibility of the program recipients. Therefore,
                          questionable or ineligible payments were made.

                          The City’s monitoring of the project also did not ensure that the
                          Colorado AIDS Project provided assistance to only eligible persons
                          and that the assistance went for rental or mortgage payments.
                          Moreover, the City of Denver amended their agreement with the
                          Colorado AIDS Project that allowed for ineligible excessive
                          assistance payments.




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                           According to the Director of the City of Denver’s Community
The City began a regular
                           Development Agency, the Agency began taking actions after our
review of the Colorado
                           discussion of the tentative findings at the completion of our site
AIDS Project
                           review. Specifically, the City’s Community Development Agency
                           implemented a regular review of the Colorado AIDS Project to
                           ensure compliance with HUD’s and the City’s requirements.

                           A project sponsor used Housing Opportunities for Persons with
Questionable Use of        AIDS and Rental Rehabilitation program funds for refinancing of
$80,330 for Refinance      an existing project acquisition debt, which is not specifically
an existing project        authorized in the applicable HUD funding program regulations. As
                           a result, the use of HUD program funds totaling $80,330 is
                           questionable as an eligible program cost.

                           The project sponsor did not specify that HUD monies would be
                           used to refinance an existing debt in its application to the City but
                           that the funds would be used only to acquire and rehabilitate the
                           project. At the time the City approved the sponsor’s project
                           application, the project sponsor had already acquired the project.
                           Therefore, the monies were used for purposes not delineated in the
                           City approved application. Nonetheless, City officials considered
                           the refinancing to be an eligible HUD program cost. A
                           determination needs to be made by HUD as to its eligibility.

                           One of seven HUD funded projects we inspected failed to meet
Project Did Not Meet       the specific HUD and City required Housing Quality Standards.
Housing Quality            Consequently, tenants and their children were exposed to safety,
Standards                  security and health hazards. The deficiencies in the Housing
                           Quality Standards went undetected since the City did not perform a
                           Housing Quality Standards inspection after completion of the
                           project’s rehabilitation. In addition, the City does not perform
                           regularly scheduled inspections to insure the project sponsor
                           continues to maintain the project within the required Housing
                           Quality Standards during the 20 year commitment of the project.
                           Without such inspection procedures, the City has limited assurance
                           the HUD funded projects and their dwelling units meet HUD’s
                           required Housing Quality Standards.

                           According to the Director of the City of Denver’s Community
The City initiated
                           Development Agency, the Agency began taking actions after our
corrective actions
                           discussion of the tentative findings at the completion of or site
                           review. Specifically, the City is now performing inspections after
                           the completion of rehabilitation and on an annual basis.

                           We also reviewed to determine if the project sponsors, their
We also reviewed for a     officials and/or owners have a conflict of interest, per HUD’s
conflict of interest       regulations, in the funded activities. Based on the items tested, we
                           concluded that no conflict of interest existed.



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                   The City and County of Denver’s Director of the Community
Auditee Comments   Development Agency provided written comments to our draft
                   report on February 22, 2000. The Director, for the most part,
                   agreed with our audit results and implemented a number of actions
                   to respond to issues identified in our report. Appendix 1, of this
                   report, includes the Director’s comments in their entirety. We
                   provided our specific responses to the Director’s comments within
                   each finding.




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Table of Contents
Management Memorandum ................................................................. ...i

Executive Summary............................................................................... iii

Table of Contents .................................................................................. ix

Introduction............................................................................................ 1

Findings and Recommendations

        1. Improvements Needed in the City’s Oversight and
           Monitoring Of HUD Program Activities ................................. 5
        2. Project Sponsors Charged Excessive Contract Rents .......... 11
        3. Colorado Aids Project Improperly Administering
           HUD Program Funds ............................................................. 17
        4. Questionable Use of $80,330 HUD Funds to
           Refinance an Existing Project Acquisition Debt ................... 27
        5. Project Did Not Meet Housing Quality Standards................ 31

Management Controls .......................................................................... 37

Appendices

        1. Auditee Comments ................................................................. 39
        2. Schedule of Ineligible and Questioned Costs ........................ 43
        3. Audit Distribution List............................................................ 45




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Introduction
HUD’s Housing Opportunity for Persons with AIDS Program (hereinafter referred to the Housing
Opportunity Program) provides monies to be used to assist eligible persons with housing assistance
programs, including providing supportive services for rental and mortgage assistance, that are
designed to prevent homelessness. Eligible persons are low income that also are medically
diagnosed with the acquired immunodeficiency syndrome or infected with the human
immunodeficiency virus.

Rental assistance may be used to pay monthly support for an eligible person. The maximum amount
of assistance per person is the difference between 30% of the tenant’s adjusted income and Fair
Market Rent. Short-term supported housing includes facilities to provide temporary shelter for
eligible individuals as well as rent, mortgage, and utility payments to enable eligible individuals to
remain in their own housing. Temporary Shelter facilities may not provide residence to any
individual for more than 60 days in any six month period. Rent, mortgage, and utility payments to
prevent homelessness may not be disbursed to an individual over a period of more than 21 weeks in
any 52 week period. Program monies may be used to acquire and rehabilitate multiunit residences
designed for eligible persons to provide a lower cost of care. Units used to house program
recipients must conform with the HUD’s Minimum Property Standards.

The City and County of Denver (City) began receiving Housing Opportunity Program funding from
HUD in 1992. Since that time the City received a total of $6.73 million through the end of 1998.
Disbursements for Housing Opportunity Program for rental assistance total approximately $2.46
million while the housing development disbursements for Program’s community residences total
about $3.59 million as of November 1998.

HUD’s Housing Opportunity Program grant funds furnished to the City were awarded to project
sponsors who were responsible for administering their particular segment of the Program. The City
and project sponsors often combined other HUD and Federal monies with local and private funding
to finance the activities by the project sponsors. Most of these monies were used to acquire and/or
rehabilitation multifamily structures for use by eligible program recipients. In addition to the Housing
Opportunity Program monies, HUD funds from the HUD Rental Assistance, HOME, and
Community Development Block Grant Programs were used. Also, HUD Section 8 Rental
Assistance Program funds were provided to some program recipients.

Our Office received two complaints alleging that the City of Denver’s Housing Opportunity
Program:

        °   Overcharged tenant rents (rents in excess of 30% of adjusted income).
        °   Allowed tenants to move-into units that were not clean and in good repair.
        °   Did not ensure that Housing Opportunity Program and HOME funds were properly
            used to rehabilitate properties.
        °   Performed deficient monitoring of the programs and subgrantees.
        °   Did not ensure that property values were not inflated before awarding Housing
            Opportunity Program or HOME funding.

We did consider the complaints in our planning for the audit and developing audit objectives.
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                       The objectives of the audit were to determine if the City and
Audit objectives and   County of Denver ensured that:
methodology
                       •   Project sponsors admit only eligible tenants and charge
                           appropriate tenant rents according to the Housing Opportunity
                           Program requirements including maximum allowable rents.
                       •   Project sponsors expended HUD funds for only eligible
                           program activities.
                       •   Project sponsors complete rehabilitation of facilities prior to
                           tenants moving into the units.
                       •   Projects sponsors maintain the dwelling units in a safe and
                           sanitary condition.
                       •   Project income is appropriately accounted for and used for
                           project related expenses.
                       •   Project sponsors, their officials and/or owners do not have a
                           conflict of interest in the funded activities.

                       We originally planned to audit the Housing Opportunity Program
                       funding; however, due to the overlapping of grant monies from the
                       various other HUD Programs grants, we had to take into
                       consideration the various restrictions of these various HUD grant
                       programs. When a project receives multiple funding, the most
                       restrictive program criteria applies.

                       During the audit, we examined accounting records and other
                       pertinent Housing Opportunity Program documents from the City
                       and County of Denver and the project sponsors regarding the nine
                       selected entities. We also conducted interviews with managers
                       and employees of these organizations.

                       The City provided us a budget schedule of funded projects from
                       1992 to 1998. The scheduled listed eight rental assistance projects
                       and twenty housing developments funded with Housing
                       Opportunity Program funds. We judgmentally selected the largest
                       rental assistance program for review. This program, The Colorado
                       AIDS Project, received about $1,018,103 from 1992 through 1997.

                       In addition, we selected the two project sponsors identified in the
                       complaint. Each project sponsor had three projects. We also
                       judgmentally selected two additional project sponsors.

                       Our audit generally covered the period January 1, 1992 through
Scope                  September 30, 1998, and was extended as necessary to fully
                       accomplish our objectives. We performed our field work from
                       November 1998 through May 1999. After the completion of field
                       work, we discussed our tentative findings with City Officials.
                       Subsequently, City officials began taking actions to address issues
                       identified in this report. We have incorporated those actions, as
                       appropriate, in this report.
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                      We conducted the audit in accordance with generally accepted
Generally Accepted
                      government auditing standards.
Government Auditing
Standards




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Findings
Finding 1

Improvement Needed in the City’s Oversight and
Monitoring of HUD Program Activities

The City needs to improve its oversight and monitoring of its HUD funded projects to
ensure that project sponsors carry out their project activities in conformity with the
applicable HUD requirements. This is particularly true since many of the sponsors
acquired and/or rehabilitated projects using more then one HUD funded programs.
Accordingly, units within each project may be controlled by different HUD program
requirements. Our review of seven judgmentally selected projects identified that the
program sponsors were not fully complying with the appropriate HUD funding program
requirements. Improved City oversight and monitoring is needed, if the City and HUD
are to have assurances that Federally funded projects are being properly administered.
In the past, the City relied primarily upon the project sponsors to ensure compliance
with specific HUD program requirements. Also the City monitoring has been through
informal contact with project sponsors.


                             Our review focused primarily on the City and County of Denver’s
 City and project sponsors   implementation of the Housing Opportunity for Persons With AIDS
 are to comply with HUD      program. This is one of several HUD programs and projects that
 program requirements        the City and County of Denver administers. The City uses a
                             combination of several Federal, local and private funding to
                             implement and carryout its various housing projects and programs.

                             The primary HUD programs consist of the Housing Opportunity
                             for Persons with AIDS, HOME, Rental Rehabilitation, Community
                             Development Block Grant, and HUD housing subsidies. The
                             implementation and administration of these HUD programs by the
                             City is for the most part passed on to various project sponsors and
                             subgrantees. These sponsors and subgrantees are to carryout their
                             particular projects and programs in conformity with the terms of
                             the contract with the City. In addition, they are obligated to ensure
                             that the particular HUD program requirements are followed. In
                             like manner, the City has the overall responsibility for ensuring that
                             the Federal requirements for the various HUD programs and
                             projects are met.



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                            The City’s responsibility is defined in Section 85.40 of Title 24, of
                            the Code of Federal Regulations. The City as grantee for the
                            HUD funds is obligated to properly manage the day-to-day
                            operations of HUD grant and subgrant supported activities. The
                            City must monitor these supported activities to assure compliance
                            with applicable Federal requirements and that performance goals
                            are being achieved. City monitoring must cover each program,
                            function or activity.

Seven projects reviewed     We reviewed seven projects that had received funding under the
were not fully complying    Housing Opportunities for Persons with AIDS program. Our
with HUD requirements       review was directed at evaluating whether the sponsors were
                            administering their projects in accordance with HUD program
                            requirements.

                            We found several areas whereby the project sponsors were not
                            carrying out their portions of the City’s program in accordance
                            with HUD requirements. The main areas of noncompliance
                            include the following four areas:

                                •   Four of the seven project sponsors received contract rents
 Project sponsors charged           in excess of the agreement with the City or other source of
 excess contract rents              assistance. As a result, program participants, other
                                    programs, and/or HUD pay excessive rent. The City did
                                    not have procedures to ensure that project sponsors
                                    charged appropriate contact rents. (Finding 2)

                                •   The Colorado AIDS Project staff did not always document
 Colorado AIDS Project              the eligibility of the participants, their need for rental
 improperly administering           assistance, or ensure that landlords received the rental
 HUD program funds                  payment. In addition, the Colorado AIDS Project provided
                                    rental assistance for a longer period then allowed by the
                                    regulation. As a result, neither HUD nor the City can be
                                    assured that assistance went to eligible participants. From
                                    our sample of 74 case files reviewed out of a total of 948,
                                    at least $37,857 was paid for ineligible rental assistance.
                                    The Colorado AIDS Project did not implement procedures
                                    to ensure that rental assistance was paid to only eligible
                                    persons. In addition, the City amended their agreement
                                    with the Colorado AIDS Project allowing for excessive
                                    rental payments. (Finding 3)

                                •   A project sponsor used Housing Opportunity for Persons
 Questionable use of                with AIDS and/or Rental Rehabilitation program funds for
 $80,330 HUD funds to               refinancing of existing acquisition debt, which is not
 refinance an existing              authorized in the HUD regulations. As a result, these
 project acquisition debt           HUD program monies totaling $80,330 were used for a
                                    questionable activity. A City official considered the
                                    refinancing as an eligible HUD funded activity. (Finding 4)

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                           One of the seven projects inspected failed to meet the HUD
Project did not meet       Housing Quality Standards. Consequently, tenants were exposed
HUD Housing Quality        to safety, security and health hazards. The City did not perform a
Standards                  Housing Quality Standard inspection of the project after the
                           rehabilitation work was completed. Subsequent to the
                           rehabilitation, the City did not routinely perform Housing Quality
                           Inspections of the projects even though the projects must met and
                           conform with the requirements for a 20-year commitment period.
                           (Finding 5)

                           In addition to these areas, we noted several other instances
                           whereby the project sponsors were not fully complying with the
                           HUD requirements of the Housing Opportunity for Persons with
                           AIDS program. These involve:

                           •   Delays in rehabilitation of an acquired project by a project
                               sponsor,
                           •   Under utilized vacant program units,
                           •   Units and related funding of specific HUD funded programs
                               not clearly identified, and
                           •   Questionable use of commercial rental income.

                           These are discussed in the following sections.

                           Delays in Project Rehabilitation A project sponsor acquired the
After 2 years, project     Gates property on April 15, 1997, for $525,431. The project
rehabilitation has not     sponsor planned to rehabilitate the property into 14 studio
started                    apartments. The project sponsor agreed in their March 31, 1997
                           loan agreement with the City, that it had 19 months from the date
                           of the note to obtain financing to enable the redevelopment of the
                           property. However, the City, when it provided $485,000 for the
                           acquisition of the property, expected that by November 1, 1998 the
                           property would be rehabilitated and ready for occupancy.

                           As of January 1, 1999, the project sponsor had raised about
                           $1,934,531 of the estimated $2,277,727 needed for rehabilitation.
                           The project sponsor had not started the rehabilitation as of March
                           3, 1999 and was still short about $343,196 for the rehabilitation.

                           As a result, over two years have elapsed since the City provided
                           the $485,000 funding for acquisition and the project is not ready to
                           house any program eligible recipients.

                           Under Utilized Vacant Program Units Our physical inspection
Program units vacant due   of seven projects, comprising of a total of 30 units allotted for
to lack of eligible        Housing Opportunity for Persons with AIDS program, identified
applicants                 that five projects had a total of 5 vacant units. All the vacant units,
                           with the exception of one which needed to be cleaned, were ready
                           for occupancy by eligible program recipients. However, the

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                            project sponsors advised us that they did not have any eligible
                            applicants available to move in to these units. As a result, the units
                            were not being utilized.
                            The City did not have procedures to ensure vacant units were
                            being utilized and rented in a timely manner. The responsibility for
                            leasing vacant program units rests with the project sponsors

                            Specific Program Funding and Related Units Unclear The
Specific program funding    City combined funding from various HUD and local sources to
and related units not       finance the acquisition and rehabilitation of its various housing
clearly identified.         projects. The amount of HUD funding by a specific program
                            determines the number of units within a project that are assigned
                            and applicable to that particular HUD program. The leasing of the
                            assigned units within a project is governed by the program
                            requirements and regulations of the specific funding program.
                            Under a contract with the City, the project sponsor is to maintain
                            the established number of units in the project for a particular
                            program for a 20-year period.

                            Our review noted that the project sponsors do not routinely identify
                            which dwelling units are assigned to and applicable to specific
                            HUD programs. The only method to identify a specifically
                            assigned unit is to question the project sponsor. Without knowing
                            what project dwelling units relate to a particular HUD, the City is
                            limited in being able to ensure that the project sponsor is properly
                            administering the appropriate HUD requirements.

                            Unrestricted Use of Commercial Rental Income One of the
City did not restrict the   seven projects inspected contained rented commercial space. The
use of commercial rent      restrictions placed upon the project by the City under its contract
from a project              with the project sponsor do not address how a project sponsor can
                            use the rental income generated by commercial space rehabilitated.
                            The project was acquired and rehabilitated using HUD Housing
                            Opportunity for Persons with AIDS program, HUD HOME
                            program monies and Low Income Housing Tax Credits. The
                            HUD regulations for these two programs do not discuss how
                            monies generated from rehabilitated commercial space may be
                            used.

                            The project sponsor current rental income from the commercial
                            space amounts to $4,392 per month or $52,704 annually. The
                            rental amount does not include one commercial space that is
                            vacant.

                            Therefore, specific guidance from HUD is needed to determine if
                            the commercial rents is program income and how the commercial
                            rental income can be used.



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                           Our review of seven selected HUD funded projects shows key
Neither HUD or the City    areas where HUD requirements have not been followed by the
knew if project sponsors   project sponsors or the use of HUD program generated revenue
complied with program      may not be properly used. As a result, the program monies may
requirements               not be used for the intended purposes. The need for compliance
                           becomes more significant since the project sponsors are obligated
                           by contract with the City to operate the projects in accordance
                           with HUD and City requirements for twenty years.

                           City officials advised that they relied on the project sponsors to
City relies on project     comply with the appropriate requirements. In addition, the City
sponsors for program       generally performed monitoring through informal contact with its
compliance                 program sponsors or through meetings, correspondence, and day-
                           to- day management. The official advised that the City monitors
                           programs individually, and does not consider the multiple funding
                           sources when monitoring a project or its sponsor. The City’s
                           management information system did not provide easily accessible
                           information on the projects funding sources and related program
                           requirements.

                           City official advised that in the past they relied on HUD’s on-site
                           reviews to identify weakness in their monitoring activities. Since,
                           HUD reduced its monitoring activity, they must now rely on
                           HUD’s technical assistance for specific questions.

                           City officials also advised that they were in the process of updating
The City initiated
                           their monitoring procedures. According to the Director of the City
corrective actions
                           of Denver’s Community Development Agency, the Agency began
                           taking actions after our discussion of the tentative findings at the
                           completion of our on-site review. Specifically:

                           •   The Agency hired a consultant to integrate its various data
                               bases and set up a monitoring module to ensure programs and
                               projects receive appropriate monitoring.
                           •   The delayed project has received the additional funding and
                               should be in operation by the end calendar year 2000.
                           •   The City is taking action to ensure the commercial rents from
                               the project are being used for that project and not other
                               projects.

                           With the implementation of improved, more comprehensive City
                           monitoring of its project sponsors, the City will be better able to
                           ensure that its HUD program grants are being used utilized and
                           that its program sponsors are fully complying with the applicable
                           HUD program requirements as well as with the City’s contract
                           provisions.

                           The City Community Development Agency Director’s written
Auditee Comments
                           comments reiterated the comments above. The Director also

                                                                                                 9
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                  noted that additional outreach is being performed to market vacant
                  units.

                  The Director disagreed that the commercial rents should be
                  included as program income under Federal regulations.
                  Furthermore, the Director advised that the income from the
                  commercial units is not net profit, but rather income that is used to
                  pay off debt related to improvements made to the commercial
                  portion of the building.

                  We disagree with the Director position. As stated above, specific
                  guidance from HUD is needed to determine if the commercial
                  rents is program income and how the commercial rental income
                  can be used. The project sponsors have a twenty year
                  commitment with the City to operate the project. We want HUD
                  and the City to ensure that the revenues generated, as a direct
                  result of Federal assistance, to this project are used for the benefit
                  of the project.


Recommendations   We recommend that the Rocky Mountain Office of Community
                  Planning and Development:

                  1A. Require the City:

                        •   Improve it oversight procedures and monitoring system
                            of its subgrantees that will include evaluating projects
                            based on the combined HUD programs’ restrictions;

                        •   Implement procedures for identifying specifically
                            assigned units within its projects that are applicable to
                            the particular HUD program funding and for the prompt
                            leasing of under utilized units within its projects to
                            appropriate program eligible tenants.

                        •   Provide appropriate guidance and assistance to the
                            project sponsor of the Gates property for the prompt
                            rehabilitation and leasing of the project.

                  1B. Make a determination whether the commercial rents
                      generated by a project is program income, and if so, provide
                      instructions to the City on the correct use of rental revenues
                      received from the leasing of HUD program acquired and/or
                      rehabilitated commercial space.

                  Recommendations relating to Findings 2 though 5 are listed with
                  their respective finding.



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Finding 2

Project Sponsors Charged Excess Contract Rents

Four of the seven project sponsors reviewed charged contract rents in excess of the
agreement with the City and County of Denver (City) or other source of assistance. As
a result, participants, HUD and other programs pay excessive rent. The overcharging
of contract rents stemmed primarily from the project sponsors not being fully
knowledgeable of the various requirements and restrictions applicable to the various
funding sources or contract restrictions applicable to their particular projects. In
addition, the City has not had effective monitoring procedures to ensure that project
sponsors charged appropriate contact rents.


                            In carrying out the City’s housing programs, the City combines
 Various funds sources      funds from various Federal, local, and private sources to acquire,
 used for City’s housing    rehabilitate and/or operate its housing programs. The Federal
 projects                   sources included various HUD programs and the Resolution Trust
                            Corporation. The HUD programs providing monies include the
                            Housing Opportunity for Persons with AIDS program, Rental
                            Rehabilitation program, HOME program, Community Development
                            Block Grant program, the Shelter Care Plus Program and Low
                            Income Housing Tax Credits.

                            In the development or establishment of the various multifamily
                            housing projects, the City combines funds from the various sources
                            available. Because of the layering of funds, certain number of
                            units within a project are often designated as being specifically
                            applicable to the particular program that provided the funding. The
                            Federal requirements applicable to the Federal program providing
                            the monies would apply to the designated housing units.

                            For example, a multifamily project consisting of six dwelling units
                            could be acquired and rehabilitated using both Housing Opportunity
                            for Persons with AIDS program and Rental Rehabilitation program
                            monies. Two units might be applicable to the Housing Opportunity
                            for Persons with AIDS and the remaining four units would be
                            applicable to the Rental Rehabilitation program. The Federal
                            regulations for each program would govern the administration and
                            operation of their designated units.




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                            As part of our review, we examined the contract rent being
Charging of contract        charged to tenants during February 1999 in seven judgmentally
rents reviewed at seven     selected projects. Contract rents are the monthly rental charges
projects                    assessed by the project sponsor against its housing tenants. We
                            noted that for four of the seven projects reviewed, some tenants
                            were being charged excessive contract rents.
                            The monthly contract rent that can be charged a tenant is
Contract rents vary by
                            dependent upon the regulations governing the particular program
funding source or
                            used for the designated units in the projects. For our test month of
contract
                            February 1999, the amount of contract rents could range from $478
                            to $835. These maximum monthly contract rent charges are
                            summarized by type of Federal program:

                            •   $478 for the HUD programs consisting of the Housing
                                Opportunity for Persons with AIDS, Rental Rehabilitation
                                program, HOME Program, and Shelter Care Plus program;
                            •   $538 for projects purchased from the Resolution Trust
                                Corporation; and
                            •   $835 for projects financed with Low Income Housing Tax
                                Credits under Internal Revenue Service requirements.

                            In addition, the City often specified in their contracts with the
                            various project sponsors that the contract rents were not to exceed
                            certain stated amounts. For two of the projects we reviewed, the
                            City contract set maximum rents of $176 and $293.

                            Of the seven projects we reviewed, four of the projects sponsors
Overcharging of contract    were charging in February 1999 monthly contract rents to its
rents by project sponsors   tenants and that in some cases exceeded the maximum rents
                            allowed by the particular funding program or set by contract with
                            the City. These four were the Jersey Street, California Street,
                            Logan Street and Corona Street projects.

                            The overcharges for these four are discussed in the following
                            sections.

                            Jersey Street Project The Jersey Street Apartments received
The Jersey Street project   $167,273 in HUD HOME funds and $80,000 in HUD Housing
sponsors charged            Opportunity for Persons with AIDS program funds from the City.
excessive rents             The HOME funds specify that two of the six units in the project
                            are to remain affordable to low income families. The Housing
                            Opportunity for Persons with AIDS program provisions stipulate
                            that the remaining four units must remain affordable to low income
                            persons eligible under the Housing Opportunity for Persons with
                            AIDS program. Under HUD program provisions, the maximum
                            monthly contract rent that could be charged in February 1999 could
                            only be $478.



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                           However, the Jersey Street project sponsor signed an agreement
                           with the City limiting rent on all units at the project. The
                           agreement specifies initial contract rent to begin at $150 a month
                           with annual increases amounting to no more than the annual
                           percentage increase in the Fair Market Rent for Section 8 Housing
                           in the area. Using the percentage rate increase for each year, the
                           contract rents in February 1999 for the project should have been no
                           more than $176 per month.

                           However, the contract rents charged to the project tenants exceed
                           the maximum allowed of $176 on four of the six units. The contact
                           rents charged on the four units ranged from $198 to $460. This
                           resulted in the project sponsor being overpaid in total by
                           approximately $754 a month. The remaining two units were
                           vacant during February 1999.

                           In addition, two of the tenants receive rental assistance from
                           HUD’s Shelter Care Plus Program. The excess rent charges
                           resulted in the Shelter Care Plus Program being charged an
                           overpayment of $289 per month.

                           California Street Project The California project received
The California Street      $94,921 in Housing Opportunity for Persons with AIDS, $59,871 in
project sponsor received   Rental Rehabilitation and $30,388 in Community Development
excessive rents            Block Grant program funds from the City. The City’s agreement
                           with the project sponsor stipulates that four of the five units must
                           remain available for persons eligible under the Housing Opportunity
                           for Persons with AIDS program.

                           Also for this project, the project sponsors signed an agreement with
                           the City limiting rent amounts. Specifically, the agreement
                           specifies rent for the one bedroom units to begin at $250 per month
                           and the three bedrooms to start at $375 per month as of April
                           1994. Allowable increases in these rents are to be restricted to the
                           annual rate of increase in the Section 8 Fair Market Rents.
                           Therefore, rents for our test month of February 1999 were not to
                           exceed $293 for the one bedroom units and $439 for the 3 bedroom
                           units.

                           The California Street Project contact rent assessed to its tenants in
                           February 1999 for the one bedroom units range from $350 to $470
                           per month and the rent for the three bedroom units were $833 per
                           month. These monthly contract rents exceeded the maximum of
                           $293 and $439 for the one bedroom and three bedroom units
                           respectively. As a result, the project sponsor was overpaid
                           approximately $1,238 for February 1999.

                           Moreover, four of the tenants receive rental assistance from other
                           HUD programs. Three received rental assistance under HUD’s

                                                                                             13
                                                                                  00-DE-259-1001


                            Section 8 Housing Assistants Program. Since the monthly contract
                            rent was too high, the amount of overpayment in Section 8 program
                            assistance to the project for the three tenants was $1,111 for
                            February 1999. A fourth tenant was receiving rental assistance
                            under the HUD Shelter Care Plus program. Again since the
                            monthly contract rent was too high, the amount of overpayment in
                            rental assistance to the project for the tenant was $127 for
                            February 1999. The combined overpayments in HUD rental
                            assistance totaled $1,238 for the month.

                            Logan Street Project The Logan Street project received
 Logan Street project       $121,000 in HUD Housing Opportunity for Persons with AIDS and
 sponsor charged            $115,000 in HUD HOME funds from the City. The project
 excessive contract rents   sponsor purchased the Logan Street property from the Resolution
                            Trust Corporation. As a result, the Resolution Trust Corporation
                            maximum contract rents applied to the Logan units.

                            All of the contract rents for the Logan Apartment building fall
                            within the limitations, with the exception of the 2 bedroom unit .
                            The two bedroom unit cannot be assessed a monthly rent charge of
                            more than $604. However, our review of rent charges for
                            February 1999 showed the project sponsor was charging $614 for
                            the two bedroom unit. The tenant is paying an excess of $10 per
                            month.

                            Corona Street Project The Corona Street property received
The Corona Street           $120,130 in HUD Housing Opportunity for Persons with AIDS
project sponsor charged     funding from the City. The City’s agreement with the project
excessive rents             sponsor stipulates that ten of the nineteen units in the project are to
                            remain available for persons eligible under this program. In
                            addition, the project sponsor purchased the project from the
                            Resolution Trust Corporation. Therefore, the contact rents for all
                            the units may not exceed the restriction imposed by the Resolution
                            Trust Corporation.

                            Five of the two bedroom units, that were designated for the
                            Housing Opportunity for Persons with AIDS program, were
                            charged in our test month of February 1999, more that the $604
                            limit stated in the Resolution Trust Corporations requirements.
                            These overcharges range from $1 to $37 per month. In total, the
                            overcharges amount to $80 per month.

                            Since the tenants were receiving rental assistance provided by the
                            HUD Section 8 Housing Assistance Program, the overcharge in
                            rental contract amount resulted in excess assistance payments
                            being paid by HUD.




                                                                                                14
                                                                                  00-DE-259-1001


                             In summary for February 1999, City housing program participants,
Excessive contract rents     as well as HUD and other programs, paid excessive amounts for
for project reviewed         contract rents to project sponsors. These overcharges ranged
totaled about $24,984        from one dollar to $540 a unit per month. We estimated that the
annually                     overcharges at these four projects for February 1999 totaled about
                             $2,082 or $24,984 annually.

                             The overcharging of contract rents by some of the project sponsors
Project Sponsors not fully   stems from one basic cause. The project sponsors in many
aware of restrictions on     instances do not fully understand the various program requirements
project contract rents       and restrictions required by the various funding source programs
                             applicable to their particular project. Instead of using the
                             applicable rental charge based upon the funding source program
                             applicable to their designated units, the project sponsors have
                             established monthly rental charges to its tenants on amounts that
                             were based upon fair market rents. At one project, the project
                             sponsor was not aware of the rent restriction specified in the City’s
                             contract with the project sponsor.

                             The City also relied upon the various project sponsors to charge the
City relies upon project     proper monthly rent to its housing tenants. No established
sponsors to comply with      procedures has been formulated by the City to perform any
contract rent provisions     comprehensive reviews or evaluations of the rental activities by the
                             sponsors to ensure that the applicable Federal program or City
                             requirements are being met. City officials stated that reviews have
                             been conducted at some projects but the reviews were based
                             solely upon an individual program rather than a review applicable to
                             all funding sources for the project.

                             We noted that the records maintained by the City do not readily
                             identify the various funding sources that were used for each of the
                             funded projects. Without this information, the City is hampered in
                             identifying the various program requirements and restrictions that
                             are applicable to its housing projects and to the various designated
                             units within the particular projects.

                             According to the Director of the City of Denver’s Community
The City initiated
                             Development Agency, the Agency began taking actions after our
corrective actions
                             discussion of the tentative findings at the completion of our on-site
                             review. Specifically, the City is in the process of working with the
                             various project sponsors to ensure that appropriate rents are
                             charged based on the various funding sources for the projects.

                             The City Community Development Agency Director’s written
Auditee Comments
                             comments, reiterated the comments above. The Director also
                             noted that the Community Development Agency has moved
                             forward to establish a fully staffed monitoring section within the
                             existing compliance department. Monitoring staff will be
                             responsible for performing annual site visits to review source file
                             data for all organizations receiving funding from the agency.
                                                                                                   15
                                                                       00-DE-259-1001



                  The Director disagreed with our rent computation related to the
                  Resolution Trust low-income rents for a two-bedroom unit in
                  February, 1999. Specifically, the rents could be as high as $637
                  rather than the $604, we identified, according to Colorado Housing
                  Finance Association records available at the management agent.

                  We obtained our rent schedules directly form the Colorado
                  Housing Finance Association. The identified disagreement clearly
                  reiterates our position and recommendations. Specifically, that
                  HUD and the City provide instructions and directions to the project
                  sponsors as to the correct contract rent to be assessed for its
                  various dwelling units based upon the various funding sources used
                  for the particular projects and requirements for the particular
                  funding


Recommendations   We recommend that the Rocky Mountain Office of Community
                  Planning and Development require the City and County of Denver:

                  2A.     Provide instruction and direction to each of its project
                          sponsors as to the correct contract rent to be assessed for
                          its various dwelling units based upon the various funding
                          sources used for the particular projects and requirements
                          for the particular funding sources.

                  2B      Require the project sponsors to review their assessment of
                          contract rents of all their tenants to determine if the proper
                          contract rent has been assessed and to made any
                          adjustments accordingly.

                  2C      Review the action taken by the various project sponsors
                          under recommendation 2B to ensure that the appropriate
                          corrective action has been taken.

                  2D      Establish and implement an effective monitoring system for
                          reviewing the assessment of contract rents by the project
                          sponsors to ensure that the appropriate program
                          requirements are being followed.




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Finding 3

Colorado Aids Project Improperly Administering HUD
Program Funds

Since May 1993, the City and County of Denver has provided to the Colorado AIDS
Project approximately $1.018 million in funds under the HUD Housing Opportunity for
Persons with AIDS (hereinafter referred to the Housing Opportunity Program). At least
$862,935 of this total was used to provide rental or mortgage assistance to 948
recipients. However, the Colorado AIDS Project has not properly implemented the
program in conformity with HUD requirements.

More specifically, the Colorado AIDS Project did not always document the eligibility of
the program participants , identify and support the need for rental or mortgage
assistance, nor ensure that landlords received the assistance payments. As a result,
neither HUD nor the City have assurances that assistance was paid to eligible
participants. In addition, the Colorado AIDS Project provided rental assistance in
excess of the 21-week maximum period a year specified by HUD regulation. Based
upon our case review sample of 74 out of the 948 recipients receiving assistance, at
least $37,857 was paid for ineligible assistance.

The Colorado AIDS Project failed to establish proper procedures to ensure that
assistance payments were made only in conformity with HUD requirements. Also, the
Project did not correctly verify and document the eligibility of the program recipients.
Therefore, questionable or ineligible payments were made.

The City’s monitoring of the project also did not ensure that the Colorado AIDS Project
provided assistance to only eligible persons and that the assistance went for rental or
mortgage payments. Moreover, the City of Denver amended their agreement with the
Colorado AIDS Project that allowed for ineligible excessive assistance payments.


                             The HUD Housing Opportunity for Persons with AIDS Program
  Housing Opportunity        (hereinafter referred to the Housing Opportunity Program)
  Program funds can be       provides monies to be used to assist eligible persons with housing
  used for rental or         assistance, including supportive services, that are designed to
  mortgage assistance        prevent homelessness. Eligible people are low income persons that
                             also are medically diagnosed with the Acquired Immunodeficiency
                             Syndrome (AIDS) or infected with the Human Immunodeficiency
                             Virus (HIV).




                                                                                            17
                                                                              00-DE-259-1001


                          During the period May 1993 through May 1997, the City of Denver
Housing assistance of
                          awarded about $1.018 million in Housing Opportunity Program
$862,935 has been
                          funds to the Colorado AIDS Project. The Colorado AIDS Project
provided to 948 persons
                          is a non-profit organization that provides support and financial
                          assistance to those that are medically qualified.

                          The Colorado AIDS Project has used a portion of the funds to
                          provide for salaries and overhead costs but the majority was used
                          for rental and mortgage assistance. Specifically, at least $862,935
                          of the $1.018 million, or about 84 percent, was used to provide
                          rental and mortgage assistance to 948 people during the period
                          January 1995 through November 1998.

                          In carrying out the HUD Housing Opportunity Program, the
Program assistance must   Colorado AIDS Project is obligated to follow the HUD program
meet specific             requirements set out in Section 574 of Title 24 of the Code of
requirements              Federal Regulations. Some key provisions to be followed by the
                          Colorado AIDS Project are:

                          •   Total family income is to be used as the basis for determining
                              rental or mortgage assistance;
                          •   Program recipients are to be in need of the specific rental or
                              mortgage assistance;
                          •   Assistance is not to be in excess of HUD contract or
                              regulatory limits;
                          •   Compensation is to be used solely for rental or mortgage
                              assistance; and
                          •   Program recipients are not permitted to receive duplicate or
                              excessive Federal assistance from other program or activity.

                          The Colorado AIDS Project established written policies or
                          procedures for administering its various programs. These are
                          outlined in their Case Managers Handbook. The handbook
                          provides guidance to case managers when determining the
                          eligibility for assistance and the limits for such assistance.

                          We wanted to know if the 948 people assisted with Housing
We reviewed program       Opportunity Program funds were eligible and received payments
eligibility for 74        according to HUD and the Colorado AIDS Project requirements.
participants              Therefore, we tested a judgmental sample of 74 of the 948 or
                          about 7.8 percent of the assistance provided to these people.

                          Our review identified that the Colorado AIDS Project could not
                          support rental and mortgage assistance payments were paid to
                          individuals that:

                          •   Were income ineligible,
                          •   Were in need of rental or mortgage assistance,
                          •   Were not in excess of the HUD’s regulatory limits,
                                                                                           18
                                                                                 00-DE-259-1001


                             •   Used the payments for rental or mortgage assistance, and
                             •   Were not already receiving Housing Opportunity Program or
                                 other rental or mortgage assistance.

                             In addition, we identified that the Colorado AIDS Project case
                             managers did not always follow their guidance and that the
                             guidance did not always comply with HUD’s requirements.

                             These areas are discussed in the following sections.

                             Questionable Income Eligibility HUD regulation at Section
The family must qualify      574.3 of Title 24 of the Code of Federal Regulations requires that
as low income                Housing Opportunity Program assisted person’s and their family
                             must qualify as low income. Specifically, HUD defines a low
                             income family as any individual or family whose annual incomes do
                             not exceed 80% of the median income for the area. HUD further
                             defines family as a household composed of two or more related
                             persons. Family also includes one or more eligible people living
                             with another person or persons who are determined to be important
                             to their care or well being.

                             Colorado AIDS Project Case Manager Handbook states that the
                             participant’s monthly income will be established by taking into
                             account the total household income from disability, employment,
                             and other sources. The handbook also states that if the participant
                             has a roommate the income of both may be considered.

                             Our review of 74 files identified that the Colorado AIDS Project
Sixty-six of 74 case files   calculates a client’s income based on verification of wages, social
did not identify income      security income, etc., for the individual alone. We identified that
from other family            only 8 of the 74 participant files contained documentation of
members                      appropriate family income .

                             For the remaining 66 recipients, the participant files contained
                             information which identified other family members living with the
                             participant, but no documentation as to their income or why, under
                             HUD regulations or the Project’s own procedures, their income
                             should or could be excluded. As a result, the Colorado AIDS
                             Project is unable to show the appropriate monthly income for 66 of
                             the 74 participants sampled.

                             Need for Rental or Mortgage Assistance Unsupported
Participants must pay a      HUD requires under Section 310(d) of Title 24 of the Code of
portion of the rent or       Federal Regulations that the participant pay a portion of the
mortgage payment             monthly rent or mortgage payment. Specifically, each person
                             receiving assistance must pay, including utilities, an amount which
                             is the higher of:



                                                                                              19
                                                                                00-DE-259-1001


                           •   Thirty percent of the family's monthly adjusted income
                               described in detail in Title 24, Section 813.102 of the Code of
                               Federal Regulations;
                           •   Ten percent of the family's monthly gross income; or
                           •   If the family is receiving payments for welfare assistance,
                               from a public agency, the portion of the payments that is
                               designated for housing costs.
                           •   The Colorado AIDS Project Case Managers Handbook
                               provided that Housing Opportunity Program funds will make up
                               the difference between 30 percent of the families adjusted
                               monthly income and the total monthly rental or mortgage
                               payment. The handbook did not include HUD’s specific
                               requirements for paying the higher of the three methods listed
                               above.

Participant’s portion of   Due to the lack of family income information, The Colorado AIDS
rent or mortgage           Project could not calculate the appropriate portion of the rental
payment could not be       payment for 66 of the 74 participants reviewed. Therefore, the
determined                 Project could not determine if the 66 participants were paying the
                           correct housing payments.

                           Possible HUD Limits Exceeded Under Section 574.320 of
Monthly rental/mortgage    Title 24 of the Code of Federal Regulations, HUD requires monthly
assistance is limited      assistance for an eligible person may not exceed the difference
                           between the lower of the rent standard or reasonable rent for the
                           unit and shall be no more than the published Section 8 Fair Market
                           Rent or the HUD-approved community-wide exception rent,
                           adjusted for the unit size. Also, the rent charged for a unit must be
                           reasonable in relation to rents currently being charged for
                           comparable units in the private unassisted market and must not be
                           in excess of rents currently being charged by the owner for
                           comparable unassisted units.

                           Colorado AIDS project established a maximum monthly assistance
                           of $400 per month. The handbook does not provide for assistance
                           limited by the Fair Market Rents nor is the assistance adjusted for
                           bedroom size.

                           Our review disclosed that 24 of the 74 files reviewed contained no
Assistance may exceed      rental or mortgage agreement. Therefore, we could not determine
HUD’s limit                the appropriate contact rent or mortgage payment. A Colorado
                           AIDS Project official advised that they recently changed their
                           policy to require a copy of the agreement in the files. Prior to this
                           policy the case manager just need to see the agreement.

                           As a result, we could not determine, for 24 participants, if the
                           actual contact rent or mortgage payment exceeded allowable
                           ceiling of the Fair Market Rent, based on bedroom size. Moreover,


                                                                                              20
                                                                               00-DE-259-1001


                           we could not determine if the actual assistance provided by the
                           Colorado AIDS Project exceeded HUD’s limit.

                           Possible Rental or Mortgage Payments Used for Other
Housing Opportunity        Purposes HUD requires under Section 574.310(a)(2) of Title 24
Program funds can be       of the Code of Federal Regulations that the grantee shall ensure
used for rental/mortgage   that grant funds will not be used to make payments for health
assistance                 services for any item or program.

                           The Colorado AIDS Project Case Managers Handbook also states
                           that any financial assistance provided will be paid directly to the
                           landlord or vendor.

                           For our sample of 74 participants, the Colorado AIDS Project
Housing Opportunity
                           issued 528 checks totaling $158,575. We reviewed the 528
Program payments may
                           canceled checks to determine if the payee and endorser agreed.
be used for questionable
                           For 13 of the 528 checks having a total of $3,679, we identified that
purpose
                           the payee of the check did not agree with the endorser of the
                           check. For example, one check was endorsed to a hair salon.
                           Accordingly, the Colorado AIDS Project’s rental or mortgage
                           payments may be used for some other unauthorized purpose.

                           The Colorado AIDS Project management advised that they
                           routinely give the check to the participants for delivery to the
                           landlords and assume that the checks were given to the landlords.
                           Under this procedure, the Colorado AIDS Project has no
                           assurance the payments are being used solely for their intended
                           purpose.

                           Assistance Period of Only 21 Weeks a Year Exceeded
HUD limits the number      Under HUD program requirements set out in Section 574.330(a)
of monthly assistance      of Title 24 of the Code of Federal Regulations, rental and mortgage
payments                   assistance is only to be provided to eligible program recipients for
                           no more that 21 weeks in any 52 week period.

                           The Colorado AIDS Project Case Managers Handbook provides
                           that a participant can receive no more then six monthly rental
                           assistance payments in their Colorado Aids Project Housing
                           Opportunity Program year. A Colorado AIDS Project official
                           advised that their program year started the first month a person
                           received assistance.

                           In addition, the City of Denver amended their agreement with the
                           Colorado AIDS Project to change the allowed rental assistance
                           from 21 weeks to 26 weeks a year. This change exceeds the
                           maximum assistance allowed by HUD regulations. Neither the
                           Colorado AIDS Project nor the City officials could explain why the
                           change was made nor who authorized the change.


                                                                                             21
                                                                            00-DE-259-1001


                          For our sample of 74 participants, rental payments beginning in
HUD limits the number     1995 were examined to determine if the Colorado AIDS Project
of monthly assistance     exceed the HUD limit of no more then 21 weeks of assistance in
payments                  any 52 week period. We identified that 36 of the 74 sample, or 48
                          percent, of the participants received payments that exceeded the
                          21 week limit. The number of overpayments received by
                          participants ranged from 1 to 8. In total, we identified 108
                          overpayments disbursed and these overpayments ranged from
                          $166 to $3,200 per participant.
                          As a result, the Colorado AIDS Project provided at least
                          $34,178.23 in ineligible rental and mortgage assistance to 36
                          participants.

                          Duplicate Assistance Provided Participants As stated above,
Recipients are not to     HUD requires that the participant pay a portion of their monthly
receive duplicate         rental or mortgage payment. Therefore, the participants should not
program assistance        receive duplicate assistance from any program or from more than
                          one HUD program.

                          The Colorado AIDS Project Case Managers Handbook states that
                          Housing Opportunity Program funds will not pay Section 8
                          payments or any subsidized housing.

                          We reviewed the rent rolls obtained during our review of selected
Some participants         Housing Opportunity Program projects and compared the names
received duplicate        and vendors to the Colorado AIDS Project program recipients. We
assistance benefits       identified one Housing Opportunity Program assisted rental project
                          where three participants were only required to pay 30 percent of
                          income in rent, but also received rental assistance from the
                          Colorado AIDS Project for the full contract rent. Therefore, these
                          three participants received assistance from two sources under the
                          same program. Moreover, their excessive assistance exceeded the
                          participants’ required monthly rental payment.

                          As a result, the Colorado AIDS Project provided participants with
                          rental assistance, when the participant were already receiving
                          Housing Opportunity Program funding.

                          Due to these deficiencies, neither HUD nor the City of Denver can
Neither HUD or the City   be sure that the Colorado AIDS Project provided rental assistance
assured Colorado AIDS     payments to persons that:
Project provided
appropriate assistance    •   Were income ineligible,
                          •   Were in need of rental or mortgage assistance,
                          •   Were not in excess of the HUD limits,
                          •   Used the payments for rental assistance, and
                          •   Were not already receiving Housing Opportunity Program
                              assistance or other rental assistance.


                                                                                         22
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                            Moreover, we identified that the Colorado AIDS Project provided
Colorado AIDS Project       at least $37,857 in ineligible Housing Opportunity Program
provided at least $37,857   payments, because the payments exceeded the 21 week limit in a
of ineligible assistance    52 week period or the checks were not cashed by the payee.

                            These deficiencies were caused from four basic problems. First,
Proper verification and     the Colorado AIDS Project failed to implement procedures to
administrative procedures   ensure that the requirements of the HUD Housing Opportunity
not followed                Program were properly established and implemented. Second, the
                            Case Managers Handbook, that is followed by the case managers
                            in determining the eligibility and administer the program, contained
                            provisions that were contrary to the HUD program requirements.
                            Third, the contract between the City and the Colorado AIDS
                            Project specified program provisions to be followed that exceeded
                            the HUD requirements. The fourth cause is the Colorado AIDS
                            Project did not properly verify and document the program eligibility
                            of the recipients.

                            Without proper controls and administrative procedures, the
                            Colorado AIDS Project has minimal assurance that the program
                            recipients are eligible for the HUD Housing Opportunity Program
                            and that the participants are being paid the correct rental or
                            mortgage assistance.

                            In addition to these four causes, the City’s monitoring did not
City did not ensure         ensure that the Colorado AIDS Project provided assistance to only
compliance with HUD         eligible persons and that the assistance went for rental payments.
requirements                The City advised that they routinely monitored the Colorado AIDS
                            Project. However, the City’s monitoring was not detailed enough
                            to identify the issues we found. The City also advised that they
                            rely on the project sponsor and their annual audit to identify
                            regulatory issues.

                            The City official also advised that HUD’s past monitoring provided
                            a basis to identify program weakness. However, HUD does not
                            routinely monitor the program and no system has been
                            implemented to identify regulatory concerns in the program
                            execution.

                            Furthermore, the City’s agreement with the Colorado AIDS
                            Project allowed for the excess payments. A City official advised
                            that they did not adequately review the agreement to ensure that it
                            complied with HUD’s requirements.

                            According to the Director of the City of Denver’s Community
The City began a regular
                            Development Agency, the Agency began taking actions after our
review of the Colorado
                            discussion of the tentative findings at the completion of our site
AIDS Project
                            review. Specifically, the City’s Community Development Agency
                            implemented a regular review of the Colorado AIDS project to
                            ensure compliance with HUD’s and the City’s requirements.
                                                                                             23
                                                                         00-DE-259-1001


                    The City Community Development Agency Director’s written
 Auditee Comments
                    comments reiterated the comments above. The Director also
                    noted that the Colorado AIDS Project is making every effort to
                    determine income and to identify family members. The subject
                    population tends to be quite transient and individuals do not always
                    have a steady source of income.
                    The Director also commented that the Colorado AIDS Project
                    staff now keep copies of leases and mortgage statements in clients'
                    files rather than in a separate master file which had previously
                    been the practice and according to Colorado AIDS Project staff,
                    they have always kept copies of leases/mortgage statements on file
                    and would have shown those document to the auditor, but were not
                    questioned about the existence of the documents.

                    We disagree with the statements from the Colorado AIDS Project.
                    The auditors ask for copies of the leases an or mortgage
                    agreements from the Colorado AIDS staff and were advised that
                    they recently changed their policy to require a copy of the
                    agreement in the files. Prior to this policy the case manager just
                    needed to see the agreement. Moreover, the audit staff meet with
                    the Colorado AIDS Management and staff during and after the
                    completion of field work to discuss our results. At no point in these
                    meeting did the staff of the Colorado AIDS Project advise that
                    additional records were available.

                    The Director also commented that the participants may have a
                    roommate for one month or one week, live alone for a month and
                    then move in with someone for a month. In other words, they do
                    what they have to do to keep a roof over their head and often
                    times they try to help others who are in the same situation.

                    We applaud the work of the Colorado AIDS Project and
                    appreciate the difficulty in performing their work. However, as
                    stated in the finding, the assistance provided from Federal funds
                    and under HUD regulations require that eligibility and amount of
                    assistance be based on specific program requirements.



Recommendations     We recommend that the Rocky Mountain Office of Community
                    Planning and Development have the City:

                    3A.     Require the Colorado AIDS Project to implement proper
                            procedures and controls that will:

                            •   Correctly identify and support the income eligibility of
                                program recipients;
                            •   Correctly calculate the monthly assistance within
                                HUD established requirements;

                                                                                        24
                                                    00-DE-259-1001


        •   Ensure that assistance is actually provided for rental or
            mortgage payments;
        •   Provide assistance for only 21 weeks per year; and
        •   Ensure that duplicate assistance is not provided.

3B.     Require the Colorado AIDS Project to correctly determine
        the eligibility of its program recipients and adjust the
        amount of monthly assistance. Any over payments or
        excess assistance needs to be repaid to the City. This will
        include the $37,857 identified and discussed above in the
        finding.

3C.     Amend the City’s contract with the Colorado AIDS
        Project to ensure the contract complies with HUD
        program requirements.

3D.      Review the revised Colorado AIDS Project procedures
after they have been implemented to ensure their program is being
carried out in conformity with HUD and City requirements. This
would include ensuring that all excess or ineligible assistance is
properly determined and refunded to the City.




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                                           26
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Finding 4

Questionable Use of $80,330 HUD Funds to Refinance an
Existing Project Acquisition Debt

A project sponsor used Housing Opportunities for Persons with AIDS and Rental
Rehabilitation program funds for refinancing of an existing project acquisition debt,
which is not specifically authorized in the applicable HUD funding program regulations.
As a result, the use of HUD program funds totaling $80,330 are questionable as an
eligible program cost.

The project sponsor did not specify that HUD monies would be used to refinance an
existing debt in its application to the City but that the funds would be used only to
acquire and rehabilitate the project. At the time the City approved the sponsor’s project
application, the project sponsor had already acquired the project. Therefore, the monies
were used for purposes not delineated in the City approved application. Nonetheless,
City officials considered the refinancing to be an eligible HUD program cost. A
determination needs to be made by HUD as to its eligibility.


                             The City and County of Denver uses HUD monies coming from
 Monies from several
                             the Housing Opportunities for Persons With AIDS, Rental
 HUD programs used to
                             Rehabilitation Grant and HOME programs to fund some of its
 fund City housing
                             housing activities. The City provides the HUD monies to project
 activities
                             sponsors who acquire and rehabilitate a project that is used to
                             provide housing for eligible tenants. The conditions and
                             requirements relating to the use of the HUD monies differs
                             somewhat by the HUD program that is involved.

                             The refinancing of an existing acquisition or rehabilitation debt is
 Refinancing of an
                             not listed as an eligible activity for the Housing Opportunities for
 existing project debt is
                             Persons with AIDS (hereinafter referred to Housing Opportunity
 eligible under the HOME
                             program) program under Section 574.300 of Title 24 of the Code of
 program only
                             Federal Regulations, nor the Rental Rehabilitation Grant Program
                             under Section 511.10(f) of Title 24 of the Code of Federal
                             Regulations. However, the HOME program specifically includes
                             the refinancing of debt under Section 92.206 (b) of Title 24. More
                             specifically, the Home program regulations state that the cost to
                             refinance existing debt is an eligible activity, as long as the project
                             is being rehabilitated with HOME funds.




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                           A project sponsor submitted an application to the City and County
Project sponsor
                           of Denver for the acquisition and rehabilitation of the Humboldt
requested funding for
                           project. The sponsor requested $82,750 of Housing Opportunity
Humboldt project
                           program funds and $57,770 of HOME funding for the project. The
acquisition and
                           application indicated that only $62,550 of the $82,750 Housing
rehabilitation
                           Opportunity program monies and all of the $57,700 of HOME
                           funds would be used for the acquisition of the project.

                           On May 21, 1996 the City approved the project sponsor’s
City approved sponsor’s    application and awarded the project sponsor with a total of
application and provided   $159,144 in HUD funds. These funds consisted of $82,750 in
HUD funding                Housing Opportunity program monies and $76,394 in Rental
                           Rehabilitation funds, rather than the HOME program as set out in
                           the sponsor’s application to the City. City officials could not
                           provide any reason as to why Rental Rehabilitation monies were
                           awarded to the sponsor rather that the HOME program funds.
                           The project sponsor signed an agreement with the City for the
                           $159,144 on July 12, 1996.

                           In a July 29, 1996 letter to the City, the project sponsor stated the
                           following planned funding sources and uses would be used for the
                           Humboldt project.

                                 FUNDING SOURCE                        USE          AMOUNT
                             Housing Opportunity for
                             Persons With AIDS Funds             Acquisition           $82,750
                             Rental Rehabilitation Program
                             Funds                               Acquisition           $33,041
                             Rental Rehabilitation Program
                             Funds                               Construction          $43,353
                             Bank Loan                           Acquisition           $50,000
                             Private Donation                    Construction          $66,400

                           In August 1996, the project sponsor requested and received all of
                           the $159,144 in HUD funds.

                           Subsequently, in October 1996, the project sponsor used $80,330 of
Sponsor used HUD           the $159,144 HUD funding to refinance a previous $165,750 bank
funds to refinance prior   loan into a new loan of $85,449.95. The previous loan was used to
project acquisition debt   acquire the Humboldt property on February 7, 1996, some three
                           months prior to the time when the City approved the sponsor’s
                           application to only acquire and rehabilitate the property. The
                           documentation relating to the $80,330 HUD program funds used to
                           refinance the $165,751 loan was unclear as to the exact amount of
                           Housing Opportunity program and Rental Rehabilitation program
                           funds that were used.




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                                                                                 00-DE-259-1001


                            In our discussions with the project sponsor, the sponsor told us that
                            they had planned to repay the bank loan once HUD funds were
                            received. In addition, a loan fact sheet used by the City to evaluate
                            the sponsor’s application identified that $115,791 of the $159,144
                            would be used to refinance the acquisition of the Humboldt
                            property. The City official responsible for the approval of the
                            funding advised us that they considered the refinancing an eligible
                            activity for the Housing Opportunity and the Rental Rehabilitation
                            programs.

                            In our opinion, the use of $80,330 in HUD funds to refinance an
Use of HUD program          existing acquisition debt is questionable as an eligible program cost
funds to refinance an       because:
existing acquisition debt
is questionable project
                            •   Neither Housing Opportunity program and Rental
cost
                                Rehabilitation program regulations specifically authorized
                                program funds to be used to refinance an existing debt; and
                            •   The application and subsequent correspondence relating to the
                                Humboldt project stated the HUD funds would be used to only
                                acquire and rehabilitate the project.

                            Had the City provided HOME program funds for the refinancing of
                            the existing debt, the cost would also be questionable since HOME
                            program monies were not used to rehabilitate the property.

                            In conclusion, a determination needs to be made by HUD as to
                            whether the refinancing of the existing project acquisition debt is
                            eligible under the specific funding program requirements.

                            The City Community Development Agency Director’s written
Auditee Comments
                            comments reiterated that the technically the activity was
                            refinancing. However, it was not to refinance a "seasoned loan"
                            that would allow the borrower to take money away from the table.
                            After funding was approved by the Community Development
                            Agency, a short-term bridge loan from the non-profit's line-of-
                            credit from a local bank was used to purchase the property. This
                            was done to expedite the process because the City funds could not
                            be made available in time to meet the closing date for the
                            purchase. It should be noted that in this housing market, a property
                            can be lost if the buyer does not close on the prescribed closing
                            date. Nearly all properties have several back up contracts. The
                            line-of-credit loan was not a long term loan and if it had been it
                            would have carried an interest rate that would have been so high,
                            the project would not have been financially feasible.

                            We appreciate the difficulty in acquiring properties for these
                            projects and the related problems with timing the various
                            applications and grant awards. However, as stated in the finding,
                            program monies are not specifically authorized in connection with

                                                                                                  29
                                                                         00-DE-259-1001


                  the refinancing of the existing acquisition debt. We will await the
                  opinion from the HUD Office of General Counsel to resolve this
                  issue.

Recommendations   We recommend that the Rocky Mountain Office of Community
                  Planning and Development:

                  4A.    Obtain a legal opinion from the Office of General Counsel
                         as to the eligibility of refinancing of the existing debt for the
                         Humboldt project with Housing Opportunity for Persons
                         with AIDS program and Rental Rehabilitation program
                         funds;

                  4B     Provide the appropriate instructions and guidance to the
                         City based upon the legal decision. If the legal decision is
                         that program monies cannot be used in connection with the
                         refinancing of the existing acquisition debt, require the City
                         to reimburse the HUD programs from non-Federal funds
                         and to submit the appropriate evidence of repayment to
                         HUD.




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                                                                                  00-DE-259-1001


Finding 5

Project Did Not Meet Housing Quality Standards

One of seven HUD funded projects we inspected failed to meet the specific HUD and
City required Housing Quality Standards. Consequently, tenants and their children
were exposed to safety, security and health hazards. The deficiencies in the Housing
Quality Standards went undetected since the City did not perform a Housing Quality
Standards inspection after completion of the project’s rehabilitation. In addition, the
City does not perform regularly scheduled inspections to insure the project sponsor
continues to maintain the project within the required Housing Quality Standards during
the 20 year commitment of the project. Without such inspection procedures, the City
has limited assurance the HUD funded projects and their dwelling units meet HUD’s
required Housing Quality Standards.


                             HUD awarded several program grants to the City and County of
 The City awarded HUD        Denver to be used in carrying out the City’s housing program.
 funds to project sponsors   HUD grant funds were provided under the HUD Housing
                             Opportunities for Persons With AIDS program, HUD Rental
                             Rehabilitation program and/or HUD HOME program. HUD
                             monies were combined by the City with other non-Federal funds to
                             finance the acquisition and rehabilitation of several housing projects
                             consisting of six or more dwelling units.

                             The acquisition and rehabilitation of the projects as well as the
                             subsequent operation of the projects are to be performed by
                             independent project owners or sponsors under agreements with the
                             City and County of Denver. These agreements require the project
                             sponsors to operate the projects in conformity with the applicable
                             HUD program requirements for a period of twenty years.

                             Under the provisions of the HUD program grants, the acquired and
 HUD requires that the       rehabilitated projects as well as their subsequent operation must
 project meet minimum        meet certain Housing Quality Standards. These standards are
 habitability standards      specified in the applicable program sections of Title 24 of the Code
                             of Federal Regulations. Basically, the Housing Quality Standards
                             require:

                             •   Structures must be structurally sound and pose no hazard to
                                 the tenants,
                             •   Project must afford adequate security for tenants and their
                                 belongings, and
                             •   Project must be maintained in sanitary condition.



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                                                                                 00-DE-259-1001


                           A City inspector told us that the City uses the Section 8 Housing
                           Quality Standards as the basis for their inspection of project units.
                           In addition, assisted units under the Housing Opportunity for
                           Persons with AIDS program and non-program assisted units must
                           meet their Housing Quality Standards.

                           We physically inspected seven projects that had been acquired and
One of seven project did
                           rehabilitated with HUD program funds for compliance with the
not meet Housing Quality
                           required Housing Quality Standards. This involved judgmentally
Standards
                           selecting and inspecting forty seven of the seventy-nine units in the
                           seven projects.

                           We found that six of the projects meet the HUD Housing Quality
                           Standards. However, the seventh project, which is referred to as
                           the Humboldt property, did not meet the standards. We identified
                           the following safety and health hazards relating to the exterior of
                           the Humboldt project:

                           •   A temporary electrical meter and outlets attached to the rear
                               fence and electrical outlets poses an electrical hazard to
                               tenants and the children that played in the enclosed area behind
                               the project.
                           •   Gas meters located on the driveway with no barriers to prevent
                               damage to the gas lines and meters from cars parking in the
                               driveway.
                           •   Garbage and old furniture in the rear area of the building
                               presenting a hazard to tenants and the children that played in
                               the area behind the project.
                           •   Access to the basements of the side units was only covered
                               with a plywood covering, allowing easy entrance to the
                               basement of the unit. Moreover, one tenant complained about
                               being robbed during the day and her family installed an alarm
                               system for the unit.

                           In addition, our inspection of all six units in the Humboldt property
                           identified the following Housing Quality Standard violations:

                           •   Garbage and building materials were not cleaned out of the
                               basement areas (two units),
                           •   Leaking water heaters (two units),
                           •   Exposed electrical wire (one unit) and
                           •   Cracked and leaking toilet (one unit).




                                                                                               32
                                                                                00-DE-259-1001


                           After our inspection, the project sponsor removed the temporary
Project sponsor removed    electrical meter and outlets attached to the rear fence of the
the electrical hazard      property. Thus, the electrical hazard was eliminated.

                           These deficiencies in the Humboldt project went undetected and
Tenants unnecessarily
                           uncorrected since the rehabilitation work was completed in August,
exposed to safety,
                           1996. The City did not performed any Housing Quality Standards
security and health
                           inspections of the project prior to our inspection. As a result,
hazards
                           tenants have been unnecessarily exposed to safety, security and
                           health hazards.

                           HUD monies totaling $159,144, comprising of $82,750 in Housing
HUD funding of             Opportunities for Persons with AIDS program funds and $76,394
$159,144 for the           in Rental Rehabilitation program funds, were used on the
Humboldt project is        acquisition and rehabilitation of the Humboldt property. Since the
questionable               rehabilitated project failed to meet HUD Housing Quality
                           Standards, the eligibility of the HUD funds is questionable.

Subsequent City            Subsequent to our project inspection, the City did perform its first
inspection found similar   Housing Quality Standards inspection of the Humboldt project on
Housing Quality            March 15, 1999. The City inspection was performed about two
Standards violations       and a half years after the Humboldt project’s rehabilitation was
                           completed.

                           The City inspector advised us that they also failed the six units in
                           the project. The City’s inspection identified similar failed items to
                           those we identified in our inspection. Moreover, the City identified
                           an ongoing problem with the project’s heating system. The City
                           inspector stated to us that the project sponsor will be required to
                           correct the Housing Quality Standards deficiencies. When the
                           violations are corrected, another inspection would be performed to
                           verify the problems are corrected.

                           The City did not perform a Housing Quality Standards review prior
                           to the tenants first moving into the rehabilitated projects.
Systematic City Housing    According to the City’s Housing Quality Standards inspector, no
Quality Standards          inspections were performed after the rehabilitation was completed.
inspections are not made   Instead, a City rehabilitation specialists performed a walk through
                           inspection of only the completed rehabilitation work. As a result,
                           inspections are not made of its HUD funded housing projects to
                           ensure that the properties meet the required Housing Quality
                           Standards.

                           In addition, the City’s does not have a specific procedures for
The City does not          performing regular scheduled inspections of its HUD funding
perform regularly          housing to ensure the properties and related units meet the Housing
scheduled inspections      Quality Standards. The City inspector informed us that depending
                           on the condition of the projects and units, inspections may be done
                           annually or less frequently, but no formal inspection schedule is
                           established. The inspector also told us that projects inspections are
                                                                                              33
                                                                                  00-DE-259-1001


                            scheduled on a non routine basis depending upon prior experience
                            with the project sponsors.

                            The City’s current procedures do not provided adequate assurance
 City lacks assurance
                            that Housing Quality Standards were met at the completion of the
 Standards are met during
                            rehabilitation work nor continue to meet the required standards
 life of its projects
                            over the 20 year life of the project.

                            According to the Director of the City of Denver’s Community
 The City initiated
                            Development Agency, the Agency began taking actions after our
 corrective actions
                            discussion of the tentative findings at the completion of our on-site
                            review.

                            The City Community Development Agency Director’s written
 Auditee Comments
                            comments disagreed that the City did not perform an inspection of
                            the property after completion of the rehabilitation work, but did
                            agree that the City did not perform its first annual inspection. The
                            Director commented that the tenants made inappropriate changes
                            to property and failed to remove their trash from the property. The
                            Director advised that they are working with the property
                            management agents to take a more active role in performing
                            regular site visits to the properties.

                            We disagree that the City performed an adequate inspection of the
                            property at the completion of construction work. Our inspection
                            identified two major safety issues that should have been identified
                            at the completion of the rehabilitation work. Specifically,

                            •     A temporary electrical meter and outlets attached to the rear
                                  fence and electrical outlets poses an electrical hazard to
                                  tenants and the children that played in the enclosed area behind
                                  the project.
                            •     Gas meters located on the driveway with no barriers to prevent
                                  damage to the gas lines and meters from cars parking in the
                                  driveway.

                            These items should, at a minimum, been identified by the City’s
                            inspection at the completion of construction.


Recommendations             We recommend that the Rocky Mountain Office of Community
                            Planning and Development:

                            5A.       Require the City establish and implement inspection
                                      procedures to ensure projects meet Housing Quality
                                      Standards after the completion of the rehabilitation and
                                      prior to the move-in of tenants;



                                                                                                 34
                                                 00-DE-259-1001


5B.   Require the City establish and implement a formal
      inspection scheduling and follow up procedures of its HUD
      funded projects to ensure its HUD funded projects
      conform to the required Housing Quality Standards for the
      20 year life of the projects;

5C.   Require the City have the Humboldt project sponsor take
      sufficient actions to correct the Housing Quality Standards
      deficiencies identified at the failed project; and

5D.   Evaluate that the City’s inspection procedures and
      scheduling are properly being implemented and that
      Housing Quality Standards deficiencies at the failed project
      are corrected.




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                                           36
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Management Controls
In planning and performing our audit, we obtained an understanding of the management controls that
were relevant to our audit. Management is responsible for establishing effective management
controls. Management controls, in the broadest sense, include the plan of 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 systems for measuring, reporting, and monitoring program performance.


                                We determined the following City and County of Denver’s
 Management controls            (hereinafter referred as City) management controls were relevant
 assessed                       to our audit objectives:

                                •   Grant oversight of the Housing Opportunity for Persons with
                                    AIDS grant recipients;
                                •   Rents charged to participants by the grant recipients;
                                •   Grant funds were expended for eligible recipients and
                                    activities; and
                                •   Assisted units met the minimum Housing Quality Standards.

                                The following audit procedures were used to evaluate the
 Assessment procedures          management controls:

                                •   Interviews with City officials and grant recipients;
                                •   Review of the City’s HUD program award and monitoring
                                    files;
                                •   Review of grant recipients records on eligibility of participants
                                    and use of grant funds;
                                •   Physical inspection of a sample of grant projects assisted with
                                    Housing Opportunity for Persons with AIDS grants; and
                                •   Evaluation of HUD’s and the City’s established policies and
                                    procedures for implementing the Housing Opportunity for
                                    Persons with AIDS Program.

                                A significant weakness exists if management controls do not give
 Significant weaknesses         reasonable assurance that resource use is consistent with laws,
                                regulations, and policies; that resources are safeguarded against
                                waste, loss, and misuse; and that reliable data is obtained and
                                maintained, and fairly disclosed in reports. Based on our audit, we
                                identified the following significant weaknesses:

                                •   The City did not adequately monitor grant recipients for
                                    program compliance (Finding 1);


                                                                                                   37
                                                     00-DE-259-1001


•   Program grantees did not ensure program recipients were
    charged appropriate rents (Finding 2);
•   Program grantees did not ensure that grant funds were
    furnished to eligible persons or that the grant assistance did not
    exceed specifically allowed amounts (Finding 3),
•   Program grant funds were used for questionable activities,
    (Finding 4); and
•   The City did not ensure that all program assisted units meet the
    minimum Housing Quality Standards (Finding 5).




                                                                   38
                                00-DE-259-1001




Appendices
Appendix 1 - Auditee Comments




                                           39
00-DE-259-1001




           40
00-DE-259-1001




           41
00-DE-259-1001




           42
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Appendix 2 - Schedule Of Questioned Amounts


           Finding        Ineligible Amount (1)       Unnecessary Cost (2)
              1                                                  (a) 52,704
              3                             $37,857
              4                                                      80,330
               Total                        $37,857                $133,034
           (a) amount of annual commercial rents


    Questioned costs include ineligible costs, unsupported costs, and
    unnecessary/unreasonable costs:

    1. Ineligible costs are those that are questioned because of an alleged violation
       of a provision of a law, regulation, contract, grant, cooperative agreement, or
       other agreement or document governing the expenditure of funds.
    2. Unnecessary costs are those which are not generally recognized as ordinary,
       prudent, relevant, and/or necessary within established practices.
       Unreasonable costs exceed the costs that would be incurred by the ordinarily
       prudent person in the conduct of a competitive business.




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Appendix 3 - Audit Distribution List

City and County of Denver
Assistant Secretary for Community Planning and Development, Room 7100
Director, Office of HIV/AIDS, Room 7154
Secretary’s Representative, 8AS (2)
Deputy Secretary, SD, Room 10100
Chief of Staff, S, Room 10000 (2)
Office of 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
Deputy Assistant Secretary for Public Affairs, W, Room 10222
Counselor to the Secretary, S, Room 10234
General Counsel, C, Room 10214
Office of Policy Development and Research, R, Room 8100
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7106
Chief Procurement Officer, N, Room 5184
Chief Information Officer, Q, Room 3152
Chief Financial Officer, F, Room 2202
Deputy Chief Financial Officer for Operations, FF, Room 10166
Director, Office of Budget, FO, Room 3270
Departmental Audit Liaison Officer, FM, Room 2206
Headquarters Audit Liaison Officer, Housing, HF, Room 9116
Acquisitions Librarian, Library, AS, Room 8141
Director, Office of Information Technology, AMI, Room 160
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
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


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