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 This page intentionally blank 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. 00-DE-259-1001 This page intentionally blank ii 00-DE-259-1001 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. iii 00-DE-259-1001 • 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. iv 00-DE-259-1001 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. v 00-DE-259-1001 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. vi 00-DE-259-1001 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. vii 00-DE-259-1001 This page intentionally blank viii 00-DE-259-1001 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 ix 00-DE-259-1001 This page intentionally blank x 00-DE-259-1001 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. 1 00-DE-259-1001 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. 2 00-DE-259-1001 We conducted the audit in accordance with generally accepted Generally Accepted government auditing standards. Government Auditing Standards 3 00-DE-259-1001 This page intentionally blank 4 00-DE-259-1001 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. 5 00-DE-259-1001 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) 6 00-DE-259-1001 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 7 00-DE-259-1001 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. 8 00-DE-259-1001 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 00-DE-259-1001 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. 10 00-DE-259-1001 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. 11 00-DE-259-1001 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. 12 00-DE-259-1001 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. 16 00-DE-259-1001 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 00-DE-259-1001 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. 25 00-DE-259-1001 This page intentionally blank 26 00-DE-259-1001 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. 27 00-DE-259-1001 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. 28 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. 30 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. 31 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. 35 00-DE-259-1001 This page intentionally blank 36 00-DE-259-1001 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 00-DE-259-1001 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. 43 00-DE-259-1001 This page intentionally blank 44 00-DE-259-1001 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 45 00-DE-259-1001 This page intentionally blank 46
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)