AUDIT REPORT
URBAN EDUCATION DEVELOPMENT RESEARCH
AND RETREAT CENTER (UEDRARC)
PHILADELPHIA, PENNSYLVANIA
01-PH-241-1001
NOVEMBER 2, 2000
OFFICE OF AUDIT, MID-ATLANTIC
PHILADELPHIA, PENNSYLVANIA
Issue Date
November 2, 2000
Audit Case Number
01-PH-241-1001
TO: Joyce Gaskins, Director, Office of Community Planning and Development, 3AD
FROM: Daniel G. Temme, District Inspector General for Audit, Mid-Atlantic, 3AGA
SUBJECT: Audit of the Philadelphia Commercial Development Corporation’s (PCDC)
Funding of the Urban Education Development Research and Retreat Center
(UEDRARC) Rehabilitation Project
We completed an audit of PCDC’s loan assistance to UEDRARC, a non-profit entity which needed
financial help for a rehabilitation project. The audit included loan activity by PCDC and the
Philadelphia Industrial Development Corporation (PIDC). This report focuses on PCDC’s loan to
UEDRARC. The conditions we observed regarding the PIDC loan evaluation process, loan
servicing, and loan monitoring practices, are addressed in a separate report. Since Community
Development Block Grant (CDBG) funds were the source of the loan assistance, we wanted to
ensure the funds were used to meet a CDBG national objective. We also wanted to ensure that
PCDC used good business practices in making the loan, had effective controls for evaluating
requests for financial assistance, employed good loan oversight procedures, and took timely and
aggressive action to obtain loan recipient compliance with its loan requirements. Finally, we
wanted to assess the condition of the UEDRARC loan and determine UEDRARC’s present and
future financial capacity to meet the loan’s terms.
We determined that the CDBG funds loaned to UEDRARC for building rehabilitation met the
CDBG national objective of preventing or eliminating a slum and blighted condition. However,
despite meeting this national objective, we found that PCDC did not observe many of its procedures
in evaluating, authorizing, and servicing the loan. By not following prudent business practices and
its own loan evaluation and authorization procedures, PCDC unnecessarily jeopardized CDBG
funds totaling $550,000. The outcome is that PCDC now holds a severely non-performing loan
with little prospect the loan will become performing in the future.
Although we found PCDC had established controls for evaluating, authorizing, and monitoring its
loans, it appears PCDC did not follow these controls fully for the UEDRARC loan. PCDC needs to
document fully all waivers to its loan requests or procedures. Because PCDC violated its own
procedures and did not observe sound business practices for the UEDRARC Project, it put the
Management Memorandum
CDBG funds used for the loan at excessive risk. Therefore, in the event of a default by UEDRARC
which causes PCDC to write off the loan, we are recommending that the City of Philadelphia use
non-Federal funds to repay its CDBG Program for the loan portion written off as uncollectable.
Within 60 days please provide us with a status report on each recommendation made in this
report which covers: (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.
Should you or your staff have any questions, please contact Thad Staniul, Assistant District
Inspector General for Audit, at (215) 656-3401.
01-PH-241-1001 Page ii
Executive Summary
We completed an audit of the Philadelphia Commercial Development Corporation’s (PCDC)
funding of the Urban Education Development Research and Retreat Center (UEDRARC)
rehabilitation project. The objectives of the audit were to determine whether: Community
Development Block Grant (CDBG) funds were used to accomplish a national objective; the
UEDRARC Project met its objectives; and PCDC effectively administered the CDBG funds
provided to UEDRARC.
We noted positive effects from the UEDRARC Project. UEDRARC met a CDBG national
objective by eliminating a slum and blighted condition, and accomplished its mission to provide
an institutional environment encompassing programs designed to promote education, research,
employment training, and human development to serve the needs of Philadelphia’s African
American community. PCDC had designed good management systems and controls to provide
project oversight and to account for all the loan funds disbursed to the project. Despite having
these good controls, PCDC did not follow its own and HUD’s requirements, and did not use
prudent financial judgment in evaluating, approving, and administering its $550,000 loan to
UEDRARC - a high risk borrower. PCDC did not observe existing loan approval policies and
procedures; enforce its loan monitoring policy and procedures when administering the loan; and
take full advantage of available recourses when UEDRARC defaulted on its loan. As a result of
PCDC’s loan decision, it is likely PCDC will need to write off the loan to UEDRARC, depriving
other applicants of needed funds.
eral requirements. PCDC’s Board of Directors overruled their Vice President
PCDC Did Not Follow its
for Lending’s recommendation to reject the loan and
Loan Approval
bypassed their Loan Committee in providing the loan to
Procedures
UEDRARC. Based on the Office of Housing and
Community Development’s (OHCD) assurances of
UEDRARC’s financial viability and a Pennsylvania State
Senator’s encouragement, PCDC’s Board authorized the
loan. The State Senator, who was a member of both
PCDC’s and UEDRARC’s Boards of Directors, used his
influence in PCDC’s loan decision making process.
Despite individual Board members’ concerns, the Board
authorized the loan, featuring unusually favorable terms
including: a loan amount exceeding the $100,000
maximum amount, an interest rate of only 3½ percent, and
a 96 month moratorium on principal payments. Finally,
PCDC used a for-profit loan vehicle to provide the loan to
UEDRARC, a non-profit organization.
PCDC did not enforce its loan monitoring policy and
PCDC Did Not Monitor
procedures, and removed its loan officer from the loan
The Project
monitoring process. PCDC relied on the Philadelphia
Industrial Development Corporation (PIDC) to monitor the
Page iii 01-PH-241-1001
Executive Summary
loan because PCDC lacked the resources to monitor the
project and the PCDC loan was subordinate to the PIDC
loan. We evaluated PIDC’s monitoring process and found
it to be ineffective. Also, PCDC did not pursue
UEDRARC for annual financial statements required by the
loan agreement or a final audit of the project. UEDRARC
defaulted on the loan within a month of receiving loan
proceeds. As of March 13, 2000, UEDRARC had been
delinquent 50 of the 53 months of the loan term and was
$22,496.01 in arrears. PCDC never required UEDRARC to
prove it lacked the capability to make its loan payments.
PCDC did not take more forceful default action because of
outside pressure and the desire to see the project succeed.
The UEDRARC Project met a CDBG national objective by
UEDRARC Project Was
eliminating a slum and blighted condition and met its goal by
Not Financially Sound
creating an educational facility at its project location.
However, its ability to sustain this success is questionable.
UEDRARC currently lacks the resources to complete facility
renovations needed to increase revenue. Furthermore,
current operations do not generate sufficient revenue to cover
long term debt and operating expenses. During the 17
months ending May 31, 2000, UEDRARC experienced an
average monthly shortfall of $24,672.86 or a total of
$419,438.62 over the period. Due to its current financial
condition, it is unlikely that UEDRARC will be able to
obtain the funding for the remaining renovations. Without
this funding and the resulting increased revenue, it is
doubtful that UEDRARC will be able to repay its debt and
continue operations.
We recommended to HUD that PCDC comply with loan
Recommendations
approval and administration policies and procedures and
loan agreements; document the reasons for circumventing
existing policies and procedures when approving and
administering loans; and require UEDRARC to obtain an
audit of the construction project.
We also recommended that, if PCDC writes off the loan,
HUD direct the City of Philadelphia to repay, to the City’s
CDBG Program, with non-Federal funds, the loan portion
written off as uncollectable.
01-PH-241-1001 Page iv
Executive Summary
Finding and We discussed the results of our review with PCDC during
Recommendations the audit and at an exit conference on September 22, 2000.
Discussed By letter, dated October 4, 2000, the President/CEO of
PCDC provided a detailed response to the conditions and
recommendations discussed in the draft report. We have
included PCDC’s pertinent comments in the Finding Finding
Section of this report. PCDC’s full response is included in
Appendix
Appendix A.A
Page v 01-PH-241-1001
Executive Summary
(THIS PAGE LEFT BLANK INTENTIONALLY)
01-PH-241-1001 Page vi
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Finding
High Risk Borrower’s Repayment of CDBG
Funded Loan in Jeopardy 5
Management Controls 15
Follow Up On Prior Audits 17
Appendices
A Auditee Comments 19
B Distribution 23
Page vii 01-PH-241-1001
Table of Contents
Abbreviations
CDBG Community Development Block Grant
HUD US Department of Housing and Urban Development
OHCD Office of Housing and Community Development
PAID Philadelphia Authority for Industrial Development
PCDC Philadelphia Commercial Development Corporation
PIDC Philadelphia Industrial Development Corporation
SBRLF Small Business Revolving Loan Fund
UEDRARC Urban Education Development Research and Retreat Center
UEF Urban Education Foundation
01-PH-241-1001 Page viii
Introduction
UEDRARC was founded as a non-profit organization to acquire the property at 4601 Market
Street, rehabilitate the buildings, restructure the facility’s governance and management, and
attract appropriate new tenants. UEDRARC’s mission is to provide an institutional environment
in which programs designed to promote education, research, employment training, and human
development can serve the needs of Philadelphia’s African American community. UEDRARC is
governed by a 12-member Board of Directors having community, educational, civic, corporate,
and real estate development expertise.
In 1983, the Provident Mutual Life Insurance Company donated the property at 4601 Market
Street to the Urban Education Foundation (UEF) to develop an educational and training center
for West Philadelphia’s disadvantaged residents. In 1991, UEF filed for bankruptcy, State and
City officials were contacted to save the facility, and a reorganization plan was developed. The
reorganization plan provided for UEDRARC to purchase and redevelop the property.
UEDRARC, incorporated in 1991, was created to continue UEF’s goal of sustaining an
educational center at the 4601 Market Street location. On December 29, 1993, Meridian Bank
provided a $1.6 million loan to UEDRARC. UEDRARC agreed to pass the funds to UEF to pay
creditors and payroll, and to set up a loan interest reserve for UEDRARC. UEDRARC took
control of the property at that time but did not actually purchase the property until March 29,
1995.
The property required substantial physical improvements, including utility systems; heating,
ventilation, and air-conditioning systems; electrical systems; and asbestos removal. In April
1992, UEDRARC consultants estimated physical improvement costs at $4.55 million and
estimated the cost of total development efforts at $7.21 million. As work progressed, these
estimates increased due to additional renovation work and asbestos removal.
Funding for the UEDRARC Project came from several sources. From 1993 through 1997, the
Commonwealth of Pennsylvania provided two grants of $3.675 million through its
Redevelopment Authority Grant Program. PIDC provided six loans of $7.15 million, and PCDC
provided one loan of $550,000. PIDC and PCDC are funded through the City’s CDBG Program.
Also, Meridian Bank provided UEDRARC a $1.6 million loan. Funding from all sources totaled
$12.975 million ($6 million in HUD funds). UEDRARC used $4.1 million in subsequent loans
and grants to pay off earlier loans, which resulted in a net $8.875 million ($5.2 million in HUD
funds) in actual funding for the Project.
From 1995 through 1997, PIDC issued to UEDRARC three permanent loans totaling $4.65
million using CDBG and HUD Section 108 funds and three interim loans totaling $2.5 million
using CDBG and PIDC (City) funds. PIDC qualified using CDBG funds for UEDRARC
because the Project met the national objective of eliminating slum and blighted conditions.
PIDC disbursed its loan funds to UEDRARC based upon contractor invoices it received from
UEDRARC.
Page 1 01-PH-241-1001
Introduction
PCDC receives about $2.2 million a year in CDBG funding for operating expenses and loans. In
1993, the City of Philadelphia’s OHCD approached PCDC to fill the funding gap for the
UEDRARC Project. PCDC filled this gap by providing UEDRARC a $550,000 loan on March
29, 1995. The PCDC loan qualified for CDBG funding by meeting the elimination of slums and
blight national objective. PCDC disbursed its loan funds by issuing checks in the name of
UEDRARC and the contractor in response to contractor invoices received from UEDRARC.
In 1995, the Commonwealth of Pennsylvania provided two grants totaling $3.675 million to
UEDRARC through an agreement with the Philadelphia Authority for Industrial Development
(PAID), a division of PIDC. The Commonwealth provided its grants by reimbursing UEDRARC
based on UEDRARC proof of payments submitted to PAID and the Commonwealth. During
1997, the Commonwealth did a limited scope audit that included only one of the nine grant
disbursements it made to UEDRARC.
Even though UEDRARC had multiple funding sources, with funds delivered as loans and grants,
as reimbursements and advances, there was no overall audit done to cover all the funds provided
to the UEDRARC Project.
The primary objectives of the audit were to determine
Audit Objectives whether:
• UEDRARC:
− accomplished a national objective;
− was meeting its goals, could account for all funds
and used the funds for appropriate purposes; and
• PCDC:
− administered effectively its CDBG funds according
to applicable laws, HUD regulations, loan
documents, and other applicable directives;
− evaluated objectively the feasibility of the
UEDRARC Project, including:
♦ determining if the UEDRARC Project was
an effective use of CDBG funds; and
♦ determining if UEDRARC had the financial
wherewithal to sustain its operation long-
term.
01-PH-241-1001 Page 2
Introduction
− had management systems and controls to provide
effective oversight for the Project;
− monitored UEDRARC operation and rehabilitation
procedures;
− accounted for all funds provided for the Project;
− validated UEDRARC’s inability to make loan
payments; and
− took appropriate action to make loan payments
current.
We performed audit work from January 2000 to August
Audit Period 2000 and covered the period January 1992 through March
2000. We extended the review through June 2000 to
analyze UEDRARC’s more recent financial operating
condition.
We reviewed UEDRARC’s:
Audit Scope and
Methodology • compliance with the terms and conditions of the PCDC
loan agreements;
• consultant’s procedures and controls for tracking
construction costs and compiling bills during the
construction process to determine whether effective
controls were in place; and
• construction and operations’ accounting process to
determine whether UEDRARC accounted for all funds
received, used the funds for appropriate purposes, and
to determine UEDRARC’s current financial position.
We inspected the UEDRARC property and surrounding
area to: determine whether the project met its goals of
contributing to the community, becoming an anchor around
which other positive activities could generate, and
eliminating a slum and blight area in a section of West
Philadelphia; and identify benefits realized by the
community because of the UEDRARC activity.
Page 3 01-PH-241-1001
Introduction
We evaluated PCDC’s procedures and controls over its
loan approval, accounting, and loan monitoring processes
to determine whether they are effective and to ensure they
were used by responsible PCDC staff.
We reviewed the Commonwealth of Pennsylvania’s audit
of one of the nine grant disbursements made to UEDRARC
to determine the audit objectives, scope, and results. We
considered this information in formulating our audit scope.
We conducted our audit in accordance with generally
accepted government auditing standards.
01-PH-241-1001 Page 4
Finding 1
High Risk Borrower’s Repayment of CDBG
Funded Loan in Jeopardy
PCDC approved and administered a $550,000 loan to UEDRARC under its Small Business
Revolving Loan Fund (SBRLF) without observing its own and HUD requirements and did not
appear to use sound financial judgment in making the loan. Also, because PCDC did not have
resources to effectively monitor a project and loan the size of UEDRARC, PCDC relied on PIDC to
provide the necessary project oversight, which we later determined to be ineffective. Consequently,
PCDC holds a UEDRARC loan that is in default and has been delinquent 50 of the 53 months the
loan has been outstanding. Though the loan went into default, PCDC did not enforce loan default
procedures because of external pressure and a desire to see the project succeed. Finally,
UEDRARC’s difficult financial situation makes it impossible to satisfy its current loan
delinquencies and we are not optimistic regarding UEDRARC’s potential for becoming current in
the near future.
A. Loan Origination
The City of Philadelphia, through its Department of
SBRLF Funding and
Commerce, provides about $2.2 million in CDBG funds
Program Description
annually to PCDC for operating expenses and loans. PCDC
operates the SBRLF, among others. The purpose of the
SBRLF is to foster economic growth within the City of
Philadelphia by providing direct financial assistance to small
businesses for expanding their operations. PCDC makes
SBRLF loans to for-profit businesses to conduct economic
development projects that will create or retain jobs and
provide goods or services to benefit an area of mostly low and
moderate income persons. PCDC used $550,000 in SBRLF
funds to help finance UEDRARC.
PCDC’s general loan requirements prescribed that, “The
PCDC Loan Guidelines
applicant must possess the requisite experience to successfully
manage the business/project to be financed.” Further,
according to the SBRLF section of the guidelines, the
Department of Commerce and PCDC’s Loan Committee are
responsible for reviewing loan applications and approving the
loans. The guidelines stipulate that SBRLF loans were for the
benefit of “for-profit” businesses. Also, the guidelines limited
the maximum amount for SBRLF loans to $50,000 originally,
later increased to $100,000 by the time of the UEDRARC
loan. The guidelines allowed for exceptions to the dollar limit
“for special economic development projects with high job
Page 5 01-PH-241-1001
Finding 1
creation/retention prospects or strong community impact”.
The guidelines set 4½ percent as the SBRLF loan interest
floor.
PCDC did not observe several of its loan evaluation and
Loan Approval
approval procedures in originating the UEDRARC loan. For
Procedures Were Not
example, though the UEDRARC Board of Directors
Followed
includes professionals from various fields, there was no
evidence that they had the requisite background and skills
necessary to undertake a project such as UEDRARC.
Further, there was no evidence that PCDC evaluated the
UEDRARC Board members with the intent of establishing
their capabilities to undertake a project of this type.
PCDC’s loan application review process requires the Vice
President for Lending to review and recommend the project
for presentation to the Loan Committee. After evaluating
the UEDRARC Project’s request for funding, the PCDC
Vice President for Lending rejected the request because he
perceived cash flow problems. The PCDC Board of
Directors overruled their Vice President for Lending’s
recommendation. Further, the Board bypassed the Loan
Committee and any reluctance the committee may have had
to approve the UEDRARC loan, by taking the authority
upon themselves to make the loan. In fact, the Board
granted UEDRARC unusually favorable terms. The more
favorable loan terms included:
• an exception to the $100,000 maximum loan amount by
awarding UEDRARC a $550,000 loan.
• a loan interest rate of 3½ percent as opposed to the normal
5½ percent rate.
• a 96 month moratorium on loan principal payments when
other loan payments include interest and principal.
Finally, PCDC’s SBRLF loans are intended for for-profit
businesses, whereas UEDRARC is a non-profit entity.
Even though the PCDC Board of Directors awarded the loan,
Board Members
individual members had reservations. Members of the PCDC
Expressed Reservations
Board of Directors questioned UEDRARC’s ability to meet
Concerning Loan
operating expenses for the building, let alone the additional
debt service burden for the project. In reviewing the
01-PH-241-1001 Page 6
Finding 1
application, the Board members noted that the prior owner of
the Project, who had similar aspirations for the building,
failed because the rent revenues generated were not sufficient
to cover the building’s high maintenance and operating
expenses. They questioned what had changed so drastically to
improve matters since the prior owner went into bankruptcy.
HUD Regulations at 24 CFR Part 85.12 recognized that
special provisions should be made for high risk recipients of
CDBG funds, and the UEDRARC Project clearly fell into this
category. HUD defined “high-risk” grantees as having a
history of unsatisfactory performance or being financially
unstable. These provisions include: payment on a
reimbursement basis; additional, more detailed financial
reports; and additional project monitoring. The UEDRARC
Project may have received heightened scrutiny because of the
risk, but this caution was eventually overcome.
To assuage Board member concerns, representatives of the
OHCD assured the PCDC Board that they had reviewed
UEDRARC’s financial information to support the loan
request and found it reasonable. Also, a Pennsylvania State
Senator, a member of PCDC’s and the applicant’s
(UEDRARC) Board of Directors, appealed to PCDC to find a
way to do the project rather than finding ways to turn it down.
Despite the reservations noted earlier, PCDC’s Board of
Directors ultimately approved the UEDRARC loan, but not
until OHCD agreed to increase PCDC’s level of CDBG
funding by the $550,000 loan amount.
The Pennsylvania State Senator planned to maintain a
Conflict of Interest
Senate office and a support office in the UEDRARC
building. PCDC asked the Philadelphia Divisional Deputy
City Solicitor for a legal opinion on this situation. The
Deputy City Solicitor stated that there was no conflict of
interest, provided UEDRARC leased the space at fair market
rents with comparable commercial terms, and the Senator
did not involve himself in the loan approval process.
Although the State Senator abstained from voting on the
project, he actively participated in the discussion preceding
PCDC’s Board of Directors’ vote. Though the Senator
eventually rented office space in the UEDRARC building at
rates comparable to other tenants, he clearly did not
disengage himself from the loan approval process.
Page 7 01-PH-241-1001
Finding 1
B. Loan Monitoring
HUD Regulations at 24 CFR Part 85.40 require that grantees
HUD Loan Monitoring
monitor grant and subgrant supported activities to assure
Requirements
compliance with applicable Federal requirements and that
performance goals are being achieved. HUD Regulations at
24 CFR Part 570.501 stipulate that the grant recipient is
responsible for ensuring that CDBG funds are used in
accordance with all program requirements. The use of
designated public agencies, subrecipients, or contractors does
not relieve the recipient of this responsibility. The recipient is
also responsible for determining the adequacy of performance
under subrecipient agreements and procurement contracts.
PCDC established effective guidelines for overseeing the
PCDC Loan Monitoring
progress of projects funded with PCDC loans and monitoring
Guidelines
loan repayments. Specifically, PCDC Loan Policy and
Guidelines stipulate that the loan officer is responsible for
monitoring the repayment of loans and interacting with all
interested parties and departments. The Technical Assistance
Unit is to provide the Legal Department and Chief Loan
Servicer with written briefings, monitor project progress,
review financial statements, and recommend appropriate
actions. The Fiscal Department is to disburse funds as
requested by the loan officer and program manager, provide
the loan officer and program manager with bi-weekly status
reports of outstanding loans, receive payment from the
borrower, and make recommendations regarding the loan
portfolio. The Legal Department is to ensure borrower’s
compliance with regulations, initiate legal actions, assist in
monitoring of judgments and liens against borrowers, and take
other actions as appropriate.
Periodic financial statements from the loan recipient are
another valuable monitoring tool that PCDC’s procedures
required. PCDC’s Commitment Letter to UEDRARC, dated
March 21, 1995, required unaudited financial statements
within 30 days of the close of each calendar year. The
statements were to include balance sheet and profit and loss
statements.
01-PH-241-1001 Page 8
Finding 1
PCDC Relied On PIDC PCDC did not employ its loan monitoring policy and
To Monitor Loan procedures when administering the $550,000 SBRLF loan to
UEDRARC. Instead, PCDC relied on PIDC to monitor the
loan because PCDC did not have the resources necessary to
monitor a project of UEDRARC’s size and because PCDC’s
loan was subordinate to much larger PIDC financing.
Unfortunately, due to outside pressure and its desire to see the
project succeed, PIDC did not effectively monitor the Project
or take available default actions, which jeopardized PCDC’s
financial interest. Also, although PCDC guidelines required
that the loan officer monitor the loan repayment, PCDC
removed their loan officer from involvement in the process
and turned the payment approval process over to their Vice
President - Legal. PCDC did not enforce the terms of their
loan agreement requiring annual financial statements and did
not require a final audit of the Project’s construction costs.
The variable funding methods (advances and reimbursements)
used to finance the UEDRARC Project, received from
multiple sources (PCDC, PIDC, Commonwealth of
Pennsylvania, and Meridian Bank) heightened the need for a
final audit of construction costs.
UEDRARC defaulted on its loan immediately. PCDC’s
UEDRARC Loan
initial loan disbursement took place in October 1995, and
Payment History
UEDRARC’s first loan payment to PCDC was due in
December 1995. UEDRARC did not make its first payment
on the PCDC loan until January 23, 1997. As of March 13,
2000, UEDRARC had been delinquent 50 of 53 months of the
loan term, with arrears to March 13, 2000 totaling $22,496.01.
Though UEDRARC was in default of their PCDC loan, and
did not make their first loan payment until January 1997,
PCDC continued to disburse additional loan funds to
UEDRARC through September 1998. It appeared that PCDC
continued to disburse the funds while UEDRARC was in loan
default because it hoped UEDRARC would eventually
improve financially, and PCDC did not want to jeopardize the
Project by withholding loan funds. A PCDC official informed
us that these were the reasons PCDC did not take more
aggressive actions when UEDRARC went into loan default.
The Loan Policy and Guidelines listed a schedule of actions
Default Procedure
PCDC would take in the event of a loan default. These
Guidelines
guidelines included providing technical assistance, deferring
principal or interest payments, restructuring the loan, calling
in the note, obtaining a pledge of additional collateral, and
Page 9 01-PH-241-1001
Finding 1
legal action as alternatives in the event of a loan default.
Also, HUD Regulations at 24 CFR 570.501 specified that
grant recipients take appropriate action when performance
problems arise.
When UEDRARC defaulted on their loan, PCDC did not take
PCDC Response to
full advantage of the recourses available to them in their Loan
UEDRARC Default
Policy and Guidelines and loan agreements with UEDRARC.
They sent letters requesting payment and restructured the loan
to recover delinquent interest payments, but these measures
were ineffective. PCDC recently established a committee to
help UEDRARC with its loan repayment problems.
However, PCDC has yet to analyze UEDRARC’s financial
condition to determine its ability to make loan payments or
prospects to become current at some future date. We believe
PCDC did not act more forcefully when UEDRARC
defaulted on the loan because of outside pressure and the
desire to see the Project succeed.
C. Loan Maintenance
HUD provides CDBG funds for many purposes. Grantees use
Future Prospects for
the funds to achieve any one of three national objectives. One
UEDRARC
of the CDBG national objectives is the prevention or
elimination of slum and blight conditions. UEDRARC met a
CDBG national objective by eliminating a slum and blight
condition. However, though UEDRARC was successful in
achieving this national objective, UEDRARC’s ability to
sustain this success in the long term as a viable project is
questionable. Further, by failing to pay back its CDBG loans,
UEDRARC continues to tie up funds that should be available
for other projects.
If new funding becomes available, UEDRARC plans to
continue renovating the remainder of its building to bring in
new tenants and thereby increase revenue. The increased
revenue is necessary if UEDRARC is to pay off its long-term
debt. Our review indicated that UEDRARC currently lacks
the resources to complete renovations to the building.
Furthermore, UEDRARC’s present operations do not generate
sufficient rental income to cover its long-term debt and
operating expenses. UEDRARC’s financial operations over
the last 17 months, from January 1999 through May 2000, are
summarized below:
01-PH-241-1001 Page 10
Finding 1
Monthly Total
Average
Expenses w/out loan pmt 1/ $139,354.97 $2,369,034.49
Plus, Loan Payment 2/ 36,890.09 627,131.53
Expenses with loan pmt 1/ 176,245.06 2,996,166.02
Less, Revenue 1/ 151,572.20 2,576,727.40
Arrears $ 24,672.86 $ 419,438.62
1/ Revenue and expense amounts were obtained from
UEDRARC’s accounting system and are unaudited.
Expenses included utilities, payroll, and maintenance
costs.
2/ Amount includes payments to PCDC and PIDC.
UEDRARC’s average monthly rent revenue covered its
average monthly operating costs, but was not sufficient to also
cover the required monthly loan payments to PCDC and
PIDC. UEDRARC has experienced a $24,672.86 shortfall in
average monthly revenue. Over the 17 month period the
shortfall amounted to $419,438.62. Due to UEDRARC’s
loan history and its current financial condition, it appears
unlikely that UEDRARC will be able to obtain the funding
necessary for the remaining planned renovations. Without
this funding and the resultant expected increase in revenue
from new tenants, it does not appear likely that UEDRARC
will be able to successfully pay off its long-term debt and
continue operations.
Although PCDC’s effort to eliminate a slum and blight
condition is admirable, it appears PCDC made a questionable
loan decision in UEDRARC’s case. As a result of PCDC’s
loan decision, it appears PCDC will eventually have to write
off the loan to UEDRARC, depriving other applicants of
needed funds.
PCDC shared our concern that UEDRARC faces challenges
PCDC Comments to sustaining its success. However, they disagreed with our
assessment of PCDC’s participation in and their approval
process for the UEDRARC Project, stating they served as a
conduit for funding at the City of Philadelphia’s request and
direction. They stated that their September 23, 1993 Board
meeting established requirements for UEDRARC to provide a
sound fiscal and management plan for the Board’s review,
Page 11 01-PH-241-1001
Finding 1
before the full Board would approve funding for the Project.
They stated the report mischaracterized the Board’s decision
not to refer the Project to the Loan Committee as an effort to
bypass the Loan Committee. They stated that the four
members of the Loan Committee are members of the Board,
and were present and voted in favor of funding the Project at
the September 23, 1993 meeting. They also stated that the
Chairman of the Board, who is also the Chairman of the Loan
Committee, was present when the full Board unanimously
approved the loan to UEDRARC at its August 3, 1994
meeting.
PCDC also disagreed with our conclusion that the
UEDRARC loan terms were unusually favorable. They stated
that although the terms of the loan were favorable, the senior
lenders’ (a group of local banks) loan structure dictated PCDC
only charge UEDRARC interest for ten years at 3 ¼ percent
per year for the PCDC loan. The stated terms were necessary
for the Project’s financial success.
Further, PCDC disagreed that the State Senator participated in
the loan approval process. They stated that he abstained from
voting on the UEDRARC Project at both meetings and did
not actively participate in the Board’s discussions of the loan.
Executive Summary
OIG Evaluation of PCDC’s SBLRF guidelines stipulate that PCDC’s Loan
PCDC’s Comments Committee is responsible for reviewing loan applications and
approving the loans. In the case of UEDRARC, the PCDC
Vice President for Lending recommended rejecting the
application based on perceived cash flow problems.
Subsequently, the application was presented directly to the
Board of Directors without ever going to the Loan Committee,
in effect bypassing the Loan Committee. We found no
documentation in minutes to any of the Board’s meetings or
elsewhere explaining why PCDC presented this application to
the full Board instead of to the Loan Committee. The minutes
to the September 23, 1993 meeting state the final commitment
of funding will be contingent upon the Board of Director’s
review and approval of a sound fiscal and managerial plan for
the Project. All four members of the Loan Committee were
present and voted to approve, in principal, the commitment of
funds for the UEDRARC Project, pending review of a fiscal
and managerial plan for the Project. However, at the August
01-PH-241-1001 Page 12
Finding 1
3, 1994 meeting, when the Board approved the loan, the only
Loan Committee members present were the Chairman of the
Loan Committee and PCDC’s President. The two remaining
members of the Loan Committee were absent, and there was
no indication that they had reviewed the fiscal and managerial
plan. Because of the size of this Project and the impact it
would have on PCDC, as stressed by PCDC’s management
during numerous discussions with OIG staff, it appeared
unusual that PCDC would vote on a loan of this magnitude
without the full Loan Committee’s participation.
We do not dispute the fact that the terms of the UEDRARC
loan were necessary to the Project’s financial success. Our
purpose was to state the fact that compared to other PCDC
loans and PCDC’s SBRLF guidelines, the UEDRARC loan
was unusually favorable in terms of the loan amount, interest
rate, and principal moratorium.
The minutes to both Board meetings state the State Senator
abstained from voting on the UEDRARC Project. However,
the minutes and the notes for the minutes to the August 3,
1994 Board meeting clearly state that the State Senator
participated in the Board’s discussion prior to the vote. As
mentioned in the finding, the Philadelphia Divisional Deputy
City Solicitor stated that there was no conflict of interest
provided the Senator did not involve himself in the loan
approval process. Clearly, by participating in the discussion
leading to the Board’s vote, the Senator placed himself in a
conflict of interest position.
Recommendations We recommend that HUD direct PCDC to:
1A. Explain and document, in the applicable loan file, all
waivers to loan approval and administration policies
and procedures regarding the UEDRARC loan.
1B. In the future, adequately explain and document, in
the corresponding loan files, the reasons for waivers
to the policies and procedures that govern its CDBG
funded loan programs.
1C. Require UEDRARC to obtain an audit of the project
construction costs which accounts for funds provided
to the project from all funding sources including,
Page 13 01-PH-241-1001
Finding 1
PCDC loans, PIDC loans, State of Pennsylvania
Grant Funds, and any other public and private funds
loaned, donated, or granted to the project.
In the event that UEDRARC’s default eventually causes
PCDC to write off the loan as uncollectable, we recommend
that HUD direct the City of Philadelphia to:
1D. Repay to the City’s CDBG Program, with non-
Federal funds, the loan portion written off as
uncollectable.
01-PH-241-1001 Page 14
Management Controls
Management controls consist of a plan of organization and methods and procedures adopted by
management to ensure that resource use is consistent with laws, regulations, and policies.
Management controls include the processes for planning, organizing, directing, and controlling
program operations. They contain the control environment for risk assessment, information
systems, control procedures, communication, and measuring and monitoring program performance.
In planning this audit, we evaluated the PCDC management
Relevant Management
controls related to our objectives to determine our audit
Controls
scope and procedures. We determined the following
management controls were relevant to our audit objectives:
• Loan approval policy and procedures to ensure PCDC
evaluated the feasibility of the UEDRARC Project,
including whether the UEDRARC Project: was an
effective use of CDBG funds; affected a national
objective; and had the financial wherewithal to sustain
its operations;
• Loan administration and accounting policy and
procedures to ensure PCDC had the systems and controls
to oversee the project and used the controls to monitor
the project and account for the funds provided; and
• Policies and procedures to ensure that PCDC
administered HUD funds in accordance with applicable
laws, HUD regulations, loan documents, and other
directives.
A significant weakness exists if management controls do not
Significant Weaknesses
give reasonable assurance that resource use is consistent
with laws, regulations, policies, and resources are
safeguarded against waste, loss, and misuse.
Our audit disclosed the following significant weaknesses:
• PCDC’s Board of Directors overrode loan approval
policy and procedures to provide a loan with unusually
favorable terms to a financially risky project (see Finding
1).
• PCDC did not observe loan administration policies and
procedures, including monitoring requirements and
default procedures (see Finding 1).
Page 15 01-PH-241-1001
Management Controls
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01-PH-241-1001 Page 16
Follow Up On Prior Audits
This is the first audit of PCDC’s funding of the UEDRARC Project by HUD’s Office of Inspector
General.
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Follow Up On Prior Audits
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01-PH-241-1001 Page 18
Appendix A
Auditee Comments
Executive Summary
Page 19 01-PH-241-1001
Appendix A
Executive Summary
01-PH-241-1001 Page 20
Appendix A
Executive Summary
Page 21 01-PH-241-1001
Appendix A
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01-PH-241-1001 Page 22
Appendix B
Distribution
Director, Office of Community Planning and Development, 3AD
Secretary’s Representative, Mid-Atlantic, 3AS (Acting)
Audit Liaison Officer, 3AFI
Departmental Audit Liaison Officer, FM (Room 2206)
Deputy Chief Financial Officer for Finance, FF (Room 2202)
Director, Office of Budget, FO (Room 3270)
Acquisitions Librarian Library, AS (Room 8141)
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 Dirksen
Senate Office Building, US Senate, Washington, DC 20510
The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706
Hart Senate Office Building, US Senate, Washington, DC 20515
Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House
Office Building, Washington, DC 20515
Director, Housing and Community Development Issue Area, US GAO, 441 G Street, N.W.,
Room 2474, Washington, DC 20548, Attn: Stanley Czerwinski
The Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn
Building, House of Representatives, Washington, DC 20515
The Honorable Henry Waxman, Ranking Member, Committee on Government Reform, 2204
Rayburn Building, House of Representatives, Washington, DC 20515
Mr. Steve Redburn, Chief, Housing Branch, Office of Management & Budget, 725 17th Street,
N.W., Room 9226, New Executive Office Building, Washington, DC 20503
President, Philadelphia Commercial Development Corporation, 1315 Walnut Street, Suite 600,
Philadelphia, PA 19107
Principal Staff
Page 23 01-PH-241-1001
Urban Education Development Research and Retreat Center (UEDRARC), Philadelphia, PA
Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-11-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)