Audit of Multifamily Operations Bowdoin Apartments Malden, Massachusetts

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-01-29.

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


      PROJECT NO: 023-55005



        JANUARY 29, 2001

                                                                     Issue Date
                                                                             January 29, 2001

                                                                    Audit Case Number

TO: Ellen Connolly, Director, Housing Management Division, 1AHMLA

FROM: Stephen D. King, Acting District Inspector General, Office of Audit, 1AGA

SUBJECT:       Audit of Multifamily Operations
               Bowdoin Apartments
               Project No: 023-55005
               Malden, Massachusetts

We performed an audit of Bowdoin Apartments, a multifamily project located in Malden,
Massachusetts. We selected Bowdoin for review based on a low physical assessment. Our objective
was to assess Bowdoin’s performance relating to: (1) general physical condition and maintenance of the
project; (2) financial management; (3) leasing and occupancy, and (4) general management practices.

Our audit disclosed one finding on underutilized apartments which the auditee is in the process of

Within 60 days, please provide us a status report on the: (1) corrective action taken; (2) proposed
corrective action and date to be completed; or (3) reason why action is not considered necessary.
Also, please furnish us copies of any correspondence or directives issued related to this audit.

If you have any questions, please contact our office at (617) 565-5259.
Management Memorandum

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2001-BO-1003              Page ii
Executive Summary
We performed an audit on Bowdoin Apartments (Bowdoin), a multifamily project located in Malden,
Massachusetts. We selected Bowdoin based on a low physical assessment obtained on a MSO
Review, which reclassified the project to “troubled”. Our objective was to assess Bowdoin’s
performance relating to: (1) general physical condition and maintenance of the project; (2) financial
management; (3) leasing and occupancy, and (4) general management practices.

                                      Bowdoin is correcting the maintenance deficiencies disclosed by
 Audit Results
                                      the MSO. We noted no deficiencies in the use of project funds.
                                      However, our audit disclosed that Bowdoin needs to relocate
                                      over-housed households to reduce underutilization of

                                      Our review disclosed that 21 of 226 apartments were
                                      underutilized contrary to HUD requirements. Based on
                                      household compositions, families are in apartments with too
                                      many bedrooms. Bowdoin had not established an effective
                                      transfer policy to address underutilization of units.
                                      Consequently, HUD is paying too much in subsidies for the
                                      number of tenants served and larger families are being restricted
                                      from appropriate size apartments.

                                      Our review initially disclosed an underutilization of Section 8
                                      subsidies under its HAP contract. Based upon Bowdoin’s
                                      response, which shows sufficient effort was made to utilize its
                                      Section 8 subsidies, this issue has been removed from the

                                      We recommend that Bowdoin revise their transfer policy to
 Recommendations-                     relocate families to appropriately sized units as such units
                                      become available, and submit quarterly progress reports on the
                                      progress in reducing underutilization.

                                      On December 1, 2000, we provided Bowdoin a draft audit
 Findings and                         report for comments and received their response on December
 Recommendations                      29, 2000. Bowdoin’s response is commented on in the
 Discussed                            Finding section of the report. A copy of the Bowdoin’s
                                      response is included in Appendix A.

                                           Page iii                                       2001-BO-1003
Executive Summary

2001-BO-1003        Page iv
Table of Contents
Management Memorandum                                i

Executive Summary                                   iii

Introduction                                        1


1     Underutilized Apartments                      5

Management Controls                                 9

    A Auditee Comments                             11

    B Distribution                                 15

                                 Page v   2001-BO-1003
Table of Contents


ACT             National Housing Act
BAC             Bowdoin Apartments Corporation
BMIR            Below Market Interest Rate
Bowdoin         Bowdoin Apartments
CFR             Code of Federal Regulations
HAP             Housing Assistance Payment
HQS             Housing Quality Standards
HUD             Housing and Urban Development
IPA             Independent Public Accountant
MRA             Malden Redevelopment Authority
MSO             Massachusetts State Office of Housing and Urban Development
NHM             National Housing Ministries
OIG             Office of Inspector General
REAC            Real Estate Assessment Center
Section 8       Section 8 of Title II of the Housing and Community Dev. Act of 1974

2001-BO-1003                               Page vi
Bowdoin Apartments (Bowdoin), is owned by Bowdoin Apartments Corporation (BAC), whose
President is John J. Auffant. The project consists of 15 multiunit wooden buildings located along Lisbon
and Bowdoin Streets in Malden, Massachusetts. Pursuant to a management agreement approved by
the Massachusetts State Office (MSO), National Housing Ministries (NHM) is the Management Agent
for the project.

NHM has a management office located on site, at 18 Bowdoin Street, Malden, Massachusetts, and a
regional office located at 135 Washington Street, Bridgeport, Connecticut. Oversight, accounting and
capital project management functions are performed at the regional office. All other functions are
performed at the on-site office.

In 1965 AFSCME Housing of Malden, Inc. (AFSCME), a non-profit organization, obtained a 40-year
HUD coinsured Below Market Interest Rate (BMIR) mortgage in connection with Section 221(d)(3) of
the National Housing Act (Act). The BMIR on the $2,366,000 mortgage is 3.125 percent. The
mortgage, which has been kept current, matures on November 1, 2005. On December 6, 1966,
AFSCME amended its Articles of Organization, and changed their name, location and purpose, to:
BAC of Boston MA, operating as a not-for-profit.

On May 31, 1995, HUD contracted Bowdoin to provide housing assistance subsidies on 108 of its 226
units, pursuant to Section 8 of Title II of the Housing and Community Development Act of 1974. The
five year 108 unit contract, began June 1, 1995 and expired on May 31, 2000. The contract was
extended until a new Section 8 contract was implemented on November 1, 2000. (This new contract
incorporated rent increases approved on September 22, 2000).

Bowdoin received a low physical assessment on the MSO’s management review of March 11, 1999,
which reclassified the project to “troubled.” The MSO and the Malden Redevelopment Authority
(MRA) have since collaborated on supplying Bowdoin with sufficient capital to correct the physical
deficiencies found by the MSO during their management review. In July 1999, the MSO granted
Bowdoin an 11 percent rent increase to allow Bowdoin a larger Reserve for Replacement to work to
repair its physical deficiencies. Additionally, the MRA issued Bowdoin two loans totaling $440,000 for
capital improvements, which are to be repaid out of the rent increases implemented on October 1,
2000. The October rent increase consisted of: “An overall 2.6 percent rent increase . . . based on
increased project operating expenses,” and a Section 8 increase which totaled 17.7 percent to cover
increased operating expenses and the debt service on the loans for the needed capital repairs.” In
addition, Bowdoin Apartments intends on withdrawing $150,000 from the Reserve for Replacement to
fund the remaining repairs.

                                            Page 1                                         2001-BO-1003

                    The objectives of our audit was to assess the Bowdoin's
 Audit Objectives   compliance with applicable laws and regulations and the terms
                    and conditions of the Regulatory Agreement relating to:

                    •   Physical condition and maintenance of the property

                    •   Leasing and occupancy and tenant eligibility

                    •   Financial condition of the project relating to costs for
                        operations, maintenance, administration and capital

                    •   General management practices

                    To accomplish the audit objectives, we:
 Audit Procedures
                    •   Reviewed HUD directives on: Multifamily Asset
                        Management, and Project Servicing, Financial Operations,
                        Accounting Procedures for Insured Multifamily Projects,
                        Housing Quality Standards (HQS), Occupancy
                        Requirements of Subsidized Multifamily Housing Programs
                        and applicable HUD Handbooks, notices and regulations.

                    •   Reviewed the MSO's project management files for
                        indicators and concerns over leasing and occupancy,
                        financial management, physical condition and maintenance.

                    •   Interviewed the MSO's project manager to obtain
                        background information on the project and to discuss any
                        concerns on project operations.

                    •   Conducted an entrance conference with the management
                        agent's representative to: explain the purpose of the audit;
                        identify key personnel and their areas of responsibility; and,
                        to request needed accounting books and records relating to
                        the operation of the project.

                    •   Reviewed: Bowdoin’s Housing Assistance Payment
                        Contract; Regulatory Agreement; Management Agreement
                        and, Standard Lease Agreement to ascertain pertinent

2001-BO-1003             Page 2

•   Reviewed Bowdoin's 1996 to 1999 audited financial

•   Interviewed the Independent Public Accountant (IPA) and
    obtained explanations and documentation for areas of
    concern on line items reported on the Profit and Loss
    Statements and in audit notes.

•   Interviewed Bowdoin's Site Manager, Tenant Occupancy
    Specialist and Maintenance Supervisor on Maintenance and
    Tenant Eligibility procedures.

•   Reviewed files of all tenants with subsidies between $400
    and $500, to test general eligibility controls over tenant
    eligibility and subsidies, to include supporting documentation
    for family composition, income and allowances to assure
    information on tenants was properly obtained, verified and
    maintained, and accurately reported.

•   Ascertained the accuracy of computed tenant rents and
    subsidy amounts by comparing rents to the FY 2000
    Income Limits Schedule, HUD Owner Certification of
    Compliance Forms-50059, HUD Rent Schedule Form
    92458 and HUD Housing Owner’s Certification &
    Application for Housing Assistance Payment Form 52670.

•   Reviewed the last three inspection reports (REAC, the
    Mortgagor - Reilly Mortgage, and HUD) to determine the
    general physical condition and maintenance history of the

•   Tested procedures and controls outlined in staff interviews
    for work order systems used by Property Maintenance, by
    reviewing work orders and disposition over a three-day

•   Reviewed maintenance work items on grounds and exterior
    building units for completion by performing drive-by and
    exterior walk-around inspections, to determine if conditions
    are improving and what actions were being taken to
    maintain the property in accordance with HQS.

                   Page 3                            2001-BO-1003

               The audit period was from October 1, 1997 through January
               31, 2000. The period was extended as needed to assess
               compliance with tenant occupancy requirements. The audit was
               performed in accordance with generally accepted government
               auditing standards.

2001-BO-1003       Page 4
                                                                                              Finding 1

                        Underutilized Apartments
Bowdoin Apartments has a significant number of apartments (21 of 266) where there are too many
bedrooms for the size of families that inhabit them. The underutilization has resulted from a failure to
establish and implement a policy for complying with HUD occupancy requirements. Consequently,
HUD’s Section 8 rent subsidies are too great for the number of people served; and, the needs of larger
families, under BMIR and Section 8, were restricted.

                                       HUD stipulates that owners should develop occupancy
 HUD Directives Require
                                       standards for determining unit size (Paragraph 2-18 of HUD
 Occupancy Standards
                                       Directive 4350.3-Occucpancy Requirements of Subsidized
                                       Multifamily Housing Programs).

                                       Occupancy standards must address units that become
                                       underutilized due to reductions in household composition.
                                       When underutilization develops, the owner must require the
                                       family to move to an appropriate unit within the project,
                                       consistent with lease terms, when one becomes available. A
                                       family may remain in the same unit, only if it pays the HUD
                                       approved market rent. Failure to pay market rent, may result in
                                       eviction (Paragraph 2-19 of HUD Directive 4350.3).

                                       Bowdoin’s lease and contract terms require compliance with
                                       HUD occupancy requirements (HUD model Lease Appendix
                                       19a Section 19-Size of Dwelling, HUD Housing Assistance
                                       Payment Contract Section 2.5 (e)-Underoccupied Units plus
                                       Exhibit 7-Relocation Plan Section V. C. and the Regulatory
                                       Agreement for Multifamily Housing Projects Co-insured by

                                       As of August 2000, 21 of the 226 apartments at Bowdoin were
 Apartment Underutilized               underutilized. Twelve households were over-housed in two-
                                       bedroom units while another nine households were overhoused
                                       in three-bedroom units. Because tenants are living in over-
                                       housed units, families needing larger apartments are being
                                       restricted, and HUD is paying too much in rent subsidies for the
                                       number of people housed. Moving a former head of household,
                                       who is living alone in a three bedroom apartment (where rents
                                       are $585) into a one bedroom apartment (where rents are

                                            Page 5                                         2001-BO-1003
Finding 1

                               $392), would reduce the monthly subsidized rent by $193 a
                               month or $2,316 annually.

                               Bowdoin has not taken adequate corrective action to resolve
 No Corrective Action          the underutilization of apartments. During the ten-month period
                               from October 1999 to July 2000, 19 units became available for
                               move-in. Of the 19 units, 14 were one and two- bedroom units
                               of which five were one-bedroom units and nine were two-
                               bedroom units. These units were available for the transfer of
                               the tenants that were over-housed, living in larger two and
                               three-bedroom units.

                               In October 1999, there were 23 over-housed households (nine
 Transfer Policy Ineffective   in three-bedroom units and 14 in two bedroom units). In
                               August 2000, there were 21 over-housed households (nine in
                               three bedroom units and 12 in two-bedroom units). Only two
                               over-housed tenants were relocated from two bedroom to one-
                               bedroom units during the period between October 1999 and
                               August 2000, per the Over-housing Reports prepared on these
                               dates. Subtracting the two households that were transferred
                               from the fourteen units vacated between October 1999 to July
                               2000, leaves twelve vacated units that could have been used for
                               additional transfers.

                               Bowdoin indicated 13 BMIR over-housed tenants remain on
 Auditee Comments              the list to be relocated. A final advisement was sent to these
                               tenants on December 19, 2000 giving them approximately 90
                               days to either relocate or start paying market rent.

 OIG Evaluation of             Based on the Bowdoin’s response, the corrective action being
 Auditee Comments              taken is inappropriate. In order to require over-housed tenants
                               to pay market rent, the appropriately sized units must be
                               available to be offered to the tenants first. If the tenant then
                               refuses to move within 30 days, the tenant must then be charged
                               market rent..

2001-BO-1003                       Page 6
                                                                       Finding 1

Recommendations   We recommend that you instruct Bowdoin to:

                  1A. Revise their transfer policy to relocate families to
                      appropriately sized units as such units become available.

                  1B. Submit quarterly       progress   reports   on   reducing

                                    Page 7                         2001-BO-1003
Finding 1

2001-BO-1003   Page 8
Management Controls
In planning and performing the audit, we considered Bowdoin Apartments' management control systems
that were relevant to the audit objective. Our goal was not to render an opinion on controls or provide
assurance of its effectiveness.

The three primary objectives of a management control system are to ensure efficient and effective
operations, accurate financial reporting and compliance with laws and regulations. An effective
management control system includes five essential components, including control environment, risk
assessment, control activities, information & communication and monitoring.

                                       We determined the following management controls were
 Relevant Management
                                       relevant to our audit objectives:
                                       •   Accounting and budgets

                                       •   Procurement and contract administration

                                       •   Capital improvements and maintenance

                                       •   Compliance with HUD tenant eligibility requirements

                                       A significant weakness exists if management controls do not
 Assessment Results                    give 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, maintained, and fairly disclosed in financial statements
                                       and reports.

                                       Our audit identified a significant deficiency in controls related to
 Significant Weakness                  complying with HUD’s requirement for tenant occupancy
                                       standards. The deficiency is discussed in the Finding section of
                                       the report.

                                            Page 9                                           2001-BO-1003
Management Controls

2001-BO-1003          Page 10
                             Appendix A

Auditee Comments

                   Page 11   2001-BO-1003
Appendix A

2001-BO-1003   Page 12
          Appendix A

Page 13   2001-BO-1003
Appendix A

2001-BO-1003   Page 14
                                                                                           Appendix B

Secretary, S, Room 1000 (1)
Deputy Secretary, SD, Room 10100 (1)
Chief of Staff, S., Room 10000 (1)
Office of Administration, S, Room 10110 (1)
Assistant Secretary for Intergovernmental Relations. J, Room 10120 (1)
Deputy Assistant Secretary for Public Affairs, W., Room 10222 (1)
Deputy Assistant to the Secretary, S, Room 10222 (1)
Deputy Assistant Secretary for Administrative Services, Office of the
        Executive Secretariat, S, Room 10220 (1)
Acting Deputy Chief of Staff, S, Room 10226 (1)
Deputy Chief of Staff for Policy, S, Room 10226 (1)
Deputy Chief of Staff for Programs, S, Room 10026 (1)
Special Counsel to the Secretary, S, Room 10234 (1)
Senior Advisor to the Secretary, S, Room 10222 (1).
Special Assistant for Inter-Faith Community Outreach, S, Room 10222 (1)
Executive Office for Administrative Operations and Management, S, Room 10220 (1)
General Counsel, C., Room 10214 (1)
Assistant Secretary for Housing/Federal Housing Commissioner, H, Room 9100 (1)
Assistant Secretary for Policy Development and Research, R, Room 8100 (1)
Assistant Secretary for Community Planning and Development, D, Room         7100 (1)
Assistant Secretary for Fair Housing and Equal Opportunity, E, Room 5100
Assistant Deputy Secretary for Field Policy and Management, SDF, Room        7108 (2)
Office of Government National Mortgage Association, T, Room 6100 (1)
Director, Office of Departmental Equal Employment Opportunity, Room 10126 (1)
Chief Procurement Officer, N, Room 5184 (1)
Assistant Secretary for Public and Indian Housing, P, Room 4100 (1)
Director, Office of Departmental Operations and Coordination, I, Room 2124 (1)
Office of the Chief Financial Officer, F, Room 2202 (1)
Chief Information Officer, Q, Room 3152 (1)
Director, Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800 (1)
Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals   Building (1)
Inspector General, G, Room 8256 (1)
Deputy Inspector General, G, Room 8256 (1)
Deputy Assistant Inspector General for Audit, GA, Room 8286 (1)
Assistant Inspector General for Investigation, GI, Room 8272 (1)
Acting Director, Program Research and Planning Division, GAP, Room 8180 (1)
Director, Financial Audits Division, GAF, Room 8286 (1)
Director, Information Systems Audit Division, GAA, Room 8172 (1)
Counsel to the Inspector General, GC, Room 8260 (1)
Central Records, GF, Room 8256 (4)
Semi-Annual Report Coordinator, GF, Room 8254 (1)

                                          Page 15                                          2001-BO-1003
Appendix B

Office of Inspector General Webmaster - Electronic format
Public Affairs Officer, G, Room 8256 (1)
Acquisitions Librarian, Library, AS, Room 8141 (1)
District Inspector General (Districts 2 - 11)
Secretary’s Representative, 1AS (2)
Appropriate Special Agent-In-Charge, 1AGI (1)
Primary Field Audit Liaison Officer, 3AFI (2)
Headquarters Audit Liaison Officer, DOT (2)
Departmental Audit Liaison Officer, FM, Room 2206 (2)
Auditee (2)
Armando Falcon, Director, Office of Federal Housing Enterprise Oversight,1700G Street, NW, Room
4011, Washington, DC (1)

Frank Edington, Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug
Policy & Human Resources, B373 Rayburn House Office Building,
Washington, DC 20515 (1)

The Honorable Fred Thompson, Chairman, Committee on Governmental
Affairs, 340 Dirksen Senate Office Building, United States Senate,
Washington, DC 20510 (1)

The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706 Hart
Senate Office Bldg., United States Senate, Washington, DC 20510 (1)

The Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn Bldg.,
House of Representatives, Washington, DC 20515 (1)

The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform, 2204
Rayburn Bldg., House of Representatives, Washington, DC 20515 (1)

Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neill House Office
Building, Washington, DC 20515 (1)

Steve Redburn, Chief, Housing Branch Office of Management & Budget, 725 17th Street, NW, Room
9226, New England Executive Office Building, Washington, DC 20503 (1)

Stanley Czerwinski, Associate Director, Resources, Community, and Economic Development Division,
United States General Accounting Office, 441 G Street, NW, Room 2T23, Washington, DC 20548 (1)

The Honorable A. Waxman, Ranking Member, Committee on Government Reform, 2204 Rayburn
Bldg., Housing of Representatives, Washington, DC 20515.

2001-BO-1003                              Page 16