AUDIT REPORT Villa West II Apartments Topeka, Kansas 2001-KC-1003 June 4, 2001 OFFICE OF AUDIT, GREAT PLAINS KANSAS CITY, KANSAS Table of Contents Exit Issue Date June 4, 2001 Audit Case Number 2001-KC-1003 TO: Herman Ransom, Director, Office of Multifamily Housing, Kansas City Hub, 7AHM FROM: Roger E. Niesen, District Inspector General for Audit, 7AGA SUBJECT: Topeka Housing Associates II L.P. Villa West II Apartments Topeka, KS We have completed an audit of the Villa West II Apartments in Topeka, Kansas. We selected the project based on an audit request from your office that indicated there were unauthorized distributions from project funds. Our overall audit objective was to determine whether project officials used project funds for purposes other than reasonable administrative fees, operating expenses, necessary repairs and allowable distributions from surplus cash. We concluded that the management agent, Metro Developers, Inc., overcharged the project $8,853 for payroll services and did not always follow its HUD approved management plan regarding allocation of direct expenses. Additionally, Metro did not always follow its management agreement that required obtaining owner approval for expenditures over $1,000. Within 60 days please give us, 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. Should you or your staff have any questions, please contact me at (913) 551-5870. Table of Contents Exit Executive Summary We have completed an audit of the Villa West II Apartments. We selected the project based on an audit request from your office that indicated there were unauthorized distributions from project funds. Our overall audit objective was to determine whether project officials used project funds for purposes other than reasonable administrative fees, operating expenses, necessary repairs and allowable distributions from surplus cash. We concluded the management agent, Metro Developers, Inc., overcharged the project $8,853 for payroll services and did not always follow its HUD approved management plan to allocate direct expenses. Additionally, the management agent did not always follow its management agreement to obtain owner approval for expenditures over $1,000. We determined Metro Developers, Inc., (Metro) made payments for other than reasonable operating expenses and necessary repairs of the project. This occurred because Metro did not have adequate controls and did not ensure it followed existing policies and procedures. As a result, HUD lacks assurance project operations were conducted in the most efficient and effective manner. From 1998 through 2000, Metro charged 25 to 35 percent Metro Overcharged the over actual payroll expenses for administration of payroll, Project payroll taxes, and worker's compensation insurance. Metro managed numerous rental properties not insured by HUD and did not alter its private sector management practices to account for the management practices required by its Regulatory Agreement with HUD. As a result, $8,853 in project funds were used to pay unallowable expenses (see Finding 1). Metro did not accurately charge maintenance payroll expenses Metro Did Not Use Its to Villa West II. Specifically, Metro used a per unit allocation Approved Plan method to charge some labor costs between projects when those costs should have been charged directly to a specific project. Metro did not have procedures to capture direct work and materials expended at individual units. As a result, Villa West II was not following its approved management plan and it could be paying more than necessary for labor costs (see Finding 1). Metro did not get owner approval for all expenditures over Metro Needs to Implement $1,000. When Metro’s employees received separate invoices Its Controls from the same vendor for work performed on the same unit on the same day, the employees processed the invoices separately. 2001-KC-1003 Page iii Table of Contents Exit Executive Summary As a result, HUD and the owners lack assurance funds were used appropriately (see Finding 1). We recommend that the Director, Office of Multifamily Housing, Kansas City Hub ensure Metro Developers, Inc. repays the Villa West II general operating account $8,853 for unauthorized disbursements for payroll expenses for the years 1998, 1999 and 2000; and obtains Metro’s payroll supporting documentation (spreadsheets) to determine and recoup the amount Metro overcharged after December 31, 2000 to date. We also recommend the Director ensure Metro develops and implements controls to charge only actual costs for payroll services and procedures to capture direct maintenance labor costs by individual apartment unit. Further, we recommend the Director ensure Metro develops and implements controls that ensure employees obtain owner approval for all expenditures over $1,000. We conducted an exit conference with the owner of Metro Developers, Inc. on March 15, 2001. We provided our draft finding to Metro Developers, Inc., on May 11, 2001. Metro Developers, Inc. provided written comments to our draft findings on May 29, 2001. We included excerpts of the comments with the finding. The complete text of the comments are included in Appendix B. We provided a copy of this report to the project’s owners and the management agent. 2001-KC-1003 Page iv Table of Contents Exit Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1. Metro Did Not Have Adequate Controls To Ensure It Followed Policies and Procedures 3 Management Controls 8 Follow Up On Prior Audits 10 Appendices A Schedule of Questioned Costs 11 B Auditee Comments 12 C Distribution 18 2001-KC-1003 Page v Exit Introduction The Topeka Housing Associates II, LP was created as a limited partnership under the laws of the State of Kansas on November 30, 1989 for the purpose of constructing and operating a rental housing project called Villa West II Apartments. HUD approved refinancing of the partnership’s existing mortgage through section 223(f) of the National Housing Act on December 17, 1996. The mortgage and HUD co-insurance subject the project to HUD's rules and regulations as stated in the project's Regulatory Agreement between the owners, the lender and HUD. The lender is GMAC Commercial Mortgage Corporation. Villa West II Apartments consists of 60 unsubsidized low income housing tax credit units. The Villa West II Apartment's Federal Housing Administration number is 102-11020. The owner of Metro has been in the construction and property managing business since 1963. Metro Developers, Inc.’s main office is located in Savannah, Georgia. In 1998, American Housing Associates, the general partner for the ownership group, became dissatisfied with the Villa West II management agent (Mid-Land Management, Co., Inc.) because the security deposit and cash accounts were under funded. In March 1998, the owners requested HUD approval for a change in management agents. Metro Developers, Inc. was approved by HUD on March 24, 1998 to take over as the new management agent for Villa West II. The Real Estate Assessment Center sent a letter on February 16, 2000 to the owners, Topeka Housing Associates II, informing them of possible program compliance deficiencies. The initial assessment by the Real Estate Assessment Center indicated there was an unauthorized distribution of project assets and security deposits were under funded. The letter, sent by the Real Estate Assessment Center, included a request for a response within 30 days. The owners did not respond within 30 days. HUD’s Office of Multifamily Housing followed up with a letter on March 24, 2000 requesting a response within 15 days. Housing received a letter, dated April 18, 2000, from a law firm representing two of the three general partners. The letter indicated the security deposits had been fully funded and the two partners had initiated legal proceedings against Metro Developers, Inc. to recover the unauthorized distribution. From April through June 2000, numerous correspondence, including two Freedom of Information Act requests, occurred between the Office of Housing, HUD General Counsel, the three general partners and the partners' separate attorneys. During this time, the project funds were not returned and no evidence of correct funding of the security deposit account was provided to HUD. Two of the general partners said they did not benefit from the unauthorized distribution of funds. They said the third general partner acted as the management agent and controlled all project funds. Our audit objective was to determine whether project officials Audit Objectives used project funds for purposes other than reasonable administrative fees, operating expenses, necessary repairs and allowable distributions from surplus cash. 2001-KC-1003 Page 1 Table of Contents Exit Introduction We performed our on-site work from March through April Audit Scope and 2001. Methodology We interviewed HUD program staff to obtain background information on the project. We interviewed the project’s owners, management agent, and management agent employees to gain an understanding of the management agent’s responsibilities and operational processes. We also interviewed the owner’s independent certified public accountant to obtain financial data. To determine whether project officials complied with applicable laws and regulations, we analyzed HUD project files, personnel and payroll records, bank statements and cancelled checks, cash receipts and deposits, check register and invoices. We also analyzed the project’s year-end financial statements for the periods ended December 31, 1998 and 1999. Further, we reviewed the Regulatory Agreement, Management Certifications, Management Agreement and Management Plan governing operation of the project between the management agent and owners. The audit covered the period from January 1998 through December 2000, and was adjusted as necessary. We conducted the audit in accordance with generally accepted government auditing standards. 2001-KC-1003 Page 2 Table of Contents Exit Finding 1 Metro Did Not Have Adequate Controls To Ensure It Followed Policies and Procedures Metro Developers, Inc., (Metro) made payments for other than reasonable operating expenses and necessary repairs of the project. The management agent, Metro, overcharged the project $8,853 for payroll services and did not always follow its HUD approved management plan to allocate direct expenses. Additionally, the management agent did not always follow its management agreement to obtain owner approval for expenditures over $1,000. Metro managed numerous rental properties not insured by HUD and did not alter its private sector management practices to account for the changes required by its Regulatory Agreement with HUD. As a result, HUD lacks assurance project officials conducted business in the most efficient and effective manner. Project funds totaling $8,853 were used for unallowable expenses. HUD Handbook 4381.5, REV-2, The Management Agent HUD Requirements Handbook, Chapter 6, Section 4, Financial Compliance, Section 6.37, ‘Assigning Management Costs’, states in paragraph c (2), "The agent may not impose surcharges or administrative fees in addition to actual costs." The same handbook Section 6.38, Management Costs Charged To The Projects Operating Account, says in paragraph a (2) “If front-line management functions for several properties are performed by staff of the agent operating out of a single office, (b) the agent may not impose surcharges or administrative fees in addition to actual costs.” Further, Chapter 6, Program Monitoring, Section 4, 6-37 paragraph c (1) says, “Salaries and fringe benefits of personnel performing front-line duties are prorated among the properties served in proportion to actual use.” The HUD approved Owner-Managing Agent Certification plan says, maintenance persons will be charged to Villa West II at the rate of $10 per hour of work performed at the property. Metro’s Management Plan states in Section 1. Exhibit -1, Part Metro’s Management Plan C.(3), The Managing Agent shall seek approval of the Owner and Agreement when any expenditure greater than $1,000 is needed for a single item with exception of recurring budgeted expenses, emergency 2001-KC-1003 Page 3 Table of Contents Exit Finding 1 repairs involving manifest dangers to property or persons or those required to avoid suspension of any necessary services to the project. The Management Agreement Section II.(B.) says, “. . . the Management Agent shall conduct its management activities in accordance with the Policies and Procedures set forth in the Management Plan.” From 1998 through 2000, Metro charged 25 to 35 percent Metro Overcharged the over actual payroll expenses for administration of payroll, Project payroll taxes, and workers compensation insurance. Metro managed numerous rental properties not insured by HUD. Metro routinely charged for payroll services expense at those properties using a flat rate markup on actual payroll costs. However, requirements at HUD-insured properties differ significantly from those in the private sector. Metro did not alter its management practices conducted in the private sector to account for the management practices required by the property's Regulatory Agreement with HUD. HUD stipulates that only actual costs can be charged for payroll services. As a result, Metro charged the project for unallowable costs. In 1998 Metro charged a flat 25 percent rate for payroll administration and taxes, and an additional flat 10 percent rate for workers compensation insurance premiums. In February 1999, Metro ceased charging the 10 percent for insurance premiums, but continued charging the 25 percent rate for administration and payroll tax services. Metro stopped charging the 10 percent fee for insurance because of an independent auditor finding in a 1998 audit report. We calculated the amount Metro overcharged the property for payroll services to be $8,853 for the years 1998, 1999, and 2000. Metro did not accurately charge maintenance payroll expenses Metro Did Not Use Its to Villa West II. Specifically, Metro used a per unit allocation Approved Plan method to charge some labor costs between projects when those costs should have been charged directly to a specific project. Metro manages three properties at Villa West Apartments. Two of the properties are non-HUD related. 2001-KC-1003 Page 4 Table of Contents Exit Finding 1 In 1998, Metro received HUD’s approval to charge maintenance workers’ wages to the property where the work is performed. Specifically, the HUD-approved Owner-Managing Agent Certification plan says that maintenance persons will be charged to Villa West II at the rate of $10 per hour of work performed at the property. However, Metro’s payroll records indicate it allocated expenses for all on-site employees, including maintenance workers, using an indirect cost allocation method. Metro used the indirect cost allocation procedure because it did not have a method, such as detailed time sheets, to show where work was performed. As a result, Villa West II was not following its approved management plan and it could be paying more than necessary for labor costs. Metro did not have a control to ensure it followed its HUD-approved plan. Metro did not get owner approval for all expenditures over OwnerNeeds Metro Approvals to Implement Were $1,000. When Metro’s employees received separate invoices Its Controls Not Always Obtained from the same vendor for work performed on the same unit on the same day, the employees processed the invoices separately. Most invoices were less than $1,000. However, invoices for work done by the same vendor on the same unit on the same day often added to be over $1,000. This occurred on invoices for floor covering and carpeting and had the effect of bypassing the requirements in the Management Plan to get owner approval for all expenditures over $1,000. We tested 53 transactions for carpet and flooring work from the Villa West II General Operating account in 1998, 1999, and 2000. We found 12 instances where multiple invoices for carpet and flooring work done in the same unit on the same day exceeded $1,000. Metro’s on-site property manager said she was not aware the invoices should have been considered as one. However, Metro did not have any controls to detect if its approval procedures were followed. Compliance with owner approval levels is an important control that ensures funds are used effectively and for authorized purposes. As a result, HUD and the owners lack assurance funds were appropriately used. 2001-KC-1003 Page 5 Table of Contents Exit Finding 1 Auditee Comments Excerpts from the President of Metro Developers, Inc. comments are copied below. Appendix B contains the complete text of the comments and attachments. 1A. Metro Developers, Inc. has reimbursed Villa West Apartments, Phase 2 General Operating Account for the 1998 – 2001 overages on the payroll expenses. Metro has also reimbursed the Operating Account in the amount of $386.55 for the January and February, 2001 overages. 1B. Metro Developers, Inc. has reduced the charge for the payroll reimbursement surcharge to 16 percent and will monitor these charges quarterly and adjust them as necessary to insure that the actual costs will be charged. 1C. A revised “Employee Time Sheet” to breakdown labor costs by property phase will be implemented. Maintenance Work Orders will be specific about time and materials used on each apartment. 1D. Owner approval will be obtained on all expenditures which exceed $1,000. OIG Evaluation of We have evaluated the actions undertaken by Metro and Auditee Comments revised our recommendations as necessary. The actions Metro has taken and planned should correct the problems identified if the actions are followed through to completion. Although Metro indicates they are still assessing the payroll surcharge as a percentage, if they adjust the charges quarterly to actual then the intent of our recommendation will be achieved. Metro’s comments only said they will obtain owner approval on all expenditures that exceed $1,000; however, Metro provided an implementation policy as an attachment. 2001-KC-1003 Page 6 Table of Contents Exit Finding 1 Recommendations We recommend the Director, Office of Multifamily Housing, Kansas City Hub ensure Metro Developers, Inc.: 1A. Repaid the Villa West II general operating account $8,853 for unauthorized disbursements for payroll expenses for the years 1998, 1999 and 2000; and properly calculates and repays all amounts overcharged to date in 2001. 1B. Establishes and implements controls to ensure only actual costs are charged for payroll services. 1C. Implements the time sheet developed to capture direct maintenance labor costs by individual apartment unit. 1D. Implements controls developed to ensure employees obtain owner approval for all expenditures over $1,000. 2001-KC-1003 Page 7 Table of Contents Exit Management Controls In planning and performing our audit, we considered the management controls of the management agent, Metro Developers, Inc., for the Villa West II Apartments to determine our auditing procedures, not to provide assurance on the controls. Management controls 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 the systems for measuring, reporting, and monitoring program performance. We determined there were no relevant management controls Relevant Management applicable to our original objectives. However, after the review Controls began we identified control weaknesses that contributed to instances of non-compliance with the Management Certification and the Regulatory Agreement. As a result, we evaluated the following management controls: 1. Assuring proper allocations of indirect costs, and 2. Assuring appropriate expenditure of project funds. It is a significant weakness if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet an organization’s objectives. Based on our review, we believe the following items are Significant Weaknesses significant weaknesses: • Metro did not differentiate its management practices conducted in the private sector and management practices required by the property's Regulatory Agreement with HUD. A control to ensure only actual payroll costs are charged to the project does not exist (See Finding 1). • Metro received HUD approval for its proposal that the maintenance workers' wages are charged to the apartment phase where the work is performed. However, Metro’s payroll records indicate it allocated expenses for all on-site employees, including 2001-KC-1003 Page 8 Table of Contents Exit Management Controls maintenance workers, using an indirect cost allocation method. A control to ensure maintenance workers' wages are correctly charged to the project as a direct cost does not exist (See Finding 1). • Metro did not combine invoices where there were two invoices for carpet and flooring work done in the same unit on the same day. Metro did not have any controls to detect if its approval procedures were being followed. Compliance with owner approval levels is an important control that ensures funds are effectively used and for authorized purposes (See Finding 1). 2001-KC-1003 Page 9 Table of Contents Exit Follow Up On Prior Audits This is the first Office of Inspector General audit of the Villa West II Apartments in Topeka, Kansas 2001-KC-1003 Page 10 Table of Contents Exit Appendix A Schedule of Questioned Costs Type of Questioned costs Recommendation Ineligible 1/ Unsupported 2/ 1A $8,853 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law, contract or Federal, State or local policies or regulations. 2/ Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and eligibility cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a future decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of Departmental policies and procedures. 2001-KC-1003 Page 11 Table of Contents Exit Appendix B Auditee Comments 2001-KC-1003 Page 12 Table of Contents Exit Appendix B 2001-KC-1003 Page 13 Table of Contents Exit Appendix B 2001-KC-1003 Page 14 Table of Contents Exit Appendix B 2001-KC-1003 Page 15 Table of Contents Exit Appendix B 2001-KC-1003 Page 16 Table of Contents Exit Appendix B 2001-KC-1003 Page 17 Table of Contents Exit Appendix C Distribution Outside of HUD Chairman, Committee on Governmental Affairs, 340 Dirksen Senate Office Building, United States Senate, Washington, DC 20510 Ranking Member, Committee on Governmental Affairs, 706 Hart Senate Office Building, United States Senate, Washington, DC 20510 Chairman, Committee on Government Reform, 2185 Rayburn Building, House of Representatives, Washington, DC 20515 Ranking Member, Committee on Government Reform, 2204 Rayburn Building, House of Representatives, Washington, DC 20515 Subcommittee on Oversight and Investigations, Room 212, O’Neil House Office Building, Washington, DC 20515 Associate Director, Resources, Community, and Economic Development Division, United States General Accounting Office, 441 G Street, NW, Room 2T23, Washington, DC 20548 Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW, Room 9226, New Executive Office Building, Washington, DC 20503 Director, Office of Federal Housing Enterprise Oversight, 1700 G Street, NW, Room 4011, Washington, DC 20552 Director, Subcommittee on Criminal Justice, Drug Policy and Human Resources, B373 Rayburn House Office Building, Washington, DC 20515 House Committee on Financial Services, 2129 Rayburn House Office Building, Washington, DC 20515 2001-KC-1003 Page 18 Table of Contents Exit
Villa West II Apartments, Topeka, Kansas
Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-06-04.
Below is a raw (and likely hideous) rendition of the original report. (PDF)