AUDIT REPORT
Villa West II Apartments
Topeka, Kansas
2001-KC-1003
June 4, 2001
OFFICE OF AUDIT, GREAT PLAINS
KANSAS CITY, KANSAS
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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
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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).
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Follow Up On Prior Audits
This is the first Office of Inspector General audit of the Villa West II Apartments in Topeka, Kansas
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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.
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Appendix B
Auditee Comments
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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Appendix B
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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
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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)