oversight

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)

                    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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