oversight

                                              U.S. Department of Housing and Urban Development
                                              Great Plains Office of District Inspector General
                                                for Audit, 7AGA
                                              Gateway Tower II - 5th Floor
                                              400 State Avenue
                                              Kansas City, Kansas 66101-2406




                                                                                    AUDIT MEMORANDUM
                                                                                            2001-KC-1802

June 28, 2001

MEMORANDUM FOR:               Tom W. Visage, Director, Fort Worth Satellite Office, 6V

                              Signed
FROM:           Roger E. Niesen, District Inspector General for Audit, 7AGA

SUBJECT:        Review of Prairie Park Apartments, Waterloo, Iowa
                Project No. 074-44037

We have completed a review of the operations of Prairie Park Apartments for the period
immediately prior to HUD takeover of the property. We performed this review at the request of
your office. Our specific objective was to determine whether the assets of the project were sold
for a fair price and whether the proceeds from the sales were used to pay for project expenses.
We did not review any other operations of the property.

We determined the owners and management agent of Prairie Park Apartments violated the
project’s Regulatory Agreement by selling property assets without prior written approval from
HUD. However, the assets were either sold for their approximate market value or were
insignificant in value, and the proceeds from the sale were used for legitimate property expenses.
Therefore, this memorandum does not contain any recommendations. Your office should take any
actions you deem necessary.

Should you or your staff have any questions, please contact me at (913) 551-5871.
 Telephone: (913) 551-5870         http://www.hud.gov/oig/oigindex.html          Fax: (913) 551-5877




                                                Background

We received an audit request from the Director of the Fort Worth Enforcement Center on July 14,
2000 regarding actions of the owners and management agent of Prairie Park Apartments, located in
Waterloo, Iowa. According to the request, Prairie Park was referred to the Enforcement Center on
February 8, 1999 as a result of a low Real Estate Assessment Center inspection score. The
Enforcement Center and the Multifamily Housing Office in Kansas City sent the owners a notice of
Regulatory default and began proceedings to accelerate the mortgage. On January 24, 2000,
American Management, Inc., HUD’s contract management agent, took over management of the
property.

American Management, Inc. found a number of deposit slips from the week previous to their
takeover in the project office. Certain chattels that had been used at the project had been sold, and
checks for the items deposited into Prairie Park Apartment’s operating account. The request we
received from the Enforcement Center questioned whether the buyers paid a fair price for the
items, and whether the funds that were deposited were properly used for project expenses before
American Management, Inc. assumed control of the bank accounts.

                              Objectives, Scope and Methodology

In accordance with the audit request, our overall objective was to determine whether the assets of
the project were sold for a fair price and whether the proceeds from the sales were used to pay for
project expenses. We did not review any other operations of the property.

During the course of the review, we conducted interviews with the appropriate Office of
Multifamily Housing staff, Prairie Park owners and the management agent. We reviewed books
and records maintained by the management agent at their main office. We also reviewed HUD
guidelines deemed appropriate to accomplish our objectives.

                                               Audit Results

We determined the owners and management agent of Prairie Park Apartments violated the
project’s Regulatory Agreement by selling property assets without prior written approval from
HUD. However, the assets were either sold for their approximate market value or were
insignificant in value, and the proceeds from the sale were used for legitimate property expenses.

The items sold prior to HUD takeover of the project were assets of Prairie Park Apartments.
Therefore, the owners and management agent violated section 6, paragraph (b) of the project’s
Regulatory Agreement, which states, “Owners shall not without the prior written approval of the
Commissioner: Assign, transfer, dispose of, or encumber any personal property of the project…”
The assets should not have been disposed of without prior written consent from HUD.

We determined the two major assets, the Chevy truck and the 820 John Deere tractor, were sold
for amounts approximating fair market value. The proceeds from these two items totaled $5,500
out of $7,114 in total proceeds. The other 15 items that accounted for $1,614 in proceeds were not
significant in value. Based on the age of the items, as described by the management agent, the
amounts received appeared to be reasonable.



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 Telephone: (913) 551-5870        http://www.hud.gov/oig/oigindex.html         Fax: (913) 551-5877




The proceeds from the sale of the assets were deposited into a Prairie Park Apartment’s operating
account. Prairie Park’s owners and management agent used the funds to pay off legitimate debts of
the project. The management agent used the funds to pay 39 percent of the balance owed to each
creditor for services performed prior to November 1, 1999. These payments were made between
January 2000 and March 2000.

While the owner and management agent violated the regulatory agreement by selling the assets
prior to HUD takeover, we did not find any significant negative results from this action. In
addition, we did not find any evidence that approval for this type of activity would normally have
been denied by HUD. Therefore, we are not making any formal recommendations for action by the
Departmental Enforcement Center.




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Telephone: (913) 551-5870        http://www.hud.gov/oig/oigindex.html           Fax: (913) 551-5877

                                                                                   Appendix A

Distribution
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, NE, 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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